china slowdown: where to strike when hunting for extraordinary value

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DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOROTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision.

20 June 2011

Asia Pacific/China

Equity Research

Macro

China Market StrategySTRATEGIC ANALYSIS

Debt threats: Sector and stock level impact

■ Rising risks to asset quality: Our analysis shows China's credit-to-GDP

has risen to alarming levels in the past two years due to massive off-

balance-sheet financing. Market has only focused on banking system loanswhich do not capture this. This raises a red flag for future asset quality

problems in banks. Further, based on a bottom-up approach, interest

coverage of some 1,000 non-financial companies in 1Q11 declined nearly to

2008-crisis levels.

■ Possible scenarios. Whether it is a ‘soft landing’, ‘hard landing’ or ‘sluggish

landing’ scenario depends on the interaction of a number of forces: (1) how

the LGFV debt problems are settled; (2) the extent of the property market

correction; (3) the CPI inflation outlook; and (4) the global economic outlook.

We believe a ‘sluggish landing’ is the most likely scenario.

■ Market implications. We cut our rating on Banks from Overweight to

UNDERWEIGHT, on ABC from Outperform to UNDERPERFORM and on

BOC from Outperform to NEUTRAL. We have also adjusted earnings, targetprices and ratings for other sectors including property, capital goods,

infrastructure and shipping. (For a full list of our estimate and target price

revisions please see page 6.)

Research Analysts

Strategy

Vincent Chan

852 2101 6568

[email protected]

Peggy Chan, CFA

852 2101 [email protected]

Banks

Sanjay Jain

65 6212 3017

[email protected]

Daisy Wu


Property

Jinsong Du

852 2101 6589

[email protected]

Wenhan Chen


Duo Chen

852 2101 7350

[email protected]

Wind Equipment

Yang Y. Song


Infrastructure

Ingrid Wei86 21 3856 0379

[email protected]

Dry Bulk Shipping

Sam Lee

852 2101 7186

[email protected]

Basic Materials

Trina Chen

852 2101 7031

[email protected]

Telecoms

Colin McCallum, CA

852 2101 6514

[email protected]

Insureance

Arjan van Veen852 2101 7508

[email protected]

Pacific Asset Management (Pamria, LLC) Two Union Square 601 Union Street Suite # 4200 Seattle, WA 98101(206) 933-1600 Direct (206) 600-3175 Fax China: JinMao Tower, Suite #31/F +182-0117-7074 Shanghai

http://www.pamria.com/



20 June 2011

China Market Strategy 2

Focus chartsFigure 1: China – credit and bank loan (x government bond) Figure 2: Credit-to-GDP gap from long-term trend

60

80

100

120

140

160

180

Mar 93 Mar 96 Mar 99 Mar 02 Mar 05 Mar 08 Mar 11

(% of GDP)

Cre dit- to-GDP Loa n-to -G DP

Widened

gap

-30

-20

-10

0

10

20

30

Mar 00 Sep 01 Mar 03 Sep 04 Mar 06 Sep 07 Mar 09 Sep 10

(% points)

US China Japan Spain

Critical lev el - 10% points

* Credit includes bank loan, corporate bond and other off-balance

sheet financing. Source: PBOC, CEIC, BIS, Credit Suisse estimates

Source: PBOC, IMF, CEIC, BIS, Credit Suisse estimates

Figure 3: Declining operating cash flow Figure 4: New supply of system funding

0

50

100

150

200

250

300

350

400

450

500

M a r 0 7

J u n 0 7

S e p 0 7

D e c 0 7

M a r 0 8

J u n 0 8

S e p

0 8

D e c 0 8

M a r 0 9

J u n 0 9

S e p 0 9

D e c

0 9

M a r 1 0

J u n

1 0

S e p 1 0

D e c 1 0

M

a r 1 1

Rmb bn (s easonally adjusted)

16.022.1

15.0 13.3 15.2 14.7 15.8

30.921.0

15.7

2.00.5

2.0 4.4 2.7

4.6

9.6

6.81.8

3.83.0

4.5

2.1

2.2

2.2

0.2

1.9 2.2 1.60.9 1.0

0.60.8

0.8

0

10

20

30

40

50

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E

Loans Off-balance sheet loans Corp Bond Equi ty & Insurance

(% of GDP)

* Based on 1,536 A-share companies, seasonally adjusted

Source: Wind Database, Credit Suisse estimates

Source: CEIC

Figure 5: High leverage ⇒ high investment ratio Figure 6: Upside/downside to 12-month index targets

10

20

30

40

50

1990 1995 2000 2005 2010

(% of GDP)

China India Indonesia

Korea Brazil Japan

-80

-60

-40

-200

20

40

60

80

"Soft Landing" "Hard Landing" "Sluggish Landing"

MSC I C hina HSC EI Shanghai A

(% upside/downside)

Source: CEIC Source: Datastream, Credit Suisse estimates




20 June 2011


Figure 7: Chinese economy – scenarios Scenarios Soft landing Hard landing Sluggish landing

Chance 35% 10% 55%

LGFV loans settlement Quick decision in the next 6-9months on how to settle the cost

among different parties

No decision on settlement; localgovernments unable to repay by

2013

Compromised decisions made aftertough negotiations; some problems

removed from the banking system,

but not allProperty market Limited or no correction; sales

rebound in 2012

Sharp correction (30%+); market

doesn't recover in the next 3-5 years

Modest correction (15-20%); market

sluggish with only a mild increase inthe next 2-3 years

Nominal GDP growth 14-15% (9%+ real growth, 4-5%

inflation)

Below 8% (7% or lower real growth,

no inflation or deflation)

11-12% (7.5-8.5% real growth, 4-5%

inflation)Listed corporate earningsgrowth

15%+ Negative or loss making Around 10%

Bank NPL ratio Stable Sharp rise to 5-10% Gradual rise to more sustained level,e.g. 2%

Financial system credit

growth

Remains strong; credit-to-GDP ratio

remains high

Sharp slowdown; credit-to-GDP ratio

rapidly drops to below long-termtrend

Slows to lower-than-nominal GDP

growth level; credit-to-GDP ratiogradually back to long-term trend

Source: Credit Suisse estimates

Figure 8: China indices under different scenariosIndex Pot. up/do EPS growth (%) Implied P/E (x)

target (12-mth) (%) 2011E 2012E 2013E Medium-Term 2011E 2012E 2013E

Soft landing scenario (35%)

MSCI China 98 54 15.7 15.5 13.8 8.0 16.5 14.3 12.6

HSCEI 20,000 64 18.1 16.2 14.8 8.0 15.2 13.1 11.4

Shanghai A 4,400 58 23.0 19.1 18.4 8.0 18.8 15.8 13.3

Hard landing scenario (10%)

MSCI China 34 -47 10.0 -30.0 -25.0 6.0 6.0 8.6 11.5

HSCEI 7,000 -42 10.0 -30.0 -25.0 6.0 5.7 8.2 10.9

Shanghai A 1,300 -53 10.0 -30.0 -25.0 6.0 6.2 8.9 11.8

Sluggish landing scenario (55%)

MSCI China 76 19 10.0 10.0 8.0 6.5 13.5 12.3 11.4

HSCEI 15,000 23 10.0 10.0 8.0 6.5 12.2 11.1 10.3

Shanghai A 3,000 7 10.0 10.0 8.0 6.5 14.3 13.0 12.1Source: DataStream, Credit Suisse estimates




20 June 2011


Debt threats: Sector and stock levelimplicationsThere are signs of an economic slowdown in China, and we believe that this may not be

just a transient problem, as the situation is much more complex with structural problems.

In this report, we re-evaluate China’s macro outlook and look at market implications in

view of the recently published system credit statistics.

Credit overhang larger than expected

For the first time, the PBOC has released total system financing data, including the

previously opaque off-balance sheet data. We adopted the Basel Committee approach to

evaluate the credit risk for the banking sector by looking at the gap between the current

credit-to-GDP ratio and its long-term trend, and found that it is already well above 10%

(figure 2), the suggested critical level, which is a cause for concern. As a result, we believe

even if inflation genuinely comes down (which is doubtful), room for credit relaxation would

become much smaller. We compared the credit-to-GDP ratio of China with nine other

countries and found that this exercise predicted the outbreak of historical crises relatively

accurately. On conducting a separate analysis on China by just looking at loan-to-GDP

instead of total credit, i.e., excluding off-balance-sheet items and corporate bond, we findthat the deviation is still problematic, but not so severe. This underlies the importance of

off-balance-sheet banking activities affecting the policy decisions right now.

Key macro implications and possible scenarios

We see a few macro implications: First, the pace of relaxation could be smaller than

expected even if inflation eases, which could, in turn, dampen economic growth. Second,

how the government handles the LGFV will have a meaningful impact on the economy and

the market. Third, the biggest risk (not our base-case though) is in the worst-case scenario

when the property market corrects significantly along with the general economy. In that case,

the negative impact would be severe, and affect investment and overall economic growth.

We outline three possible scenarios – soft landing, hard landing and sluggish landing – based on various factors, and assign the probability of occurrence (35%, 10% and 55%,

respectively) of each scenario. We believe the sluggish landing scenario is the most likely,

whereby some but not all LGFV will be removed from the system, the property market

only corrects modestly, nominal GDP will be 11-12%, EPS growth will be 10%, the bank

NPL ratio will rise to a more sustained level of around 2% and credit-to-GDP will be

lowered to the long-term trend level with slower credit growth than nominal GDP growth.

Market implications

We cut our EPS growth forecast for the MSCI China, the HSCEI and Shanghai A share to

10% for 2011 and 2012, and our new index targets are 76, 15,000 and 3,000, respectively,

which still represent 7-23% potential upside. However, we expect the market to remain

very difficult and volatile in the next few months.

We have made changes to our model portfolio. Most importantly, we are now

UNDERWEIGHT (UW) banks from Overweight (OW) previously. In contrast, we have

increased our OVERWEIGHT on insurance and consumer, while changing utilities from

Market Weight (MW) to OVERWEIGHT. On the flip side, we have increased our

UNDERWEIGHT position on the energy and capital goods sectors.

Credit-to-GDP ratio is 10%

higher than the long-term

trend

We expect a ‘sluggishlanding’ scenario

We cut HSCEI target from

17,500 to 15,000

OVERWEIGHT insurance

and consumer and

UNDERWEIGHT banks

(marginally) and cyclicals




20 June 2011


Table of contentsEarnings estimates and target price revisions .....................................................................6

Sector impact .......................................................................................................................7 China Banks Sector .............................................................................................................8

Agricultural Bank of China ...........................................................................................10Bank of China Ltd ........................................................................................................12

China Property: Maintain UNDERWEIGHT .......................................................................14 Guangzhou R&F Properties Co Ltd...............................................................................17

Greentown China Holdings Ltd......................................................................................19

Kaisa Group .................................................................................................................21

KWG Property Holding Limited......................................................................................23

Poly (Hong Kong) Investments Ltd................................................................................25

Shimao Property Holdings Ltd.......................................................................................27

Sino-Ocean Land Holdings Ltd......................................................................................29Wind Equipment Sector .....................................................................................................31

Xinjiang Goldwind Science & Technology .....................................................................34

China High Speed Transmission Equipment .................................................................36

China Ming Yang Wind Power Group Ltd......................................................................38

Infrastructure Sector...........................................................................................................40 China Communications Construction Co Ltd.................................................................43

China Railway Construction Corporation.......................................................................45

China Railway Group Ltd...............................................................................................47

Dry Bulk Shipping Sector ...................................................................................................49 China COSCO Holdings ..............................................................................................51

China Basic Materials Sector .............................................................................................53 Telecoms: structural positives............................................................................................55 Insurance Sector ................................................................................................................60




20 June 2011


Earnings estimates and target pricerevisionsFigure 9: Bank Sector: Gordon growth model derived target price

’12-13E COE g Implied FV Implied FV Avg FV CMP Up(dn)- Old Chg

Bank Rating ROE (%) (Rf+Rm*beta) (%) (%) P/B (x) (HK$) P/E (x) (HK$) = TP (HK$) side (%) TP %ICBC Outperform 17.6 11.3 5 1.99 6.43 11.3 7.31 6.87 5.81 18.2 7.93 -13

CCB Outperform 17.5 11.3 5 1.98 7.05 11.3 8.22 7.64 6.64 15.0 8.99 -15BOC Neutral 13.5 11.7 5 1.28 3.88 9.5 4.29 4.09 3.82 7.1 5.12 -20

ABC Underperform 13.6 12.0 5 1.23 2.94 9.1 4.16 3.55 4.02 -11.8 5.29 -33BCOM Neutral 14.3 12.5 5 1.24 6.69 8.7 8.34 7.51 7.23 3.9 9.22 -18CMB Neutral 18.1 11.5 5 2.01 18.10 11.1 19.83 18.96 18.10 4.8 21.60 -12

CNCB Neutral 13.7 12.3 5 1.19 5.50 8.7 5.35 5.43 4.96 9.4 5.86 -7CMBC Underperform 13.6 12.6 5 1.13 5.90 8.3 6.84 6.37 7.19 -11.4 8.10 -21

CRCB Underperform 13.3 12.3 5 1.14 3.96 8.6 4.32 4.14 4.73 -12.4 4.78 -13

Source: Bloomberg, Credit Suisse estimates

Figure 10: Property sector

Company Recommendation Target 12M forward NAV 2011E EPS 2012E EPS 2013E EPSNew Old New Old New Old New Old New Old New Old

GZ R&F N N 10.0 12.0 18.0 22.0 1.40 1.46 1.40 1.50 1.43 1.56

Greentown U U 6.9 7.9 17.3 19.9 1.16 1.13 1.85 1.89 2.03 2.38

Kaisa N O 3.1 3.5 5.7 6.4 0.30 0.31 0.32 0.34 0.36 0.41

KWG N O 5.4 7.4 9.9 13.4 0.67 0.68 0.65 0.77 0.70 0.91

Poly HK N N 6.1 7.8 11.1 14.0 0.50 0.58 0.64 0.80 0.89 1.11

Shimao N N 10.1 12.0 18.3 21.7 1.15 1.18 1.22 1.35 1.53 1.71

Sino Ocean N N 3.9 5.2 7.1 9.5 0.44 0.51 0.45 0.54 0.56 0.67

Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM

Source: Company data, Credit Suisse estimates

Figure 11: Wind equipment sector

EPS Old EPS New* TP* Rating*2011 2012 2011 2012 Old New Old New

Goldwind (HKD) 2208.HK n.a. n.a. 0.69 0.60 n.a. 7.2 n.a. U

CHST (HKD) 0658.HK 1.01 1.04 0.79 0.79 16.86 9.5 O N

MY (USD) MY US 1.41 1.54 0.80 0.75 15.2 7.5 O N

* Note: Changes implemented in China Wind Equipment Sector: Storm ahead, published 13 June 2011.


Figure 12: Infrastructure sector Mkt cap CS Upside/ EPS EPS chg % P/E Divd yield PB

Code Curr Price (US$ mn ) rating TP downside 11E 12E 11E 12E 11E 12E 11E 11E

CCCC 1800 HK HKD 6.57 13,159 N 7.48 13.9 0.74 0.85 -1.1 -1.2 7.4 6.3 3.1 1.2

CRCC 1186 HK HKD 6.45 12,252 N 7.12 10.4 0.70 0.75 -3.2 -8.4 7.8 7.0 3.6 1.0

CRGL 0390 HK HKD 3.55 13,374 N 3.90 9.9 0.40 0.42 -4.9 -10.3 7.5 6.8 2.0 0.9


Figure 13: Dry bulk shipping sector EPS TP EPS Div.

CS Price chg (%) (%) Up/dn EPS grth (%) P/E (x) yld (%) ROE P/B

Company Ticker rating Local Target FY11 FY12 Chg (%) FY11 FY12 FY11 FY12 FY11 FY12 FY11 (%) (x)

Ch Cosco 1919 HK U 5.78 5.20 n.m. (42) (21) (10) 0.0 0.2 n.a n.a n.m. 23.2 0 (0.4) 1.1





20 June 2011


Sector impact




20 June 2011


China Banks SectorDowngrade on asset quality concerns

Sanjay Jain – 65 6212 3017 – [email protected]

Daisy Wu – 852 2101 7167 – [email protected]

Earnings and target price changesFigure 14: Key earnings drivers revisions for Chinese banks (2012-2013E)

2012E 2013E

New Old Chg New Old Chg

Loan growth (%) 12.8 13.6 -0.7 12.1 13.3 -1.2Fee growth (%) 17.1 20.0 -2.9 15.1 19.7 -4.7

Margin (%) 2.61 2.65 -0.04 2.61 2.67 -0.06Credit cost (bp) 107 74 33 145 79 66


Figure 15: Gordon growth model derived target price ’12-13E COE g Implied FV Implied FV Avg FV CMP Up(dn)- Old Chg

Bank Rating ROE (%) (Rf+Rm*beta) (%) (%) P/B (x) (HK$) P/E (x) (HK$) = TP (HK$) side (%) TP %

ICBC Outperform 17.6 11.3 5 1.99 6.43 11.3 7.31 6.87 5.81 18.2 7.93 -13

CCB Outperform 17.5 11.3 5 1.98 7.05 11.3 8.22 7.64 6.64 15.0 8.99 -15BOC Neutral 13.5 11.7 5 1.28 3.88 9.5 4.29 4.09 3.82 7.1 5.12 -20ABC Underperform 13.6 12.0 5 1.23 2.94 9.1 4.16 3.55 4.02 -11.8 5.29 -33BCOM Neutral 14.3 12.5 5 1.24 6.69 8.7 8.34 7.51 7.23 3.9 9.22 -18CMB Neutral 18.1 11.5 5 2.01 18.10 11.1 19.83 18.96 18.10 4.8 21.60 -12

CNCB Neutral 13.7 12.3 5 1.19 5.50 8.7 5.35 5.43 4.96 9.4 5.86 -7CMBC Underperform 13.6 12.6 5 1.13 5.90 8.3 6.84 6.37 7.19 -11.4 8.10 -21

CRCB Underperform 13.3 12.3 5 1.14 3.96 8.6 4.32 4.14 4.73 -12.4 4.78 -13

Source: Bloomberg, Credit Suisse estimates

More leveraged than meets the eyeUsing the social financing data released by PBoC for the first time, we find that credit

penetration, including the previously opaque off-balance-sheet financing, has risen sharply

in China over the past two years. In fact, it is already above the critical levels of credit-to-

GDP being >10% ahead of the long-term trend which has, as per econometric models of

Basel committee, led to banking sector stresses in many markets. This alarming statistic is

not visible if we simply use the on-balance-sheet lending of the banking system.

In a bottom-up approach, analysing the 1Q11 cash flow of some 1,000 non-financial

companies in China, we estimate that interest coverage was 8x, down close to the levels

last seen during the global financial crisis (2008-09). Higher debt-levels mean that even

moderating inflation may not lead to an easing that the market is keenly expecting.

Asset quality the key variableWe have trimmed our forecast loan growth (GDP deceleration) to 12-13% in 2012-13E

(from 13-14%), fee income growth (slower demand) to 15-17% (from 20%), and net

interest margins (no more interest income when a borrower defaults) to 2.6% (from 2.65-

2.67%). The biggest impact on earnings is from asset quality, where we now assume

NPLs rising to 1.8% levels in 2012E (from 1.1-1.2% earlier) and 2.5% levels in 2013E.

This leads to our credit cost assumption increasing to approximately 75 bp in 2011E (from

~60 bp earlier), 100 bp in 2012E (from ~70 bp) and 150 bp in 2013E (from ~75-80 bp).

These levels are not extreme or theoretical – Thai/Indo/Korean banks lost double-digit

percentage of loans during the Asian Financial Crisis (similar case of fixed asset

China’s total credit-GDP

levels now up to critical

levels of >10% above long-

term trend, a sign of banking

sector stress according to

Basel committee

We trim our loan growth

assumptions and increase

our credit costs assumptions

to 100-150 bp in 2012-13E




20 June 2011


investment binge led by mis-pricing of cost of capital). China itself has seen 200 bp levels

in the earlier part of the last decade (based on our checks and estimates, since banks did

not start getting listed until 2005). Of course, some observers will worry about ever-

greening by banks and that such NPLs may never show up. If the GDP downturn is short

lived then banks may be able to gloss over it but a protracted slowdown, especially with

stricter CBRC (not to forget a new administration taking over in 2012), may lead to better

transparency.

Downgrading the bank sector

We downgrade China’s bank sector to UNDERWEIGHT and ABC to UNDERPERFORM,

BOC to NEUTRAL (from Outperform). ABC has greater risks from its county portfolio, in

our view, while BOC grew its loan book massively (particularly domestic loans by 56%) in

2009. CCB remains OUTPERFORM on fundamentals, but we recognise the technical

overhang to be created by the 10.2% stake held by Bank of America coming off the lock-

up in August. ICBC is our top pick.

2Q11 results in late August, supply of equity in 2H, and GDP indicators would be the

catalysts. Regulatory action may provide negative risks while a government carve-out of

LGFV related bad loans would be positive for bank stocks, in our view.

ICBC is our top pick;

downgrading ABC to

UNDERPERFORM and

BOC to NEUTRAL




20 June 2011


Asia Pacific / China

Regional Banks

Agricultural Bank of China(1288.HK / 1288 HK)

County loan book more concerning;downgrade to UNDERPERFORM

■ Downgrade to UNDERPERFORM; earnings cut in 2012-13E: We cut our

earnings forecast for ABC by 19% and 31%, respectively, in 2012E and

2013E, primarily driven by a higher credit cost assumption (raised to 150bp

and 175bp in 12-13E from 96 bp and 100 bp in 10A and 11E). We also

revise down our loan growth by about 1% to 13-14%, and trim margins by 2-

6 bp in 12-13E. We downgrade the stock to UNDERPERFORM (fromOutperform) with our target price cut to HK$3.55 (from HK$5.29).

■ County loan book more concerning amid a macro slowdown: The bank

has the largest county level loan exposure (about 30% of its loan book)

among big banks. Its county loan business recorded 173 bp and 130 bp

credit cost against 87 bp and 81 bp in urban areas during 2009 and 2010,

according to our estimate. We believe ABC will probably have bigger risks

from its county portfolio when growth starts to decelerate amid tighter

liquidity and a higher interest rate environment.

■ Higher exposure in risky sectors: ABC had about 11% of its loan made to

developers by end-2010, the highest among big banks (5-8% at peers). It

also has more than 20% loan exposure in the manufacturing industry, higher

than ICBC and CCB at 14% and 17%. Higher risky sectors’ exposure couldadd more credit quality pressure as anecdotally we heard that, of late, SMEs

and developers are finding it tough to borrow.

■ Valuation: The stock had outperformed peers by 3-9% and MSCI China by

8% year-to-date. Its multiple discount to ICBC and CCB had narrowed to 5%

and 10% from the historical average of 10% and 15%. We believe rising

concerns over its asset quality could lead to a relative weakness in its price

performance. Our new target price of HK$3.55 (indicating 12% potential

downside) is implied from 1.5x 11E BPS and 7.8x 11E EPS.

Share price performance

23

45

6

Jul-10 Nov-10 Mar-11

80

100

120

140

P rice (LH S) R eba sed Rel (RHS )

The price relative chart measures performance against the

MSCI China Free index which closed at 63.73 on 17/06/11

On 17/06/11 the spot exchange rate was HK$7.8/US$1

Performance Over 1M 3M 12MAbsolute (%) -10.7 -0.5 —Relative (%) -6.0 -0.1 —

Financial and valuation metrics

Year 12/10A 12/11E 12/12E 12/13EPre-prov Op profit (Rmb mn) 164,146.0 214,594.0 247,534.9 275,784.4Pre -tax profit (Rmb mn) 120,734.0 161,027.8 155,458.2 153,448.0

Net attributable profit (Rmb mn) 94,873.0 124,755.7 120,431.1 118,863.4EPS (CS adj.) (Rmb) 0.32 0.38 0.37 0.37Change from previous EPS (%) n.a. 0 -19.3 -30.9Consensus EPS (Rmb) n.a. 0.39 0.48 0.57EPS growth (%) 29.8 18.4 -3.5 -1.3P/E (x) 10.3 8.7 9.0 9.1Dividend yield (%) 4.6 4.6 4.4 4.4CS adj. BVPS (Rmb) 1.7 2.0 2.2 2.4P/B (x) 2.0 1.7 1.5 1.4ROE 21.4 20.9 17.6 15.7ROA (%) 1.0 1.1 1.0 0.8Tier 1 Ratio (%) 9.8 9.3 9.0 8.7Source: Company data, Thomson Reuters, Credit Suisse estimates.

*Stock ratings are relative to the relevant country benchmark.

¹Target price is for 12 months.

[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Sanjay Jain


Daisy Wu


Rating (from Outperform)UNDERPERFORM* [V]Price (17 Jun 11, HK$) 4.02Target price (HK$) (from 5.29) 3.55¹Chg to TP (%) -11.7Market cap. (HK$ mn) 1,305,672Number of shares (mn) 324,794.12Free float (%) 10.152-week price range 4.75 - 3.21




20 June 2011


Agricultural Bank of China 1288.HK / 1288 HK Price (17 Jun 11): HK$4.02, Rating: UNDERPERFORM [V], Target Price: HK$3.55, Analyst: Sanjay Jain

Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (wtd avg) (mn) 292,397.00 324,794.00 324,794.00 324,794.00EPS (Credit Suisse) (Rmb) 0.32 0.38 0.37 0.37Book value per share 1.67 2.00 2.22 2.43Tangible book value per share 1.67 2.00 2.22 2.43DPS (Rmb) 0.15 0.15 0.15 0.15

Key earnings driver 12/10A 12/11E 12/12E 12/13E — — — — — — — — — — — — — — —

Valuation 12/10A 12/11E 12/12E 12/13EEPS growth (%) 29.8 18.4 -3.5 -1.3P/E (x) 10.3 8.7 9.0 9.1P/B (x) 2.0 1.7 1.5 1.4P/TB (x) 2.0 1.7 1.5 1.4Dividend yield (%) 4.6 4.6 4.4 4.4

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13EInterest income 357,660.0 457,430.8 550,600.7 646,348.0Interest expense 115,508.0 157,563.9 200,764.7 250,463.6Net interest income pre 242,152.0 299,866.9 349,836.0 395,884.4Fee and commission income 46,128.0 59,966.4 68,961.4 —Trading income -244.0 500.0 300.0 300.0Insurance inc & premiums — — — —Other income 1,722.0 1,722.0 500.0 500.0Total non interest income 50,101.0 64,388.4 70,961.4 80,616.0Total income 292,253.0 364,255.3 420,797.4 476,500.4

Personal expense 67,130.0 80,556.0 96,667.2 116,000.6Total expenses 128,107.0 149,661.3 173,262.4 200,716.0Pre provision profit 164,146.0 214,594.0 247,534.9 275,784.4Loan loss provisions 43,412.0 53,566.3 92,076.7 122,336.4Operating profit 120,734.0 161,027.8 155,458.2 153,448.0Other non operating inc/(exp) — — — —Pre-tax profit 120,734.0 161,027.8 155,458.2 153,448.0Income tax (expense) 25,827.0 36,231.3 34,978.1 34,525.8Net profit before minorities 94,907.0 124,796.5 120,480.1 118,922.2Minority interests 34.0 40.8 49.0 58.8Preferred dividends — — — —Net income (CS) (Rmb mn) 94,873.0 124,755.7 120,431.1 118,863.4

Balance sheet 12/10A 12/11E 12/12E 12/13EAssetsGross customer loans 4,956,741.0 5,716,510.8 6,533,720.0 7,424,614.3Risk provisions 168,733.0 206,079.9 279,769.6 367,151.8Net customer loans 4,788,008.0 5,510,431.0 6,253,950.4 7,057,462.4Interbank Loans 698,599.0 838,318.8 1,005,982.6 1,207,179.1Investment & Securities — — — —Cash and cash equivalents 2,082,332.0 2,118,355.6 2,002,364.5 1,846,809.3Fixed Assets 121,391.0 127,460.6 133,833.6 140,525.3Intangible assets & goodwill (Rmb — — — 1.0Other assets 119,645.0 176,495.5 189,069.5 202,656.2Total assets 10,337,406.0 11,803,978.6 13,224,701.2 14,822,034.0LiabilitiesInterbank deposits 701,131.0 620,449.0 620,450.5 620,452.1Customer deposits 7,497,618.0 8,887,905.0 10,225,420.0 11,551,872.0Total deposits 9,508,354.0 10,845,870.5 12,172,324.1 13,672,895.0Other liabilities 224,472.0 246,311.4 270,051.5 296,122.5Total liabilities 9,795,170.0 11,154,525.9 12,504,719.6 14,031,361.5Shareholders' equity 542,071.0 649,287.7 719,816.6 790,507.6Minority interest 165.0 165.0 165.0 165.0Preferred stock — — — —Total liabilities and shareholders' 10,337,406.0 11,803,978.6 13,224,701.2 14,822,034.0

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EROE stated - return on 21.4 20.9 17.6 15.7ROE - CS adj.return on 21.4 20.9 17.6 15.7ROA - credit suisse adj. 1.0 1.1 1.0 0.8Gearing (x) 21.7 18.6 18.3 18.6Asset quality (%)NPL to gross loans ratio 2.0 2.0 2.5 3.1Reserves to NPL ratio 168.1 180.8 168.7 158.5Capital ratios (%)Eqt Tier 1 Ratio (12/11E, 7.7 9.8 9.3 9.0Tier 1 ratio (12/11E, %) 9.8 9.3 9.0 8.7Capital adequacy ratio 10.4 11.6 11.2 10.8Growth and balanceRevenue growth 30.7 24.6 15.5 13.2Operating expense growth 16.9 16.8 15.8 15.8Pre-provisional op. profit 43.9 30.7 15.4 11.4Net profit growth 46.0 31.5 -3.5 -1.3Deposit growth 18.5 15.0 13.0 13.0Loan-deposit ratio 53.9 53.9 54.1 54.1


Source: Company data, Thomson Reuters, Credit Suisse estimates.




20 June 2011


Bank of China Ltd 3988.HK / 3988 HK Price (16 Jun 11): HK$3.83, Rating: NEUTRAL, Target Price: HK$4.09, Analyst: Sanjay Jain

Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (wtd avg) (mn) 254,366.25 279,147.00 279,147.00 279,147.00EPS (Credit Suisse) (Rmb) 0.41 0.38 0.39 0.36Book value per share 2.31 2.54 2.78 2.99Tangible book value per share 2.30 2.53 2.77 2.98DPS (Rmb) 0.15 0.15 0.15 0.14

Key earnings driver 12/10A 12/11E 12/12E 12/13ELoan growth 14.79 12.56 12.25 —Net interest margin 2.04 2.11 2.21 —Fee growth 16.31 17.71 18.08 —Cost-inc ratio 43.89 43.52 43.67 —P&L provision (% of loans) 0.93 0.50 0.65 —

Valuation 12/10A 12/11E 12/12E 12/13EEPS growth (%) 28.9 -7.6 2.0 -7.0P/E (x) 7.7 8.4 8.2 8.8P/B (x) 1.4 1.3 1.1 1.1P/TB (x) 1.4 1.3 1.1 1.1Dividend yield (%) 4.6 4.7 4.7 4.4

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13EInterest income 313,718.1 393,899.8 469,651.7 529,763.2Interest expense 119,640.0 163,531.8 205,381.7 240,515.5Net interest income pre 193,962.0 230,368.1 264,269.9 289,247.8Fee and commission income 54,483.0 68,029.6 78,748.9 —Trading income 3,491.0 5,500.0 6,255.0 7,132.0Insurance inc & premiums — — — —Other income 2,000.0 — — —Total non interest income 82,556.0 100,413.6 112,329.2 126,734.8Total income 276,518.0 330,781.6 376,599.1 415,982.5

Personal expense 53,420.0 64,104.0 75,642.7 87,745.6Total expenses 122,409.0 145,673.1 165,819.7 188,044.1Pre provision profit 154,109.0 185,108.5 210,779.4 227,938.5Loan loss provisions 12,993.0 41,551.0 63,897.9 90,264.3Operating profit 141,116.0 143,557.5 146,881.5 137,674.2Other non operating inc/(exp) — — — —Pre-tax profit 142,145.0 144,689.4 148,126.5 139,043.8Income tax (expense) 32,454.0 33,278.6 34,069.1 31,980.1Net profit before minorities 109,691.0 111,410.8 114,057.4 107,063.7Minority interests 5,273.0 5,536.7 6,090.3 6,699.3Preferred dividends — — — —Net income (CS) (Rmb mn) 104,418.0 105,874.2 107,967.1 100,364.4

Balance sheet 12/10A 12/11E 12/12E 12/13EAssetsGross customer loans 5,660,621.0 6,439,663.5 7,180,956.8 7,996,422.9Risk provisions 149,679.2 162,714.0 186,402.2 —Net customer loans 5,537,765.0 6,287,243.7 6,979,255.0 7,738,566.7Interbank Loans 1,787,638.0 2,085,322.2 2,203,494.1 2,372,303.7Investment & Securities — — — —Cash and cash equivalents 722,344.0 754,364.8 951,986.6 1,148,330.2Fixed Assets 123,568.0 129,746.4 136,233.7 143,045.4Intangible assets & goodwill (Rmb 2,342.0 2,342.0 2,342.0 2,342.0Other assets 230,884.0 246,776.1 264,162.7 283,188.5Total assets 10,459,865.0 11,766,651.6 13,024,416.1 14,423,412.7LiabilitiesInterbank deposits 1,152,424.0 1,580,030.0 1,659,031.5 1,692,212.1Customer deposits 6,620,552.0 7,483,254.0 8,605,742.1 9,724,488.6Total deposits 9,063,284.0 10,264,773.6 11,416,700.7 12,714,728.5Other liabilities 588,544.0 625,523.3 661,166.2 700,007.7Total liabilities 9,783,715.0 11,022,183.9 12,209,753.9 13,546,623.1Shareholders' equity 644,165.0 709,284.2 775,960.4 834,217.6Minority interest 31,985.0 35,183.5 38,701.9 42,572.0Preferred stock — — — —Total liabilities and shareholders' 10,459,865.0 11,766,651.6 13,024,416.1 14,423,412.7

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EROE stated - return on 18.0 15.6 14.5 12.5ROE - CS adj.return on 18.0 15.6 14.5 12.5ROA - credit suisse adj. 1.1 1.0 0.9 0.7Gearing (x) 16.6 16.4 16.7 17.0Asset quality (%)NPL to gross loans ratio 1.1 1.2 1.6 2.0Reserves to NPL ratio 142.1 129.7 111.4 —Capital ratios (%)Eqt Tier 1 Ratio (12/11E, 9.1 10.1 9.5 9.3Tier 1 ratio (12/11E, %) 10.1 9.5 9.3 9.0Capital adequacy ratio 11.1 12.6 11.1 10.8Growth and balanceRevenue growth 18.9 19.6 13.9 10.5Operating expense growth 14.1 19.0 13.8 13.4Pre-provisional op. profit 23.0 20.1 13.9 8.1Net profit growth 29.2 1.4 2.0 -7.0Deposit growth 13.0 15.0 13.0 13.0Loan-deposit ratio 74.0 73.1 71.8 70.4





20 June 2011


China Property: MaintainUNDERWEIGHTJinsong Du – 852 2101 6589 – [email protected]

Wenhan Chen – 852 2101 6407 – [email protected]

Duo Chen – 852 2101 7350 / [email protected]

Earnings estimates and target price revisions

Figure 16: Change summary

Company Recommendation Target 12M forward NAV 2011E EPS 2012E EPS 2013E EPS

New Old New Old New Old New Old New Old New Old

GZ R&F N N 10.0 12.0 18.0 22.0 1.40 1.46 1.40 1.50 1.43 1.56

Greentown U U 6.9 7.9 17.3 19.9 1.16 1.13 1.85 1.89 2.03 2.38

Kaisa N O 3.1 3.5 5.7 6.4 0.30 0.31 0.32 0.34 0.36 0.41

KWG N O 5.4 7.4 9.9 13.4 0.67 0.68 0.65 0.77 0.70 0.91

Poly HK N N 6.1 7.8 11.1 14.0 0.50 0.58 0.64 0.80 0.89 1.11

Shimao N N 10.1 12.0 18.3 21.7 1.15 1.18 1.22 1.35 1.53 1.71

Sino Ocean N N 3.9 5.2 7.1 9.5 0.44 0.51 0.45 0.54 0.56 0.67

Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM


Sales turning ‘non-cash’; widespread price cutsshould soon lead to further de-rating

With banks delaying the approval and release of mortgage loans, developers’ cash

collection on property pre-sales has declined significantly. Moreover, due to the banks’

tighter loan quota, several high-end projects have started allowing home buyers to pay on

an installment basis. Therefore, the cash collection for high-end players may deteriorate

much more significantly than the sector average.

Given a more bearish macro outlook and potentially worse-than-expected financial

conditions of property developers, we expect the property price cuts in 2H11 to be more

significant. When widespread property price cuts happen, volumes would dry up instead of

increasing – home buyers would wait for the bottoming of prices instead of rushing to buy,

in our view.

The deteriorating financial condition of developers, property prices and volume drop in

2H11E should lead to a further derating of the China property sector, in our view.

Figure 17: Key driversFY11E

Major markets’ housing price YoY change (%) -10

Before -5

Major markets’ primary housing transaction volumes, YoY change (%) -15

Before -10Developers’ financing cost (direction) Increase YoY

Before Flat YoY

Source: Credit Suisse estimates




20 June 2011


Figure 18: Valuation table CS Price EPS TP EPS grth P/E Div.

Year Chg(%) (%) Up/dn EPS (%) (x) yld (%) ROE P/B

Company Ticker Rating Local Target T T+1 T+2 Chg (%) T+1 T+2 T+1 T+2 T+1 T+2 T+1 (%) (x)

Guangzhou R&F 2777 HK N 9.65 12 10-Dec -4 -7 -17 24 1.5 1.5 28 3 5.5 5.4 7.3 21.9 1.1

Greentown 3900 HK U 7.25 7.95 10-Dec 2 -2 -13 10 1.1 1.9 22 67 5.3 3.2 7.5 17.3 0.9

Kaisa 1638 HK O 2.8 3.5 10-Dec -2 -7 -10 25 0.3 0.3 7 13 7.6 6.7 1.6 15.8 1.3

KWG Property 1813 HK O 4.9 7.4 10-Dec -1 -16 -27 51 0.7 0.8 53 14 6 5.3 3.1 15.4 0.9Poly HK 119 HK N 4.73 7.8 10-Dec -13 -20 -22 65 0.6 0.8 57 39 8.2 5.9 1.8 8.2 0.6

Shimao Property 813 HK N 8.94 12 10-Dec -2 -10 -16 34 1.2 1.4 17 15 6.3 5.5 4.4 15.5 1

Sino-Ocean Land 3377 HK N 3.52 5.2 10-Dec -13 -17 -25 48 0.5 0.5 54 6 5.7 5.4 4.9 11 0.6


Persistent credit tightening should lead to sectorderating

The Credit Suisse economist and strategist believe the chances of a soft landing for

China’s economy is diminishing, and inflation is likely to be more persistent than the

current market expectation. Therefore, we expect the Chinese government to keep

tightening the property sector despite the potential property market weakness. Moreover,

continued RRR and interest rate hikes should also severely deteriorate property

developers’ financial conditions and reduce home buyers’ demand.

Therefore, we revise our assumptions for the China property sector as follows:

(1) Property prices in major markets to decline 10% YoY in 2011E. Previously, we had

assumed a 5% YoY decline in property prices in China’s major property markets. Given

the more bearish macro outlook and potentially worse-than-expected financial conditions

of property developers, we expect the property price cuts in 2H11 to be more significant.

(2) Primary housing transaction volumes in major markets to decline 15% YoY in

2011E. When we established a 10% YoY volume decline assumption for 2011E in

October 2010, Credit Suisse was the only broker with a negative outlook on 2011E

volumes. This was because we believe when widespread property price cuts happen,

volumes would dry up instead of increasing – home buyers would wait for thebottoming of prices instead of rushing to buy. Now, with a potentially sharper and more

persistent property price decline, we expect transaction volumes to dry up further,

especially with a very strong sales surge in 4Q10A.

(3) Financing costs are rising in 2011E and beyond. With the current credit tightening,

many developers are facing difficulties borrowing from banks at normal bank lending

rates. As a result, they have been raising capital/borrowing from alternative sources at

much higher rates (for details, please refer to our 30 May China property sector report,

Holes in the bull argument ). Therefore, we have increased the assumed average

financing cost for developers – each developer’s financing costs are different.

High-end players in bigger cities should suffer more

As the current government policies focus on suppressing investment-driven demand for

residential properties, we expect sales of high-end projects in bigger cities to weaken.

Moreover, due to the banks’ tighter loan quota, several high-end projects have started

allowing home buyers to pay on an installment basis. Therefore, the cash collection for

high-end developers may deteriorate much more significantly than the sector average.

As a result, we maintain COLI (0688.HK, CP HK$15, UNDERPERFORM, TP HK$13), a

high-end developer, as our top Underperform idea. Also, we downgrade high-end

developer KWG (1813.HK) from Outperform to NEUTRAL, and downgrade big city

(Shenzhen) based player Kaisa (1638.HK) from Outperform to NEUTRAL. We significantly




20 June 2011


reduce our target price for high-end developer Shimao, but maintain our NEUTRAL rating

as its share price has already significantly underperformed.

How clients should be positioned

We still believe that investors should reduce their exposure in more expensive, high-end

developers (such as COLI), and those focusing on major cities (such as Sino Ocean, KWG

and Kaisa). On a relative basis, those with mass-market products in smaller cities, such as

Evergrande (3333.HK) and China Vanke (000002.SZ), should suffer less from the sector

downturn, in our view.




20 June 2011



Real Estate Management & Development

Guangzhou R&F Properties Co

Ltd (2777.HK / 2777 HK)

Reduce target price due to a more bearishsector outlook

■ We reduce our target price for Guangzhou R&F from HK$12 to HK$10:

Together with Credit Suisse economist and strategist’s more bearish call on

China, we revise our assumptions for the China property sector: we now

expect ASP in major markets to drop 10% YoY (5% previously), and

volumes to drop 15% YoY (10% previously). As a result, we reduce our

forward NAV estimate for Guangzhou R&F from HK$22 to HK$18, andreduce the target price from HK$12 to HK$10.

■ Sales uncertainty to increase in 2H11E: From January to May, R&F

recorded Rmb11.2 bn of contracted sales, representing 30% of its full-year

guidance. We believe its contracted sales may become uncertain in 2H11E,

especially when property price cuts become more widespread, which could

affect transaction volumes.

■ Valuation: Guangzhou R&F is trading at 54% to 12-month NAV. Given the

current sector downturn, we think the current valuation is fair.


05

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4060

80100120

P rice (LH S) R ebased Rel (RHS )




Performance Over 1M 3M 12MAbsolute (%) -3.5 -4.3 -4.5Relative (%) 1.4 -1.8 -10.2

Financial and valuation metricsYear 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 24,641.8 31,148.3 34,612.6 36,190.2EBITDA (Rmb mn) 8,313.6 9,340.9 9,038.6 9,430.8EBIT (Rmb mn) 7,969.1 8,962.0 8,621.8 8,972.3Net income (Rmb mn) 3,665.6 4,510.0 4,509.5 4,617.7EPS (CS adj.) (Rmb) 1.14 1.40 1.40 1.43Change from previous EPS (%) n.a. -4.0 -6.6 -8.2Consensus EPS (Rmb) n.a. 1.38 1.55 1.72EPS growth (%) 45.4 23.0 -0.0 2.4P/E (x) 7.1 5.7 5.7 5.6Dividend yield (%) 6.2 7.0 7.0 7.1EV/EBITDA (x) 5.4 5.5 6.5 7.1P/B (x) 1.3 1.1 1.0 0.9ROE (%) 20.0 21.1 18.5 17.0Net debt/equity (%) 93.4 107.7 124.7 137.6

Source: Company data, Thomson Reuters, Credit Suisse estimates



Research Analysts

Jinsong Du

852 2101 6589

[email protected]

Wenhan Chen


Duo Chen

852 2101 7350

[email protected]

Rating NEUTRAL*Price (16 Jun 11, HK$) 9.65Target price (HK$) (from 12.00) 10.00¹Chg to TP (%) 3.6Market cap. (HK$ mn) 31,095.8Enterprise value (Rmb mn) 51,149Number of shares (mn) 3,222.37Free float (%) 28.052-week price range 13.02 - 9.59




20 June 2011


Guangzhou R&F Properties Co Ltd 2777.HK / 2777 HK Price (16 Jun 11): HK$9.65, Rating: NEUTRAL, Target Price: HK$10.00, Analyst: Jinsong Du

Target price scenarioScenario TP % Up/dwn AssumptionsUpsideCentral case 10.00 3.63Downside

Per share data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 3,222.4 3,222.4 3,222.4 3,222.4EPS (Credit Suisse) 1.14 1.40 1.40 1.43Consensus EPS (Rmb) n.a. 1.38 1.55 1.72DPS (Rmb) 0.50 0.56 0.56 0.57Operating cash flow per 0.20 -1.49 -1.76 -1.84

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 24,642 31,148 34,613 36,190Cost of goods sold 15,348.6 20,134.9 24,028.8 25,183.6SG&A (excluding R&D) 1,547.2 2,308.0 2,257.1 2,344.2R&D costs — — — —Other operating inc/(exp.) -223.1 -256.6 -295.1 -309.9EBITDA 8,314 9,341 9,039 9,431Depr & amort (excl. goodwill) 344.5 378.9 416.8 458.5Goodwill impairment — — — —EBIT 7,969.1 8,962.0 8,621.8 8,972.3Net interest expense 940.8 484.9 720.0 868.4Net non operating inc (exp) — — — —Share of associates/JVs' equity -67.8 1.7 214.0 660.7Exceptional/extraordinary items — — — 1.0Recurring PBT 6,960.5 8,478.8 8,115.8 8,764.6Taxes 3,189.2 3,815.5 3,165.2 3,418.6Profit after tax 3,771.4 4,663.3 4,950.6 5,347.0Other after tax income 685.0 — — —Minority interest 105.8 153.4 441.2 729.4Preferred dividends — — — —Reported net income 4,350.6 4,510.0 4,509.5 4,617.7Analyst after tax adjustment -685.0 — — —Net income (Credit Suisse) 3,666 4,510 4,509 4,618

Cash flow (Rmb mn) 12/10A 12/11E 12/12E 12/13E

EBIT 7,969 8,962 8,622 8,972Cash taxes paid 1,392.1 1,695.8 1,623.2 1,753.1Change in working capital -4,049.8 -10,330.4 -10,418.3 -10,361.2Other cash & non-cash items -1,869.8 -1,746.8 -2,239.1 -2,790.1Cash flow from operations 657.4 -4,811.0 -5,658.8 -5,932.0Capex 334.8 384.2 442.1 507.8Disposals of PPE — — — —Free cash flow to the firm 322.6 -5,195.2 -6,100.9 -6,439.8Acquisitions — — — —Divestments — — — —Other investment/(outflows) — — — —Cash flow from investment -334.8 -384.2 -442.1 -507.8Net share issue/(repurchase) — — — —

Dividends paid 998.9 1,288.9 1,804.0 1,803.8Change in debt — — — —Other financing inflows/outflows — — — —Cash flow from financing activities -998.9 -1,288.9 -1,804.0 -1,803.8Effect of exchange rates — — — —Movements in cash/equivalents -676.3 -6,484.1 -7,904.9 -8,243.6

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 9,168.1 10,085.0 11,093.5 12,202.8Accounts receivable 7,229.4 7,751.4 8,377.9 9,129.6Inventory — — — 1.0Other current assets 40,694.0 48,755.4 58,417.5 69,998.6Total current assets 52,052.1 60,544.5 70,632.0 82,623.9Total fixed assets 4,119.1 4,505.3 4,949.5 5,460.2Intangible assets and goodwill 875.1 875.1 875.1 875.1Investment securities — — — —Other assets 20,370.6 23,981.3 27,750.0 31,702.3Total assets 77,416.9 89,906.2 104,206.6 120,661.5Current liabilitiesAccounts payable 7,845.4 8,629.9 9,492.9 10,442.2Short-term debt 1,496.2 1,870.2 2,337.8 2,922.3Other short term liabilities 25,252.1 28,550.4 32,322.9 36,644.3Total current liabilities 34,593.7 39,050.6 44,153.6 50,008.8Long-term debt 15,169.4 21,058.6 28,139.3 35,269.5Other liabilities 7,654.5 6,423.4 5,393.4 5,361.5Total liabilities 57,417.7 66,532.6 77,686.3 90,639.8Shareholders' equity 19,787.7 23,008.7 25,714.2 28,485.3Minority interest 211.5 364.9 806.0 1,535.4Total liabilities andshareholders' equity

77,416.9 89,906.2 104,206.6 120,660.5

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 35.4 26.4 11.1 4.6EBIT 63.9 12.5 -3.8 4.1Net profit 45.4 23.0 -0.0 2.4EPS 45.4 23.0 -0.0 2.4Margins (%)EBITDA margin 33.7 30.0 26.1 26.1EBIT margin 32.3 28.8 24.9 24.8Pretax margin 28.2 27.2 23.4 24.2Net margin 14.9 14.5 13.0 12.8Valuation metrics (x)P/E 7.1 5.7 5.7 5.6P/B 1.3 1.1 1.0 0.9EV/sales 1.8 1.6 1.7 1.9EV/EBITDA 5.4 5.5 6.5 7.1EV/EBIT 5.6 5.7 6.8 7.5ROE analysis (%)

ROE (%) 20.0 21.1 18.5 17.0ROIC 11.2 10.2 8.8 7.7Asset turnover (x) 0.32 0.35 0.33 0.30Interest burden (x) 0.87 0.95 0.94 0.98Tax burden (x) 0.54 0.55 0.61 0.61Financial leverage (x) 3.9 3.8 3.9 4.0Credit ratiosNet debt/equity (%) 93.4 107.7 124.7 137.6Net debt / EBITDA (x) 2.2 2.7 3.7 —Interest coverage ratio (x) 8.5 18.5 12.0 10.3


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20 June 2011




Greentown China Holdings Ltd(3900.HK / 3900 HK)

Sluggish sales indicate more risks

■ YTD sales behind schedule: As of May, Greentown had achieved gross

contracted sales of Rmb13.8 bn, down 15% YoY. In the first five months it

achieved only 25% of its 2011 full-year sales target of Rmb55 bn, and its sales

progress is among the slowest under our coverage. The company’s

management recently highlighted the difficulties in realising the target. We

expect a higher possibility of slippage in the company’s contracted sales this

year and reduce our 2011 contracted sales forecast by 15% to Rmb47 bn.

■ NAV reduced on new sector assumptions: We revise our assumptions for

the China property sector – we now expect ASP in major markets to drop

10% YoY (5% previously), and volume to drop 15% YoY (10% previously).

As a result, we revise down our forward NAV estimate for Greentown to

HK$17.3 from HK$19.9 and target price to HK$6.90 from HK$7.95.

■ Earning impact lag to appear, gearing to climb soon: Given Greentown’s

longer-than-average development cycle, the blended effect from lower ASP

and slower sales this year might show in 2012-13. However, the shortfall in

sale proceeds will likely push the company’s formidable gearing ratio even

higher and may approach 200% (net debt to attributable equity) by year end.

■ Valuation: Greentown is trading at a 58% discount to 12-month NAV and 1x

P/B. Given the expected market downturn and the company’s high-endposition and aggressive strategy, we continue to see risks for the company

and maintain our UNDERPERFORM rating.


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Performance Over 1M 3M 12MAbsolute (%) -11.0 -2.3 -15.5Relative (%) -6.6 0.2 -20.6


Year 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 11,161.3 20,117.2 27,444.2 31,933.3EBITDA (Rmb mn) 1,816.6 5,130.6 7,102.6 5,561.8EBIT (Rmb mn) 1,816.6 5,130.6 7,102.6 5,561.8Net income (Rmb mn) 1,531.8 1,896.9 3,039.3 3,334.8EPS (CS adj.) (Rmb) 0.93 1.16 1.85 2.03Change from previous EPS (%) n.a. 1.9 -2.2 -14.6Consensus EPS (Rmb) n.a. 1.29 1.95 2.48EPS growth (%) 84.3 24.0 60.2 9.7P/E (x) 6.5 5.2 3.3 3.0

Dividend yield (%) 5.0 7.7 12.3 13.5EV/EBITDA (x) 17.9 7.8 4.8 6.4P/B (x) 0.97 0.87 0.75 0.65ROE (%) 15.5 17.6 24.8 23.5Net debt/equity (%) 133.7 158.1 129.5 121.3Source: Company data, Thomson Reuters, Credit Suisse estimates




Research Analysts

Wenhan Chen852 2101 6407

[email protected]

Jinsong Du

852 2101 6589

[email protected]

Duo Chen

852 2101 7350

[email protected]

Rating UNDERPERFORM* [V]Price (16 Jun 11, HK$) 7.25Target price (HK$) (from 7.95) 6.90¹Chg to TP (%) -4.8Market cap. (HK$ mn) 11,884.5Enterprise value (Rmb mn) 39,875Number of shares (mn) 1,639.25Free float (%) 37.352-week price range 10.04 - 7.02




20 June 2011


Greentown China Holdings Ltd 3900.HK / 3900 HK Price (16 Jun 11): HK$7.25, Rating: UNDERPERFORM [V], Target Price: HK$6.90, Analyst: Wenhan Chen

Target price scenarioScenario TP %Up/Dwn AssumptionsUpsideCentral Case 6.90 -4.83Downside

Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 1,644.1 1,641.9 1,641.9 1,641.9EPS (Credit Suisse) 0.93 1.16 1.85 2.03Consensus EPS (Rmb) n.a. 1.29 1.95 2.48DPS (Rmb) 0.30 0.46 0.74 0.81Operating cash flow per 6.65 2.20 — —

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 11,161 20,117 27,444 31,933Cost of goods sold 7,759.9 12,783.9 18,145.4 23,959.1SG&A (excluding R&D) 1,658.1 2,276.0 2,269.4 2,485.7R&D costs — — — —Other operating inc/(exp.) -73.3 -73.3 -73.3 -73.3EBITDA 1,817 5,131 7,103 5,562Depr & amort (excl. goodwill) — — — —Goodwill impairment — — — —EBIT 1,816.6 5,130.6 7,102.6 5,561.8Net interest expense -137.1 964.9 1,046.5 1,046.5Net non operating inc (exp) 481.7 — — —Share of associates/JVs' equity 565.0 893.9 1,104.2 995.7Exceptional/extraordinary items — — — —Recurring PBT 3,000.3 5,059.7 7,160.3 5,511.0Taxes 1,084.8 2,457.2 3,082.1 1,431.0Profit after tax 1,915.5 2,602.5 4,078.2 4,080.0Other after tax income — — — —Minority interest 383.8 705.5 1,038.9 745.1

Preferred dividends — — — —Reported net income 1,531.8 1,896.9 3,039.3 3,334.8Analyst after tax adjustment — — — —Net income (Credit Suisse) 1,532 1,897 3,039 3,335

Cash flow (Rmb mn) 12/10A 12/11E 12/12E 12/13EEBIT 1,817 5,131 7,103 5,562Cash taxes paid 1,084.8 2,457.2 — —Change in working capital 11,344.0 4,000.7 — —Other cash & non-cash items -1,134.8 -3,063.5 -7,102.6 -5,561.8Cash flow from operations 10,941.0 3,610.7 — —Capex 333.2 349.9 — —Disposals of PPE — — — —Free cash flow to the firm 10,607.8 3,260.8 — —Acquisitions — — — —Divestments — — — —Other investment/(outflows) — — — —Cash flow from investment -333.2 -349.9 — —Net share issue/(repurchase) — — — —

Dividends paid 584.5 496.5 — —Change in debt 5,430.4 5,000.0 — 5,425.7Other financing inflows/outflows 3,884.2 636.8 — —Cash flow from financing activities 3,299.7 140.3 — —Effect of exchange rates — — — —Movements in cash/equivalents 13,907.5 3,401.1 — —

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 14,972.9 13,865.8 15,069.4 13,620.4Accounts receivable 4,196.0 4,196.0 4,196.0 4,196.0Inventory 2,034.2 2,034.2 2,034.2 2,034.2Other current assets 94,803.2 105,001.4 112,578.7 125,860.2Total current assets 116,006.2 125,097.3 133,878.2 145,710.8Total fixed assets 2,448.3 2,448.3 2,448.3 2,448.3Intangible assets and goodwill — — — —Investment securities — — — —Other assets 6,904.5 18,760.6 23,991.8 24,720.9Total assets 125,359.0 146,306.2 160,318.3 172,880.0Current LiabilitiesAccounts payable 8,928.0 8,928.0 8,928.0 8,928.0

Short-term debt 11,993.9 14,392.7 17,271.2 20,725.5Other short term liabilities 66,519.4 80,835.6 92,222.5 102,315.5Total current liabilities 87,441.3 104,156.3 118,421.7 131,969.0Long-term debt 21,621.4 24,654.6 21,776.1 18,321.8Other liabilities 1,843.5 1,411.6 1,411.6 1,411.6Total liabilities 110,906.3 130,222.4 141,609.3 151,702.4Shareholders' equity 10,199.5 11,337.7 13,161.3 15,162.2Minority interest 4,253.2 4,746.0 5,547.7 6,015.4Total liabilities and 125,359.0 146,306.2 160,318.3 172,880.0

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 27.9 80.2 36.4 16.4EBIT 50.7 182.4 38.4 -21.7Net profit 91.2 23.8 60.2 9.7EPS 84.3 24.0 60.2 9.7Margins (%)EBITDA margin 16.3 25.5 25.9 17.4EBIT margin 16.3 25.5 25.9 17.4Pretax margin 26.9 25.2 26.1 17.3Net margin 13.7 9.4 11.1 10.4Valuation metrics (x)P/E 6.5 5.2 3.3 3.0P/B 0.97 0.87 0.75 0.65EV/sales 2.9 2.0 1.2 1.1EV/EBITDA 17.9 7.8 4.8 6.4EV/EBIT 17.9 7.8 4.8 6.4ROE analysis (%)

ROE (%) 15.5 17.6 24.8 23.5ROIC 3.4 6.4 9.4 8.8Asset turnover (x) 0.09 0.14 0.17 0.18Interest burden (x) 1.7 1.0 1.0 1.0Tax burden (x) 0.64 0.51 0.57 0.74Financial leverage (x) 8.7 9.1 8.6 8.2Credit ratiosNet debt/equity (%) 133.7 158.1 129.5 121.3Net debt / EBITDA (x) 10.6 5.0 3.4 —Interest coverage ratio (x) -13.3 5.3 6.8 5.3




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20 June 2011




Kaisa Group(1638.HK / 1638 HK)

Fairly priced

■ We downgrade Kaisa from Outperform to NEUTRAL: Although Kaisa’

contracted sales in May picked up to Rmb1.28 bn, up 125% MoM and 106%

YoY, the company’s first five months’ sales of Rmb3.2 bn accounted for just

21% of its full-year target of Rmb15 bn. Its YTD sales progress is among the

slowest under our coverage. We expect the company’s sales progress to

continue to be hindered from the austerity measures and trim our 2011

contracted sales forecast to Rmb13 bn.

■ Reducing NAV with new sector assumptions: Together with Credit

Suisse economist and strategist’s more bearish call on China, we revise our

assumptions for the China property sector: we now expect ASP in major

markets to drop 10% YoY (5% previously), and volume to drop 15% YoY

(10% previously). As a result, we revise down our forward NAV estimate for

Kaisa to HK$5.7 from HK$6.4 and target price to HK$3.14 from HK$3.50.

■ Valuation: Kaisa is trading at a 51% discount to 12-month NAV and 1.2x

P/B. Given the current sector downturn and uncertainties ahead of its

contracted sales, we downgrade Kaisa from Outperform to NEUTRAL.


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Performance Over 1M 3M 12MAbsolute (%) 0.7 8.1 75.0Relative (%) 5.8 10.9 64.4

Financial and valuation metricsYear 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 7,755.9 9,310.0 12,407.5 16,302.2EBITDA (Rmb mn) 2,450.4 2,512.1 3,072.7 3,587.2EBIT (Rmb mn) 2,422.4 2,479.8 3,035.6 3,544.6Net income (Rmb mn) 1,409.5 1,564.3 1,788.5 2,011.4EPS (CS adj.) (Rmb) 0.29 0.30 0.32 0.36Change from previous EPS (%) n.a. -2.1 -6.5 24.0Consensus EPS (Rmb) n.a. 0.29 0.40 0.61EPS growth (%) 173.6 4.4 7.9 12.5P/E (x) 8.1 7.8 7.2 6.4Dividend yield (%) 1.2 1.9 2.1 17.9EV/EBITDA (x) 6.3 5.8 5.1 3.7P/B (x) 1.1 1.3 1.2 1.0ROE (%) 16.9 15.5 17.2 17.4Net debt/equity (%) 40.3 30.0 41.6 16.3





Research Analysts


[email protected]

Jinsong Du

852 2101 6589

[email protected]

Duo Chen

852 2101 7350

[email protected]

Rating (from Outperform)NEUTRAL* [V]Price (16 Jun 11, HK$) 2.80Target price (HK$) (from 3.50) 3.14¹Chg to TP (%) 12.1Market cap. (HK$ mn) 13,733.1Enterprise value (Rmb mn) 14,468Number of shares (mn) 4,904.67Free float (%) 22.052-week price range 3.39 - 1.51




20 June 2011


Kaisa Group 1638.HK / 1638 HK Price (16 Jun 11): HK$2.80, Rating: NEUTRAL [V], Target Price: HK$3.14

Target price scenarioScenario TP %Up/Dwn AssumptionsUpsideCentral Case 3.14 12.14Downside

Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 4,927.9 5,237.9 5,547.9 5,547.9EPS (Credit Suisse) 0.29 0.30 0.32 0.36Consensus EPS (Rmb) n.a. 0.29 0.40 0.61DPS (HK$) 0.03 0.05 0.06 0.50Operating cash flow per -0.00 0.17 -0.07 0.55

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 7,756 9,310 12,408 16,302Cost of goods sold 4,745.0 6,111.4 8,273.6 10,890.7SG&A (excluding R&D) 594.5 740.3 1,112.1 1,883.6R&D costs — — — —Other operating inc/(exp.) -6.0 -21.6 -13.8 -16.7EBITDA 2,450 2,512 3,073 3,587Depr & amort (excl. goodwill) 28.0 32.2 37.1 42.6Goodwill impairment — — — —EBIT 2,422.4 2,479.8 3,035.6 3,544.6Net interest expense 45.8 31.7 48.1 44.0Net non operating inc (exp) — — — —Share of associates/JVs' equity — — — —Exceptional/extraordinary items — — — —Recurring PBT 2,376.5 2,448.1 2,987.5 3,500.6Taxes 967.0 883.8 1,199.1 1,489.2Profit after tax 1,409.5 1,564.3 1,788.5 2,011.4Other after tax income — — — —Minority interest — — — —Preferred dividends — — — —Reported net income 1,409.5 1,564.3 1,788.5 2,011.4Analyst after tax adjustment — — — —Net income (Credit Suisse) 1,410 1,564 1,788 2,011


EBIT 2,422 2,480 3,036 3,545Cash taxes paid 476.2 385.7 471.7 530.5Change in working capital -1,383.0 -465.1 -1,945.7 1,080.9Other cash & non-cash items -573.3 -742.2 -996.0 -1,065.6Cash flow from operations -10.2 886.8 -377.7 3,029.4Capex 26.5 27.9 29.3 30.7Disposals of PPE — — — —Free cash flow to the firm -36.7 858.9 -407.0 2,998.7Acquisitions 704.7 596.4 520.3 558.4Divestments — — — —Other investment/(outflows) -123.7 -273.4 -393.0 -400.6Cash flow from investment -855.0 -897.7 -942.6 -989.8Net share issue/(repurchase) — — — —

Dividends paid — — — —Change in debt — — — —Other financing inflows/outflows — — — —Cash flow from financing activities — — — —Effect of exchange rates — — — —Movements in cash/equivalents -865.2 -10.9 -1,320.4 2,039.7

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 4,869.7 6,034.1 7,752.9 10,678.8Accounts receivable 2,482.3 4,652.3 7,690.4 11,943.6Inventory 603.3 965.9 1,231.5 1,847.2Other current assets 12,484.2 15,468.2 19,238.9 23,915.7Total current assets 20,439.4 27,120.5 35,913.6 48,385.3Total fixed assets 106.1 101.8 94.0 82.1Intangible assets and goodwill — — — —Investment securities — — — —Other assets 5,877.0 5,885.4 5,894.6 5,904.7Total assets 26,422.5 33,107.7 41,902.2 54,372.1Current LiabilitiesAccounts payable — — — —Short-term debt 1,751.7 1,804.3 1,858.4 1,914.1Other short term liabilities 7,530.5 12,816.7 18,231.9 28,067.2Total current liabilities 9,282.2 14,621.0 20,090.3 29,981.3Long-term debt 6,175.7 1,490.4 4,475.4 5,309.0Other liabilities 1,199.9 6,779.2 6,779.2 6,479.2Total liabilities 16,429.1 22,890.7 31,345.0 41,769.6Shareholders' equity 9,988.5 10,211.8 10,551.7 12,596.8Minority interest 4.9 5.2 5.4 5.7Total liabilities and 26,422.5 33,107.7 41,902.2 54,372.1

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 66.0 20.0 33.3 31.4EBIT 156.7 2.4 22.4 16.8Net profit 239.0 11.0 14.3 12.5EPS 173.6 4.4 7.9 12.5Margins (%)EBITDA margin 31.6 27.0 24.8 22.0EBIT margin 31.2 26.6 24.5 21.7Pretax margin 30.6 26.3 24.1 21.5Net margin 18.2 16.8 14.4 12.3Valuation metrics (x)P/E 8.1 7.8 7.2 6.4P/B 1.1 1.3 1.2 1.0EV/sales 2.0 1.6 1.3 0.8EV/EBITDA 6.3 5.8 5.1 3.7EV/EBIT 6.4 5.8 5.2 3.8ROE analysis (%)


[V] = Stock considered volatile (see Disclosure Appendix).Source: Company data, Thomson Reuters, Credit Suisse estimates.


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20 June 2011




KWG Property Holding Limited(1813.HK / 1813 HK)

Increasing risk of missing guidance; Shanghailaunch time less favourable

■ We downgrade KWG from Outperform to NEUTRAL: KWG’s May sales

were weaker than expected, due to the slower sell-through for some of its

high-end projects. Its Beijing project is also affected significantly by the

severe tightening measures there. From January to May, KWG recorded

Rmb5.53 bn of contracted sales, representing 37% of its full year guidance.

We expect KWG’s sales to remain relatively weak in the coming months,increasing the likelihood of reducing its FY11E contracted sales guidance.

■ Shanghai project launch becomes riskier now: KWG had originally

planned to launch its first Shanghai project in 2Q11, and we upgraded KWG

on 14 February with the hope of a successful launch. Now, this project

launch has been delayed to September/October. Given the potentially

deteriorating market sentiment, we believe the Shanghai project launch has

become riskier.


Suisse economist and strategist’s more bearish call on China, we revise our

assumptions for the China property sector: we now expect ASP in major

markets to drop 10% YoY (5% previously), and volumes to drop 15% YoY

(10% previously). As a result, we reduce our forward NAV estimate fromHK$13.4 to HK$9.9, and reduce our target price from HK$7.4 to HK$5.4.

■ Valuation: KWG is trading at a 49% discount to 12-month NAV. Given the

current sector downturn and KWG’s exposure in the high-end segment and

major cities, we think the current valuation is fair.


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Performance Over 1M 3M 12MAbsolute (%) -7.0 -5.0 5.4Relative (%) -2.3 -2.6 -1.0


Year 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 7,465.9 9,764.0 10,471.4 12,322.1EBITDA (Rmb mn) 2,501.5 3,313.7 3,327.6 4,061.4EBIT (Rmb mn) 2,490.3 3,301.4 3,314.0 4,046.5Net income (Rmb mn) 1,280.8 1,930.7 1,873.1 2,038.5EPS (CS adj.) (Rmb) 0.44 0.67 0.65 0.70Change from previous EPS (%) n.a. -1.5 -15.8 -22.9Consensus EPS (Rmb) n.a. 0.62 0.80 0.98

EPS growth (%) 65.9 50.7 -3.0 8.8P/E (x) 9.2 6.1 6.3 5.8Dividend yield (%) 2.0 3.1 3.0 3.2EV/EBITDA (x) 6.9 6.2 7.0 6.0P/B (x) 0.96 0.89 0.80 0.72ROE (%) 11.0 15.2 13.4 13.1Net debt/equity (%) 45.0 66.9 78.8 76.0Source: Company data, Thomson Reuters, Credit Suisse estimates




Research Analysts

Jinsong Du852 2101 6589

[email protected]

Wenhan Chen

852 2101 6407

[email protected]

Duo Chen

852 2101 7350

[email protected]

Rating (from Outperform)NEUTRAL* [V]Price (16 Jun 11, HK$) 4.90Target price (HK$) (from 7.40) 5.40¹Chg to TP (%) 10.2Market cap. (HK$ mn) 14,176.4Enterprise value (Rmb mn) 20,636Number of shares (mn) 2,893.15Free float (%) 30.052-week price range 7.13 - 4.56




20 June 2011


KWG Property Holding Limited 1813.HK / 1813 HK Price (16 Jun 11): HK$4.90, Rating: NEUTRAL [V], Target Price: HK$5.40, Analyst: Jinsong Du


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 2,893.8 2,893.8 2,893.8 2,893.8EPS (Credit Suisse) 0.44 0.67 0.65 0.70Consensus EPS (Rmb) n.a. 0.62 0.80 0.98DPS (Rmb) 0.08 0.13 0.12 0.13Operating cash flow per 0.14 -1.50 -1.02 -0.49

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 7,466 9,764 10,471 12,322Cost of goods sold 4,368.3 5,980.7 6,792.8 7,248.7SG&A (excluding R&D) 656.6 933.0 875.6 1,154.6R&D costs — — — —Other operating inc/(exp.) -49.3 -451.0 -511.1 -127.8EBITDA 2,501 3,314 3,328 4,061Depr & amort (excl. goodwill) 11.2 12.3 13.6 14.9Goodwill impairment — — — —EBIT 2,490.3 3,301.4 3,314.0 4,046.5Net interest expense -13.5 -15.6 5.6 55.0Net non operating inc (exp) — — — —Share of associates/JVs' equity — — — —Exceptional/extraordinary items — — — 103.3Recurring PBT 2,503.8 3,317.0 3,308.4 3,991.5Taxes 1,223.0 1,386.2 1,435.3 1,952.9Profit after tax 1,280.8 1,930.7 1,873.1 2,038.5Other after tax income — — — —Minority interest 0.0 — — —


Cash flow (Rmb mn) 12/10A 12/11E 12/12E 12/13EEBIT 2,490 3,301 3,314 4,047Cash taxes paid 909.4 1,370.9 1,330.0 1,447.4Change in working capital -646.5 -5,113.2 -3,329.5 -2,427.6Other cash & non-cash items -529.9 -1,154.5 -1,597.0 -1,589.2Cash flow from operations 404.4 -4,337.2 -2,942.4 -1,417.8Capex 318.3 286.5 308.0 304.3Disposals of PPE 110.6 103.1 106.9 105.0Free cash flow to the firm 86.1 -4,623.7 -3,250.4 -1,722.1Acquisitions 4.5 3.8 4.1 3.9Divestments — — — —Other investment/(outflows) — — — —Cash flow from investment -212.2 -187.2 -205.3 -203.3Net share issue/(repurchase) — — 1.0 2.0

Dividends paid 144.7 240.1 361.9 351.1Change in debt — — — —Other financing inflows/outflows -540.7 1,451.8 747.4 1,099.6Cash flow from financing activities -685.4 1,211.7 386.5 750.5Effect of exchange rates — — — —Movements in cash/equivalents -493.1 -3,312.7 -2,761.2 -870.5

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 6,803.6 8,011.5 14,510.3 17,227.5Accounts receivable 47.7 54.8 63.1 72.5Inventory 2,553.8 4,451.5 6,569.8 7,981.8Other current assets 15,515.1 17,089.8 19,206.7 21,592.7Total current assets 24,920.1 29,607.7 40,350.0 46,874.6Total fixed assets 1,343.9 1,618.1 1,912.6 2,202.0Intangible assets and goodwill — — — —Investment securities — — — —Other assets 13,770.3 11,385.2 12,536.2 13,838.5Total assets 40,034.3 42,611.0 54,798.8 62,915.0Current LiabilitiesAccounts payable 10,416.2 8,658.2 6,281.4 8,284.9

Short-term debt 2,281.7 2,327.3 2,373.9 2,421.3Other short term liabilities 2,733.8 1,522.0 5,195.2 5,905.7Total current liabilities 15,431.6 12,507.5 13,850.5 16,612.0Long-term debt 10,050.0 14,524.9 23,738.4 27,278.6Other liabilities 2,258.5 2,371.4 2,490.0 2,614.5Total liabilities 27,740.1 29,403.8 40,078.8 46,505.0Shareholders' equity 12,284.3 13,196.7 14,708.9 16,398.4Minority interest 10.0 10.5 11.0 11.6Total liabilities andshareholders' equity

40,034.3 42,611.0 54,798.8 62,915.0

Key earnings driver 12/10A 12/11E 12/12E 12/13EASP (Rmb per sqm) 11,475.6 12,032.1 12,530.7 —GFA (000 sqm) 1,001.74 1,054.21 1,453.78 1,706.44

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 75.0 30.8 7.2 17.7EBIT 99.1 32.6 0.4 22.1Net profit 75.6 50.7 -3.0 8.8EPS 65.9 50.7 -3.0 8.8Margins (%)EBITDA margin 33.5 33.9 31.8 33.0EBIT margin 33.4 33.8 31.6 32.8Pretax margin 33.5 34.0 31.6 32.4Net margin 17.2 19.8 17.9 16.5Valuation metrics (x)P/E 9.2 6.1 6.3 5.8P/B 0.96 0.89 0.80 0.72EV/sales 2.3 2.1 2.2 2.0

EV/EBITDA 6.9 6.2 7.0 6.0EV/EBIT 7.0 6.3 7.1 6.0ROE analysis (%)ROE (%) 11.0 15.2 13.4 13.1ROIC 7.1 8.7 7.1 7.2Asset turnover (x) 0.19 0.23 0.19 0.20Interest burden (x) 1.0 1.0 1.0 1.0Tax burden (x) 0.51 0.58 0.57 0.51Financial leverage (x) 3.3 3.2 3.7 3.8Credit ratiosNet debt/equity (%) 45.0 66.9 78.8 76.0Net debt / EBITDA (x) 2.2 2.7 3.5 —Interest coverage ratio (x) -184.3 -211.6 590.3 73.5



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Poly (Hong Kong) Investments

Ltd (0119.HK / 119 HK)

Valuation approaching appealing

■ May sales picked up while still long way ahead: Poly HK achieved

contracted sales of Rmb2.4 bn in May, which boosted the company’s YTD

sales to Rmb5.6 bn. The company’s first five months showed a 33% YoY

growth while achieving just 31% of its full-year target of Rmb18 bn. The

company divided its full-year target – Rmb7 bn in 1H and Rmb11 bn in 2H –

and was confident of realising its 1H target. Given the market uncertainty, we

are cautious on its sales in 2H11 and revise down our sales forecast by 10%

to Rmb16.2 bn based on the company’s target. We also noticed that thecompany’s YTD ASP of Rmb7,000 psm is lower than its guidance of

Rmb8,500 psm, which could put pressure on the company’s margin.

■ Land replenishment continuing: YTD, Polly HK has acquired around 2.2

mn in Guiyang, Yantai, Weihai and Ningbo with total cost of around Rmb1.9

bn and it also bought a large project with a GFA of 4 mn in Zunyi at a cost of

Rmb2 bn. However, the company sees little possibility to conduct further

asset injections in the near term due to weak share price and market

sentiment.


the China property sector: we now expect ASP in major markets to drop 10%

YoY (5% previously), and volumes to drop 15% YoY (10% previously). As a

result, we revise down our forward NAV estimate to HK$11.1 from HK$14and target price to HK$6.1 from HK$7.8.

■ Valuation: Poly HK is trading at a 57% discount to 12-month NAV. Also its

current price implies 0.78x P/B, which is approaching – 1SD (0.67x) of three-

year moving average (1.15x). Our new target price is set at 1x P/B; maintainNEUTRAL

.


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Performance Over 1M 3M 12MAbsolute (%) -18.6 -24.2 -38.2Relative (%) -14.5 -22.2 -41.9


Year 12/10A 12/11E 12/12E 12/13ERevenue (HK$ mn) 8,514.1 13,049.1 19,536.4 24,440.2EBITDA (HK$ mn) 2,802.8 3,622.6 4,810.3 6,231.0EBIT (HK$ mn) 2,802.8 3,622.6 4,810.3 6,231.0Net income (HK$ mn) 1,209.6 1,808.1 2,322.8 3,221.9EPS (CS adj.) (HK$) 0.37 0.50 0.64 0.89

Change from previous EPS (%) n.a. -13.3 -20.0 -19.9Consensus EPS (HK$) n.a. 0.53 0.77 1.09EPS growth (%) 22.4 36.4 28.5 38.7P/E (x) 12.9 9.4 7.3 5.3Dividend yield (%) 3.3 1.6 15.7 40.6EV/EBITDA (x) 11.1 9.9 7.1 5.1P/B (x) 0.78 0.73 0.67 0.66ROE (%) 6.6 8.0 9.6 12.6Net debt/equity (%) 58.5 73.7 62.2 50.7Source: Company data, Thomson Reuters, Credit Suisse estimates




Research Analysts


[email protected]

Jinsong Du

852 2101 6589

[email protected]

Duo Chen

852 2101 7350

[email protected]

Rating NEUTRAL* [V]Price (16 Jun 11, HK$) 4.73Target price (HK$) (from 7.80) 6.10¹Chg to TP (%) 29.0Market cap. (HK$ mn) 17,067.9Enterprise value (HK$ mn) 35,716Number of shares (mn) 3,608.44Free float (%) 46.052-week price range 9.51 - 4.73




20 June 2011


Poly (Hong Kong) Investments Ltd 0119.HK / 119 HK Price (16 Jun 11): HK$4.73, Rating: NEUTRAL [V], Target Price: HK$6.10, Analyst: Wenhan Chen


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 3,292.6 3,608.4 3,608.4 3,608.4EPS (Credit Suisse) 0.37 0.50 0.64 0.89Consensus EPS (HK$) n.a. 0.53 0.77 1.09DPS (HK$) 0.2 0.1 0.7 1.9Operating cash flow per -0.11 -1.13 0.49 1.53

Income statement (HK$ mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 8,514 13,049 19,536 24,440Cost of goods sold 5,030.4 8,280.1 13,241.7 16,198.3SG&A (excluding R&D) 1,070.8 1,362.4 1,787.4 2,270.4R&D costs — — — —Other operating inc/(exp.) -389.8 -216.1 -302.9 -259.5EBITDA 2,803 3,623 4,810 6,231Depr & amort (excl. goodwill) — — — —Goodwill impairment — — — —EBIT 2,802.8 3,622.6 4,810.3 6,231.0Net interest expense 257.3 336.2 337.1 338.1Net non operating inc (exp) — — — —Share of associates/JVs' equity 11.6 53.9 29.5 7.2Exceptional/extraordinary items — — — —Recurring PBT 2,557.1 3,340.3 4,502.7 5,900.1Taxes 1,049.4 1,297.6 1,823.3 2,349.9Profit after tax 1,507.7 2,042.7 2,679.4 3,550.2Other after tax income — — — —Minority interest 298.1 234.7 356.6 328.3


Cash flow (HK$ mn) 12/10A 12/11E 12/12E 12/13EEBIT 2,803 3,623 4,810 6,231Cash taxes paid 577.7 680.9 893.1 1,183.4Change in working capital 1,381.8 -1,152.6 4,899.8 8,941.0Other cash & non-cash items -3,973.3 -5,864.1 -7,057.5 -8,485.0Cash flow from operations -366.5 -4,075.0 1,759.4 5,503.6Capex — — — —Disposals of PPE — — — —Free cash flow to the firm -366.5 -4,075.0 1,759.4 5,503.6Acquisitions — — — —Divestments — — — —Other investment/(outflows) — — — —Cash flow from investment — — — —Net share issue/(repurchase) — — — —

Dividends paid 131.3 559.3 271.2 2,671.2Change in debt — — — —Other financing inflows/outflows — — — —Cash flow from financing activities -131.3 -559.3 -271.2 -2,671.2Effect of exchange rates — — — —Movements in cash/equivalents -497.8 -4,634.4 1,488.2 2,832.3

Balance sheet (HK$ mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 16,054.7 11,438.5 12,946.7 15,801.1Accounts receivable 1,215.0 1,336.5 1,470.2 1,617.2Inventory — — — —Other current assets 45,025.0 57,027.9 72,510.6 92,504.7Total current assets 62,294.7 69,803.0 86,927.5 109,923.0Total fixed assets 1,751.5 1,751.5 1,751.5 1,751.5Intangible assets and goodwill — — — —Investment securities — — — —Other assets 9,758.0 12,379.7 14,684.4 16,756.2Total assets 73,804.2 83,934.2 103,363.4 128,430.8Current LiabilitiesAccounts payable 1,967.2 2,164.0 2,380.4 2,618.4

Short-term debt 9,522.6 10,474.9 11,522.4 12,674.6Other short term liabilities 16,936.3 24,630.1 40,407.9 63,077.8Total current liabilities 28,426.2 37,269.0 54,310.6 78,370.8Long-term debt 20,300.6 19,411.6 18,440.0 17,378.9Other liabilities 1,305.1 1,940.6 2,891.6 4,081.0Total liabilities 50,031.9 58,621.2 75,642.3 99,830.7Shareholders' equity 22,010.2 23,258.9 25,310.5 25,861.2Minority interest 1,819.3 2,054.0 2,410.6 2,738.9Total liabilities andshareholders' equity

73,861.4 83,934.2 103,363.4 128,430.8

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 18.3 53.3 49.7 25.1EBIT 189.5 29.3 32.8 29.5Net profit 82.7 49.5 28.5 38.7EPS 22.4 36.4 28.5 38.7Margins (%)EBITDA margin 32.9 27.8 24.6 25.5EBIT margin 32.9 27.8 24.6 25.5Pretax margin 30.0 25.6 23.0 24.1Net margin 14.2 13.9 11.9 13.2Valuation metrics (x)P/E 12.9 9.4 7.3 5.3P/B 0.78 0.73 0.67 0.66EV/sales 3.6 2.7 1.8 1.3EV/EBITDA 11.1 9.9 7.1 5.1EV/EBIT 11.1 9.9 7.1 5.1ROE analysis (%)





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20 June 2011




Shimao Property Holdings Ltd(0813.HK / 813 HK)

Lack of imminent catalyst

■ Revising down 2011 contracted sales forecast: As of May, Shimao had

achieved contracted sales of Rmb11 bn (up 16% YoY) or 847,000 sqm

(down 3% YoY), which means 31% of its 2011 full-year target of Rmb36 bn

was achieved. Although its current sales progress is similar to that in 2010,

we expect market conditions to be less favourable in 3Q than in 3Q10 when

there was a significant volume rebound. Therefore, there will still likely be

quite a few uncertainties in the coming months. We reduce our 2011

contracted sales forecast by 10% to Rmb33 bn.


the China property sector: we now expect ASP in major markets to drop 10%

YoY (5% previously), and volume to drop 15% YoY (10% previously). As a

result, we revise down our forward NAV estimate for Shimao to HK$18.3

from HK$21.7 and target price to HK$10.1 from HK$12.00.

■ Lack of catalyst in the near term: The company’s YTD commercial

properties sales are around Rmb2 bn, behind its target of Rmb10 bn. Also,

the company indicated there is a little possibility to spin off its hotel portfolio.

Therefore, there is no strong catalyst for the company in the near term.

■ Valuation: Shimao is trading at a 51% discount to 12-month NAV and 1x

P/B. Given the expected market downturn and the company’s current salesprogress, we maintain our NEUTRAL rating.


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Year 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 21,789.0 26,300.0 31,919.4 40,730.3EBITDA (Rmb mn) 9,574.6 7,753.3 8,342.3 10,347.1EBIT (Rmb mn) 9,289.5 7,753.3 8,342.3 10,347.1Net income (Rmb mn) 3,563.6 4,086.9 4,322.0 5,437.7

EPS (CS adj.) (Rmb) 1.01 1.15 1.22 1.53Change from previous EPS (%) n.a. -2.3 -9.9 -10.1Consensus EPS (Rmb) n.a. 1.20 1.43 1.73EPS growth (%) 25.1 14.7 5.8 25.8P/E (x) 7.4 6.5 6.1 4.8Dividend yield (%) 4.7 4.3 4.5 5.8EV/EBITDA (x) 5.1 6.7 5.8 4.8P/B (x) 0.99 0.97 0.89 0.85ROE (%) 14.2 15.1 15.2 18.0Net debt/equity (%) 67.9 72.7 65.6 65.7Source: Company data, Thomson Reuters, Credit Suisse estimates




Research Analysts


[email protected]

Jinsong Du

852 2101 6589

[email protected]

Duo Chen

852 2101 7350

[email protected]

Rating NEUTRAL* [V]Price (16 Jun 11, HK$) 8.94Target price (HK$) (from 12.00) 10.10¹Chg to TP (%) 13.0Market cap. (HK$ mn) 31,730.9Enterprise value (Rmb mn) 51,730Number of shares (mn) 3,549.32Free float (%) 41.752-week price range 15.50 - 8.94




20 June 2011


Shimao Property Holdings Ltd 0813.HK / 813 HK Price (16 Jun 11): HK$8.94, Rating: NEUTRAL [V], Target Price: HK$10.10, Analyst: Wenhan Chen


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 3,544.7 3,544.3 3,544.3 3,544.3EPS (Credit Suisse) 1.01 1.15 1.22 1.53Consensus EPS (Rmb) n.a. 1.20 1.43 1.73DPS (Rmb) 0.35 0.32 0.34 0.43Operating cash flow per 1.31 1.86 2.68 -1.65

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 21,789 26,300 31,919 40,730Cost of goods sold 13,812.1 16,316.9 21,176.5 27,856.0SG&A (excluding R&D) 1,647.0 2,229.8 2,400.6 2,527.2R&D costs — — — —Other operating inc/(exp.) -2,959.7 — — —EBITDA 9,575 7,753 8,342 10,347Depr & amort (excl. goodwill) 285.1 — — —Goodwill impairment — — — —EBIT 9,289.5 7,753.3 8,342.3 10,347.1Net interest expense 671.6 466.0 451.3 450.3Net non operating inc (exp) — — — —Share of associates/JVs' equity -48.1 117.8 381.7 743.6Exceptional/extraordinary items — — — —Recurring PBT 8,569.9 7,405.1 8,272.6 10,640.4Taxes 3,079.4 2,883.2 3,349.0 4,413.3Profit after tax 5,490.5 4,521.9 4,923.6 6,227.1Other after tax income — — — —Minority interest 819.4 435.0 601.6 788.7Preferred dividends — — — —Reported net income 4,671.1 4,086.9 4,322.0 5,438.4Analyst after tax adjustment -1,107.5 — — -0.7Net income (Credit Suisse) 3,564 4,087 4,322 5,438


EBIT 9,290 7,753 8,342 10,347Cash taxes paid 2,007.6 1,629.1 1,820.0 2,447.3Change in working capital -1,557.4 2,640.8 5,298.9 -11,265.7Other cash & non-cash items -1,083.2 -2,161.0 -2,312.9 -2,499.0Cash flow from operations 4,641.3 6,604.0 9,508.3 -5,864.9Capex — — — —Disposals of PPE — — — —Free cash flow to the firm 4,641.3 6,604.0 9,508.3 -5,864.9Acquisitions — — — —Divestments — — — —Other investment/(outflows) — — — —Cash flow from investment — — — —Net share issue/(repurchase) — — — —

Dividends paid 1,346.4 1,417.7 1,348.7 1,426.3Change in debt 8,100.9 — — —Other financing inflows/outflows — — — —Cash flow from financing activities 6,754.6 -1,417.7 -1,348.7 -1,426.3Effect of exchange rates — — — —Movements in cash/equivalents 11,395.9 5,186.3 8,159.6 -7,291.2

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 13,728.6 11,522.6 11,852.9 10,426.6Accounts receivable 5,124.3 5,124.3 5,124.3 5,124.3Inventory — — — 1.0Other current assets 35,942.2 35,240.0 37,186.4 55,541.3Total current assets 54,795.1 51,886.9 54,163.6 71,093.1Total fixed assets 6,553.6 6,553.6 6,553.6 6,553.6Intangible assets and goodwill 2,280.5 2,280.5 2,280.5 2,280.5Investment securities — — — —Other assets 32,040.1 43,939.4 48,600.4 51,713.3Total assets 95,669.3 104,660.4 111,598.0 131,640.5Current LiabilitiesAccounts payable 11,512.9 15,745.4 17,813.9 34,838.6Short-term debt 9,376.7 9,376.7 9,376.7 9,376.7Other short term liabilities 17,760.0 21,348.7 23,212.5 23,999.9Total current liabilities 38,649.6 46,470.8 50,403.0 68,215.2Long-term debt 24,695.5 24,695.5 24,695.5 24,695.5Other liabilities 2,370.2 2,488.7 2,613.2 2,743.8Total liabilities 65,715.3 73,655.0 77,711.7 95,654.5Shareholders' equity 26,698.8 27,315.2 29,594.6 30,904.6Minority interest 3,255.2 3,690.2 4,291.7 5,080.4Total liabilities and 95,669.3 104,660.4 111,598.0 131,639.5

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 27.9 20.7 21.4 27.6EBIT 54.9 -16.5 7.6 24.0Net profit 28.4 14.7 5.8 25.8EPS 25.1 14.7 5.8 25.8Margins (%)EBITDA margin 43.9 29.5 26.1 25.4EBIT margin 42.6 29.5 26.1 25.4Pretax margin 39.3 28.2 25.9 26.1Net margin 16.4 15.5 13.5 13.4Valuation metrics (x)P/E 7.4 6.5 6.1 4.8P/B 0.99 0.97 0.89 0.85EV/sales 2.3 2.0 1.5 1.2EV/EBITDA 5.1 6.7 5.8 4.8EV/EBIT 5.3 6.7 5.8 4.8ROE analysis (%)




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20 June 2011




Sino-Ocean Land Holdings Ltd(3377.HK / 3377 HK)

Beijing risk remains high; financial conditionworsening despite the perpetual bond

■ Reducing 2011E ESP due to the recently issued perpetual bond: We

expect Sino Ocean’s recently issued perpetual bond to add Rmb155 mn

financial cost in 2011E and Rmb267 mn from 2012E onwards; this translates

into HK$0.03 and HK$0.06 per share.


Suisse economist and strategist’s more bearish call on China, we revise ourassumptions for the China property sector: we now expect ASP in major

markets to drop 10% YoY (5% previously), and volume to drop 15% YoY

(10% previously). As a result, we reduce our forward NAV estimate from

HK$9.45 to HK$7.1. Also, the combined impact from the perpetual bond and

the more bearish sector outlook result in 13%, 17% and 17% reduction in our

2011, 2012 and 2013 EPS estimates, respectively.

■ Actual financial condition may deteriorate: Sino Ocean’s Beijing projects

are affected significantly by the severe tightening measures there. From

January to May, Sino Ocean recorded Rmb9.2 bn of contracted sales,

representing 31% of its full-year guidance. We expect Sino Ocean’s sales to

remain relatively weak in the coming months, increasing the likelihood of

reducing its FY11E contracted sales guidance. Although net gearingappears improved on the perpetual securities issuance, but in fact its

financial condition is deteriorating due to the cash outflow for its increasing

number of commercial property projects.

■ Valuation: Sino Ocean is trading at a 50% discount to 12-month NAV. Given

the current sector downturn, Sino Ocean's exposure in major cities such as

Beijing, as well as its potentially deteriorating financial condition, we maintain

our NEUTRAL rating despite its recent share price weakness.


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Year 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 13,720.7 20,107.9 23,868.8 30,638.8EBITDA (Rmb mn) 3,385.5 5,231.9 5,075.1 5,755.4EBIT (Rmb mn) 3,385.5 5,231.9 5,075.1 5,754.4Net income (Rmb mn) 1,663.1 2,504.2 2,539.6 3,132.5EPS (CS adj.) (Rmb) 0.30 0.44 0.45 0.56Change from previous EPS (%) n.a. -13.0 -16.8 -16.7Consensus EPS (Rmb) n.a. 0.49 0.57 0.66EPS growth (%) 51.6 50.6 1.4 23.3P/E (x) 9.9 6.6 6.5 5.3Dividend yield (%) 4.4 4.9 5.4 5.9EV/EBITDA (x) 9.1 6.5 7.0 6.5P/B (x) 0.65 0.60 0.54 0.50ROE (%) 6.8 9.5 8.8 9.8Net debt/equity (%) 42.8 45.5 46.3 46.7Source: Company data, Thomson Reuters, Credit Suisse estimates



Research Analysts

Jinsong Du

852 2101 6589

[email protected]

Wenhan Chen


Duo Chen

852 2101 7350

[email protected]





20 June 2011


Sino-Ocean Land Holdings Ltd 3377.HK / 3377 HK Price (16 Jun 11): HK$3.52, Rating: NEUTRAL, Target Price: HK$3.90, Analyst: Jinsong Du


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 5,636.6 5,636.6 5,636.6 5,636.6EPS (Credit Suisse) 0.30 0.44 0.45 0.56Consensus EPS (Rmb) n.a. 0.49 0.57 0.66DPS (Rmb) 0.13 0.14 0.16 0.17Operating cash flow per -1.11 0.53 0.37 0.77

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 13,721 20,108 23,869 30,639Cost of goods sold 9,596.0 13,644.4 17,424.7 23,127.3SG&A (excluding R&D) 898.3 1,453.4 1,725.2 2,214.5R&D costs — — — —Other operating inc/(exp.) -159.1 -221.8 -356.2 -458.5EBITDA 3,385 5,232 5,075 5,755Depr & amort (excl. goodwill) — — — 1.0Goodwill impairment — — — —EBIT 3,385.5 5,231.9 5,075.1 5,754.4Net interest expense 287.4 269.5 283.0 296.5Net non operating inc (exp) — — — —Share of associates/JVs' equity — — — —Exceptional/extraordinary items — — — —Recurring PBT 3,098.1 4,962.4 4,792.1 5,457.9Taxes 1,225.8 1,768.9 1,452.1 1,525.0Profit after tax 1,872.3 3,193.6 3,340.0 3,932.9Other after tax income 566.5 — — —Minority interest 5.3 56.3 56.3 56.3

Preferred dividends — — — —Reported net income 2,433.6 3,137.3 3,283.7 3,876.6Analyst after tax adjustment -770.5 -633.1 -744.1 -744.1Net income (Credit Suisse) 1,663 2,504 2,540 3,133

Cash flow (Rmb mn) 12/10A 12/11E 12/12E 12/13EEBIT 3,385 5,232 5,075 5,754Cash taxes paid 1,136.2 1,481.4 1,549.4 1,824.9Change in working capital -6,913.4 2,000.0 1,026.1 2,885.8Other cash & non-cash items -1,581.8 -2,739.7 -2,476.2 -2,447.8Cash flow from operations -6,245.9 3,010.8 2,075.7 4,367.5Capex 29.8 31.3 — —Disposals of PPE 342.4 448.7 395.6 395.6Free cash flow to the firm -6,275.7 2,979.6 2,075.7 4,367.5Acquisitions — — — —Divestments — — — —Other investment/(outflows) — — — —Cash flow from investment -574.7 -514.3 395.6 395.6Net share issue/(repurchase) 5,814.0 2,522.0 — —

Dividends paid 628.0 955.7 14.5 1,177.8Change in debt 1,500.0 1,500.0 1,500.0 1,500.0Other financing inflows/outflows -1,485.9 -1,796.8 — —Cash flow from financing activities 5,200.2 1,269.5 1,485.5 322.2Effect of exchange rates — — 1.0 2.0Movements in cash/equivalents -1,620.4 3,766.0 3,957.7 5,087.3

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 15,034.6 13,349.8 12,938.1 12,869.9Accounts receivable 2,101.9 2,417.2 2,779.7 3,196.7Inventory 97.1 106.8 117.4 129.2Other current assets 48,271.0 54,144.9 60,724.4 68,112.4Total current assets 62,634.8 66,718.5 72,764.4 79,943.8Total fixed assets 369.0 405.9 446.5 491.2Intangible assets and goodwill 971.5 1,117.2 1,284.8 1,477.5Investment securities — — — —Other assets 14,880.1 20,665.2 23,839.4 26,403.7Total assets 78,855.4 88,906.9 98,335.2 108,316.2Current LiabilitiesAccounts payable 6,625.9 7,619.8 8,762.8 10,077.2

Short-term debt 9,920.1 9,920.1 9,920.1 9,920.1Other short term liabilities 8,769.8 11,112.7 14,129.7 18,020.2Total current liabilities 25,315.8 28,652.6 32,812.6 38,017.5Long-term debt 16,676.2 18,176.2 19,676.2 21,176.2Other liabilities 3,737.7 3,965.2 4,238.2 4,565.9Total liabilities 45,729.6 50,794.0 56,727.0 63,759.5Shareholders' equity 31,070.7 35,852.3 39,121.5 41,821.3Minority interest 2,055.1 2,260.6 2,486.7 2,735.3Total liabilities and 78,855.4 88,906.9 98,335.2 108,316.2

Key earnings driver 12/10A 12/11E 12/12E 12/13EASP (Rmb per sqm) 12,950.0 14,218.9 14,212.1 14,489.5GFA (sqm) 1,660,22 1,774,33 2,153,77 2,572,65

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 55.5 46.6 18.7 28.4EBIT 55.5 54.5 -3.0 13.4Net profit 51.6 50.6 1.4 23.3EPS 51.6 50.6 1.4 23.3Margins (%)EBITDA margin 24.7 26.0 21.3 18.8EBIT margin 24.7 26.0 21.3 18.8Pretax margin 22.6 24.7 20.1 17.8Net margin 12.1 12.5 10.6 10.2Valuation metrics (x)P/E 9.9 6.6 6.5 5.3P/B 0.65 0.60 0.54 0.50EV/sales 2.2 1.7 1.5 1.2

EV/EBITDA 9.1 6.5 7.0 6.5EV/EBIT 9.1 6.5 7.0 6.5ROE analysis (%)ROE (%) 6.8 9.5 8.8 9.8ROIC 4.3 6.1 5.8 6.3Asset turnover (x) 0.17 0.23 0.24 0.28Interest burden (x) 0.92 0.95 0.94 0.95Tax burden (x) 0.60 0.64 0.70 0.72Financial leverage (x) 2.4 2.3 2.4 2.4Credit ratiosNet debt/equity (%) 42.8 45.5 46.3 46.7Net debt / EBITDA (x) 4.2 3.3 3.8 —Interest coverage ratio (x) 11.8 19.4 17.9 19.4



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20 June 2011


Wind Equipment SectorGone with the wind

Yang Y. Song – 852 2101 6550 – [email protected]

Earnings and target price changes

Figure 19: Key drivers Key drivers FY11E FY12E FY13E

Installed WTG (GW) 17.0 16.8 16.5

Before n.s. n.a. n.a.

WTG ASP (Rmb/KW) 3650 3252 3100

Before 4000 3800 3610


Figure 20: Earnings changes and target price EPS old EPS new* TP* Rating*

2011 2012 2011 2012 Old New Old New

Goldwind (HK$) n.a. n.a. 0.69 0.60 n.a. 7.2 n.a. U

CHST (HK$) 1.01 1.04 0.79 0.79 16.86 9.5 O N

MY (US$) 1.41 1.54 0.80 0.75 15.2 7.5 O N

* Note: Changes implemented in China Wind Equipment Sector: Storm ahead, published 13 June 2011.


Wind power demand goes ex-growth

The wind power industry is one of many industries in China that saw ‘over-zealous’

investment during the past few years. Many wind farms have been constructed without

adequate transmission/ grid interconnection planning. As of year end 2010, only 31.1 GW

(or 69%) of the 45 GW installed wind turbines were connected to the grid. In addition,

according to the CEC, approximately 11% of wind power generated in first half of 2010

was rejected by the power grid, with Inner Mongolia being the most affected after having

23% curtailment. Jilin and Gansu provinces followed suit with 15% and 12% of thegenerated wind power rejected by the grid. If this calculation were to include the

opportunity lost by WTG shutdowns, as commanded by the grid central dispatch, the

curtailment would be even higher.

We believe as China addresses the debt problem developed during the past two years

through continued tightening, the investments in the wind power sector will also slow down.

We are forecast 16-17 GW in installed wind power growth per annum for 2011-15;

decreasing from the 18.9 GW installed in 2010.

Figure 21: Installed and commissioned wind capacity forecast (GW) 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Connected wind capacity (cum) 1.1 2.1 4.2 8.4 16.1 31.1 49.9 67.7 85.2 102.4 119.3

Installed wind capacity (cum) 1.3 2.6 5.9 12.1 25.9 44.8 61.8 78.6 95.1 111.3 127.3

Previously installed but not connected 0.2 0.5 1.7 3.7 9.8 13.7 11.9 10.9 9.9 8.9

Newly-installed wind capacity 1.3 3.3 6.2 13.8 18.9 17.0 16.8 16.5 16.3 16.0

Commissioned wind 1.0 2.1 4.2 7.7 14.9 18.8 17.8 17.5 17.2 16.9

Newly-installed but not connected 0.5 1.7 3.7 9.8 13.7 11.9 10.9 9.9 8.9 8.0

% cumulative installed but not connected 20.2 28.7 30.9 37.7 30.7 19.3 13.9 10.4 8.0 6.3

% newly installed wind connected to the grid 60.6 48.7 40.1 29.1 27.4 30.0 35.0 40.0 45.0 50.0

Source: CEC, Credit Suisse estimates




20 June 2011


We discuss factors contributing to slower wind power growth below:

■

Government approvals become more stringent

According to the China Daily , China's National Energy Bureau (NEB) is drafting new

regulations to standardise the approval on wind farms. Currently, China's local

governments have the power to approve wind farm projects of less than 50 MW in

installed capacity. Wind farm projects larger than 50 MW are approved by the NDRC. To

get their projects approved by local governments, an easier and faster route than theapproval by the central government, wind operators often divide their wind farm projects

into multiple stages, each being smaller than 50 MW. As a result, numerous wind farms

across the country are 49.5 MW in size.

The new regulation would require local governments to first gain approval from the NEB

before they can offer licences for wind projects. We believe this move is the central

government’s bid to curb over-enthusiasm in wind development at the provincial level and

reshape wind development so that it is more coordinated with the regional transmission

development.

■ Difficulty in access to capital could also play a role in limiting wind capacity growth

Chinese authorities have been combatting inflation through monetary tightening, including

reducing lending quota and increasing reserve requirement and the interest rate. As windfarms are typically financed by over 70% debt, there is concern that monetary tightening

could affect growth in wind power capacity. We believe the SOEs with a good relationship

with Chinese banks will see less impact while private developers or regional entities could

be more affected. Anecdotally, we hear from small wind developers that access to capital

is becoming increasingly difficult.

■ Wind power integration constraints limit capacity growth beyond 2011/12

We see significant wind power integration issues that are difficult to resolve within the

medium term and, in our view, will cap the wind capacity growth beyond the immediate

future. We believe the integration bottleneck is caused because of: (1) highly concentrated

wind farm distribution in wind-rich areas as China pursues the 10+ GW wind base

strategy; (2) lack of regulation capacity to ramp up/ down to accommodate intermittency of

wind generation; and (3) lack of T&D infrastructure to transmit wind power to load centres.

All above-mentioned issues may take years to be resolved hence our bearish view on the

growth potential of wind generation in China beyond 2011/12.

2011/12 EPS estimates 20-40% below consensus

WTG industry is facing significant over capacity. We estimate capacity utilisation declines

materially to 54% in 2011 from 73% in 2010, creating enormous pressure on WTG’s

average selling prices. We forecast the realised ASP for 2011 sales to be Rmb780/kW

lower than 2010’s, and decline by a further Rmb390/kW in 2012, guided by recent WTG

tender pricing points in addition to the supply/ demand curve we constructed.

As demand softens and ASP continues to decline, we see significant risk to earnings that

is not yet acknowledged by the Street. In Figure 22, we show our estimates for thesecompanies (Goldwind, CHST and Mingyang), and found our estimates are 20-40% below

Street. We find the consensus is discounting unrealistically bullish assumptions in terms of

sales volume, ASP and gross margin for the three companies and believe there is

significant downward earning revision ahead.




20 June 2011


Figure 22: CS versus consensus earnings estimates Consensus (Rmb) CS (Rmb) CS vs Consensus (%)

2011 2012 2011 2012 2011 2012

Goldwind 0.85 0.89 0.69 0.60 -19 -33

CHST 1.02 1.10 0.79 0.79 -22 -28

MY 1.13 1.20 0.80 0.75 -29 -38

Source: IBES, Credit Suisse estimates

Negative catalysts abound

We expect consensus earnings for these stocks to fall 20-40% to properly reflect softening

wind equipment demand and continued pressure in equipment ASPs, hence further share

price weakness in both names, especially around the time of interim results (August). We

also see continued news flow on ASP declining, quality issues of wind turbines and

tightening government policies in the coming months.

We value Goldwind, CHST and MY on 10x 2012 earnings and reach target prices of

HK$7.20, HK$9.50 and UD$7.20, respectively, implying 11% downside, 14% upside and

36% upside from the 17 June closing. WE rate Goldwind UNDERPERFORM and both

CHST and MY as NEUTRAL. We should point out that the upsides in our target prices for

CHST and MY are purely valuation-based. Given the lack of WTG demand and pricing

visibility and substantial downward revision we are expecting to theses stocks’ earnings,

we believe the market will assign discount multiples to both names in the short run and the

stock prices will remain depressed.




20 June 2011



Electrical Equipment

Xinjiang Goldwind Science &

Technology (2208.HK / 2208 HK)

The Gold is losing its shine

■ Sales volume forecast too bullish. Goldwind forecasts 5.5 GW sales for

2011, which implies a market share gain of 12%, from 20% in 2010 to 32%

in 2011, based on our 17 GW installed WTG forecast. We believe this is

extremely difficult to achieve given our view that direct drive technology (that

Goldwind is the champion) has balanced advantages and disadvantages

compared with the double-fed wind turbine generators (WTGs) with

gearboxes. The direct drive WTGs’ market share gain in the last four years

(from 3% in 2007 to 20% in 2010) results from Goldwind’s internal switch ofWTG models from the smaller 750 kW geared WTG to the bigger 1.5 MW

direct drive model. Goldwind’s 750 kW geared WTG’s market share

decreased from 20% in 2007 to 1% in 2010. This alone explains the market

share gain of direct drive against geared WTGs. As the 750 kW model has

been almost completely phased out, we do not expect significant increase in

direct drive WTG’s market share going forward and thus no significant uptick

in market share for Goldwind.

■ ASP under pressure. Goldwind started the ASP decline to sub-

Rmb4,000/kW when it bid Rmb3,850/kW in the Xinjiang Hami tender last

year. The company does not command an ASP premium versus other

domestic players and will suffer from the same, as intense competition due

to overcapacity and lack of differentiation continues to weigh on WTG price.

■ Significant downside to earnings. Our 2011/12 EPS estimates are 19%

and 33% below IBES consensus, primarily due to our lower assumption for

Goldwind’s WTG sales at 4,315 MW and 4,485 MW and domestic ASP at

Rmb3,606/ kW and Rmb3,273/ kW for 2011/12. We expect material

downward revisions to earnings in the not-so-distant future, especially

around the time of interim results. Goldwind is our top short idea within the

group.


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MSCI CHINA F IDX which closed at 6417.61 on 17/06/11


Performance over 1M 3M 12MAbsolute (%) -21.0 -40.8 —Relative (%) -14.3 -39.2 -4.3


Year 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 17,475.2 16,663.3 16,319.4 16,555.6EBITDA (Rmb mn) 3,356.1 2,650.9 2,589.7 2,660.8EBIT (Rmb mn) 3,188.9 2,352.1 2,100.8 2,049.6

Net income (Rmb mn) 2,289.5 1,592.7 1,384.3 1,339.4EPS (CS adj.) (Rmb) 0.99 0.69 0.60 0.58Change from previous EPS (%) n.a. 0 0 0Consensus EPS (Rmb) n.a. 0.85 0.89 0.95EPS growth (%) -20.7 -30.4 -13.1 -3.2P/E (x) 7.2 10.3 11.8 12.2Dividend yield (%) 5.6 3.9 3.4 3.3EV/EBITDA (x) -0.9 -1.4 -1.4 -2.2P/B (x) 1.3 1.2 1.2 1.1ROE (%) 26.3 12.4 10.1 9.2Net debt/equity (%) net cash net cash net cash net cashSource: Company data, Thomson Reuters, Credit Suisse estimates




Research Analysts

Yang Y. Song852 2101 6550

[email protected]

Rating UNDERPERFORM* [V]Price (17 Jun 11, HK$) 8.54Target price (HK$) 7.20¹Chg to TP (%) -15.7Market cap. (HK$ mn) 4,270.4Enterprise value (Rmb mn) -3,826Number of shares (mn) 500.05Free float (%) —52-week price range 21.30 - 8.46




20 June 2011


Xinjiang Goldwind Science & Technology 2208.HK / 2208 HK Price (17 Jun 11): HK$8.54, Rating: UNDERPERFORM [V], Target Price: HK$7.20, Analyst: Yang Song


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 2,315.8 2,315.8 2,315.8 2,315.8EPS (Credit Suisse) 0.99 0.69 0.60 0.58Consensus EPS (Rmb) n.a. 0.85 0.89 0.95DPS (Rmb) 0.40 0.28 0.24 0.23Operating cash flow per 0.09 1.72 0.70 1.59

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 17,475 16,663 16,319 16,556Cost of goods sold 13,453.8 13,271.5 13,235.7 13,474.9SG&A (excluding R&D) 1,248.4 1,051.0 833.1 730.0R&D costs 98.4 249.9 244.8 248.3Other operating inc/(exp.) -681.5 -560.1 -583.9 -558.4EBITDA 3,356 2,651 2,590 2,661Depr & amort (excl. goodwill) 167.2 298.8 488.9 611.1Goodwill impairment — — — —EBIT 3,188.9 2,352.1 2,100.8 2,049.6Net interest expense 117.0 144.9 153.8 153.8Net non operating inc (exp) -272.2 -259.6 -254.2 -257.9Share of associates/JVs' equity — — — —Exceptional/extraordinary items — — — —Recurring PBT 2,799.7 1,947.6 1,692.8 1,637.9Taxes 415.9 289.3 251.5 243.3Profit after tax 2,383.8 1,658.3 1,441.4 1,394.6Other after tax income — — — —Minority interest 94.3 65.6 57.0 55.2


Cash flow (Rmb mn) 12/10A 12/11E 12/12E 12/13EEBIT 3,189 2,352 2,101 2,050Cash taxes paid -415.9 -289.3 -251.5 -243.3Change in working capital -1,895.4 1,941.1 -402.1 1,570.0Other cash & non-cash items -675.5 -26.3 177.7 298.1Cash flow from operations 202.1 3,977.6 1,625.0 3,674.4Capex -1,454.9 -2,250.0 -1,000.0 -800.0Disposals of PPE — — — —Free cash flow to the firm -1,252.8 1,727.6 625.0 2,874.4Acquisitions — — — —Divestments — — — —Other investment/(outflows) -1,040.5 -144.9 -153.8 -153.8Cash flow from investment -2,495.4 -2,394.9 -1,153.8 -953.8Net share issue/(repurchase) 7,038.8 — — —

Dividends paid -165.8 -916.2 -637.3 -553.9Change in debt 342.8 — — —Other financing inflows/outflows 63.0 13.1 45.7 62.9Cash flow from financing activities 7,278.8 -903.1 -591.6 -491.0Effect of exchange rates — — — —Movements in cash/equivalents 4,985.6 679.6 -120.4 2,229.6

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 9,658.2 10,333.8 10,209.4 12,435.0Accounts receivable 7,583.1 5,007.4 3,786.3 3,841.1Inventory 4,390.7 2,755.4 4,371.4 2,884.2Other current assets 1,204.0 1,155.4 1,131.5 1,147.9Total current assets 22,836.1 19,252.0 19,498.6 20,308.2Total fixed assets 3,782.8 5,788.3 6,353.8 6,597.1Intangible assets and goodwill 610.1 555.7 501.3 446.9Investment securities — — — —Other assets 1,168.7 1,172.7 1,176.7 1,180.7Total assets 28,397.6 26,768.7 27,530.4 28,532.8Current liabilitiesAccounts payable 8,130.2 5,864.7 5,848.8 5,954.5

Short-term debt 1,501.5 296.7 296.7 296.7Other short term liabilities 2,824.5 2,771.4 2,756.3 2,804.6Total current liabilities 12,456.2 8,932.8 8,901.8 9,055.8Long-term debt 1,465.3 2,670.2 2,670.2 2,670.2Other liabilities 845.2 818.5 807.2 815.0Total liabilities 14,766.7 12,421.5 12,379.2 12,540.9Shareholders' equity 12,372.8 13,328.2 14,158.6 14,962.0Minority interest 341.9 381.7 438.7 493.9Total liabilities and 28,397.6 26,768.7 27,530.4 28,532.8

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 63.8 -4.6 -2.1 1.4EBIT 49.7 -26.2 -10.7 -2.4Net profit 31.2 -30.4 -13.1 -3.2EPS -20.7 -30.4 -13.1 -3.2Margins (%)EBITDA margin 19.2 15.9 15.9 16.1EBIT margin 18.2 14.1 12.9 12.4Pre-tax margin 16.0 11.7 10.4 9.9Net margin 13.1 9.6 8.5 8.1Valuation metrics (x)P/E 7.2 10.3 11.8 12.2P/B 1.3 1.2 1.2 1.1EV/sales -0.18 -0.23 -0.23 -0.36EV/EBITDA -0.9 -1.4 -1.4 -2.2EV/EBIT -1.0 -1.6 -1.8 -2.9ROE analysis (%)

ROE (%) 26.3 12.4 10.1 9.2ROIC 52.1 28.8 24.0 24.2Asset turnover (x) 0.62 0.62 0.59 0.58Interest burden (x) 0.88 0.83 0.81 0.80Tax burden (x) 0.85 0.85 0.85 0.85Financial leverage (x) 2.2 2.0 1.9 1.8Credit ratiosNet debt/equity (%) -49.1 -51.3 -47.8 -59.2Net debt / EBITDA (x) -2.0 -2.8 -2.8 —Interest coverage ratio (x) 27.3 16.2 13.7 13.3




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China High Speed Transmission

Equipment (0658.HK / 658 HK)

Weak wind market fundamentals priced in

■ Sales volume forecast bullish, ASP under pressure. CHST has forecast

12,000 MW sales for 2011, which implies domestic market share gain of

more than 20%, from 55% in 2010 to 77% in 2011, based on our 17,000 MW

installed WTG forecast. We believe this is extremely difficult to accomplish,

as CHST’s market share has not seen any increase in the last three years.

We also see significant pressure in ASP as WTG manufacturers continue to

squeeze component suppliers. Hence, there is a high likelihood of margin

erosion for the company. We forecast wind gearbox gross margin todecrease to 27% and 25% in 2011/12 from 31% in 2010.

■ Weak wind market fundamentals priced in. We believe the softening wind

turbine demand and declining ASP are largely priced in. We estimate the

market is pricing in 10,500 MW in sales volume, 24% gross margin and a

wind gearbox price drop of 17% from Rmb600/kW in 2010 to Rmb500/kW in

2012 (slightly lower than our forecast of 11,100 MW WTG sales, 25% gross

margin and Rmb500/kW wind gearbox ASP). Given CHST’s growing

potential in the export market (it received orders for wind gearboxes of 1,500

MW from GE in 2011 and plans to increase the delivery by 60% to 2,400

MW in 2012) and its major competitor in the international market Hansen

Transmissions’ financial difficulties, we believe the company’s wind gearbox

export growth could surprise the market on the upside.

■ On a pure valuation basis, we think the share price reflects much of the

future weakness in the wind equipment market, hence our NEUTRAL rating.

But our EPS estimates are 22% and 28% below IBES consensus. We

believe downward revision in earnings and high uncertainty in ASP and

demand will continue to weigh down this name. We believe there will be a

better entry point for CHST after consensus estimates are revised down

sufficiently.


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MSCI CHINA F IDX which closed at 6417.61 on 17/06/11


Performance over 1M 3M 12MAbsolute (%) -22.2 -34.7 -53.2Relative (%) -15.5 -33.1 -57.5


Year 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 7,392.6 7,286.1 7,728.1 7,728.1EBITDA (Rmb mn) 2,013.5 1,818.7 1,827.5 1,856.3EBIT (Rmb mn) 1,644.1 1,386.7 1,360.3 1,360.3

Net income (Rmb mn) 1,383.6 1,015.9 1,011.0 1,062.2EPS (CS adj.) (Rmb) 1.08 0.79 0.79 0.83Change from previous EPS (%) n.a. 0 0 0Consensus EPS (Rmb) n.a. 1.02 1.10 1.15EPS growth (%) 39.1 -26.6 -0.5 5.1P/E (x) 6.1 8.3 8.3 7.9Dividend yield (%) 3.3 3.9 2.8 2.8EV/EBITDA (x) 5.2 5.5 5.1 4.5P/B (x) 1.4 1.0 1.0 0.9ROE (%) 23.4 13.1 11.9 11.5Net debt/equity (%) 19.1 11.7 4.1 net cashSource: Company data, Thomson Reuters, Credit Suisse estimates



Research Analysts

Yang Y. Song

852 2101 6550

[email protected]

Rating NEUTRAL*Price (17 Jun 11, HK$) 7.92Target price (HK$) 9.50¹Chg to TP (%) 19.9Market cap. (HK$ mn) 10,792.9Enterprise value (Rmb mn) 9,913Number of shares (mn) 1,362.74Free float (%) 84.652-week price range 18.50 - 7.92




20 June 2011


China High Speed Transmission Equipment 0658.HK / 658 HK Price (17 Jun 11): HK$7.92, Rating: NEUTRAL, Target Price: HK$9.50, Analyst: Yang Song


Per share data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 1,281.3 1,281.3 1,281.3 1,281.3EPS (Credit Suisse) 1.08 0.79 0.79 0.83Consensus EPS (Rmb) n.a. 1.02 1.10 1.15DPS (Rmb) 0.22 0.25 0.19 0.19Operating cash flow per 1.39 1.35 1.19 1.29

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 7,393 7,286 7,728 7,728Cost of goods sold 5,093.8 5,256.1 5,676.8 5,676.8SG&A (excluding R&D) 747.2 736.4 781.1 781.1R&D costs 50.5 49.7 52.8 52.8Other operating inc/(exp.) -512.3 -574.8 -610.0 -638.8EBITDA 2,013 1,819 1,828 1,856Depr & amort (excl. goodwill) 409.6 472.2 507.4 536.2Goodwill impairment 40.2 40.2 40.2 40.2EBIT 1,644.1 1,386.7 1,360.3 1,360.3Net interest expense 146.8 219.1 198.5 137.5Net non operating inc (exp) 111.3 - 142,108,547, —Share of associates/JVs' equity 41.5 43.8 43.8 43.8Exceptional/extraordinary items — — — —Recurring PBT 1,650.0 1,211.5 1,205.7 1,266.7Taxes 256.5 188.4 187.5 196.9Profit after tax 1,393.5 1,023.1 1,018.2 1,069.7Other after tax income — — — —Minority interest 9.8 7.2 7.2 7.5Preferred dividends — — — —Reported net income 1,383.6 1,015.9 1,011.0 1,062.2Analyst after tax adjustment — — — —Net income (Credit Suisse) 1,384 1,016 1,011 1,062


EBIT 1,644 1,387 1,360 1,360Cash taxes paid -256.5 -188.4 -187.5 -196.9Change in working capital -76.3 104.8 -106.5 —Other cash & non-cash items 470.9 424.7 460.0 488.4Cash flow from operations 1,782.1 1,727.9 1,526.3 1,651.8Capex -1,354.3 -600.0 -500.0 -400.0Disposals of PPE — — — —Free cash flow to the firm 427.9 1,127.9 1,026.3 1,251.8Acquisitions — — — —Divestments — — — —Other investment/(outflows) -712.3 -219.1 -198.5 -137.5Cash flow from investment -2,066.6 -819.1 -698.5 -537.5Net share issue/(repurchase) 1,969.7 — — —

Dividends paid -327.4 -327.4 -240.4 -239.3Change in debt 534.4 -471.6 -1,000.0 -500.0Other financing inflows/outflows 70.8 -111.0 7.2 7.5Cash flow from financing activities 2,247.5 -910.1 -1,233.2 -731.7Effect of exchange rates — — — —Movements in cash/equivalents 1,963.0 -1.2 -405.4 382.6

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 3,037.4 3,036.2 2,630.8 3,013.4Accounts receivable 3,810.8 3,755.9 3,983.7 3,983.7Inventory 1,257.7 1,297.7 1,401.6 1,401.6Other current assets 17.9 17.6 18.7 18.7Total current assets 8,123.8 8,107.4 8,034.8 8,417.4Total fixed assets 4,869.8 5,078.0 5,151.1 5,095.4Intangible assets and goodwill 196.6 156.3 116.1 75.9Investment securities 829.6 873.4 917.2 961.0Other assets 893.5 893.5 893.5 893.5Total assets 14,913.1 15,108.7 15,112.7 15,443.2Current liabilitiesAccounts payable 2,612.6 2,695.9 2,911.6 2,911.6Short-term debt 2,428.6 2,172.4 1,629.3 1,357.8Other short term liabilities 184.7 172.7 183.2 183.2Total current liabilities 5,225.9 5,041.0 4,724.2 4,452.6Long-term debt 2,043.1 1,827.6 1,370.7 1,142.2Other liabilities 148.2 30.0 30.0 30.0Total liabilities 7,417.2 6,898.6 6,124.8 5,624.8Shareholders' equity 7,392.7 8,081.2 8,851.8 9,674.8Minority interest 121.6 128.8 136.0 143.5Total liabilities and 14,931.5 15,108.7 15,112.7 15,443.2

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 30.9 -1.4 6.1 —EBIT 18.3 -15.7 -1.9 —Net profit 43.2 -26.6 -0.5 5.1EPS 39.1 -26.6 -0.5 5.1Margins (%)EBITDA margin 27.2 25.0 23.6 24.0EBIT margin 22.2 19.0 17.6 17.6Pre-tax margin 22.3 16.6 15.6 16.4Net margin 18.7 13.9 13.1 13.7Valuation metrics (x)P/E 6.1 8.3 8.3 7.9P/B 1.4 1.0 1.0 0.9EV/sales 1.4 1.4 1.2 1.1EV/EBITDA 5.2 5.5 5.1 4.5EV/EBIT 6.3 7.1 6.9 6.2ROE analysis (%)ROE (%) 23.4 13.1 11.9 11.5ROIC 17.1 12.9 12.4 12.3Asset turnover (x) 0.50 0.48 0.51 0.50Interest burden (x) 1.0 0.9 0.9 0.9Tax burden (x) 0.84 0.84 0.84 0.84Financial leverage (x) 2.0 1.8 1.7 1.6Credit ratiosNet debt/equity (%) 19.1 11.7 4.1 -5.2Net debt / EBITDA (x) 0.71 0.53 0.20 —Interest coverage ratio (x) 11.2 6.3 6.9 9.9



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China Ming Yang Wind Power

Group Ltd. (MY / MY US)

All about market share gain

■ Aggressive sales volume forecast. MY management is guiding aggressive

commissioned WTG volume growth in 2011 (2,300-2,400 MW versus 936

MW in 2010) and significant market share gains (12-14% versus 5.5% in

2010). Our sensitivity analysis shows that whether MY’s valuation is

attractive at the current price hinges on the company’s ability to grow its

market share to 10% or above in 2012. Note that our US$7.50 target price

assumes MY can achieve its stated goal to grow market share to at least

12%. There could be additional downside to our earnings estimates andtarget price if MY fails to deliver on this. Comparing MY’s year-end 2010

order backlogs against those of other major domestic competitors, we do not

see significant market shares gains. We remain sceptical on MY’s ability to

achieve its market share growth target.

■ Street too bullish. Our 2011/12 earnings estimates are 29%/38% below

IBES consensus. We estimate consensus earnings are discounting

Rmb3,600/ kW+ for ASP (excluding VAT), 21%+ gross margin and 2GW+

WTG sales in 2012 versus our assumptions of Rmb3,217/ kW ASP, 17%

gross margin and 2,149 MW WTG sales. We believe Street is too optimistic

and aggressive given our view of moderating WTG installation from the 2010

levels and the ASP possibly declining to as low as Rmb3,050/kW.

■ Time is not right. Besides deteriorating fundamentals of the wind energy

market and the downward earnings revision by Street, US-listed China

stocks are currently suffering from a crisis of confidence among investors,

making it difficult to be more constructive on this name at present.


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The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6491.91 on 16/06/11.

On 16/06/11 the spot exchange rate was US$1./US$1

Performance over 1M 3M 12MAbsolute (%) -32.9 -49.0 —Relative (%) -26.3 -47.4 -4.3


Year 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 5,517.8 6,516.2 6,933.3 6,731.7EBITDA (Rmb mn) 828.9 772.6 855.7 931.1EBIT (Rmb mn) 790.5 695.7 688.9 770.6Net income (Rmb mn) 730.1 652.6 608.0 693.1EPS (CS adj.) (Rmb) 5.84 5.22 4.86 5.54Change from previous EPS (%) n.a. 0 0 0Consensus EPS (Rmb) n.a. 7.37 7.82 7.07

EPS growth (%) n.m -10.6 -6.8 14.0P/E (x) 5.9 6.6 7.0 6.2Dividend yield (%) 0 0 0 0EV/EBITDA (x) 2.7 4.4 3.4 2.3P/B (x) 1.2 1.0 0.9 0.8ROE (%) 36.5 17.2 13.8 13.7Net debt/equity (%) net cash net cash net cash net cashSource: Company data, Thomson Reuters, Credit Suisse estimates




Research Analysts

Yang Y. Song852 2101 6550

[email protected]

Rating NEUTRAL* [V]Price (16 Jun 11, US$) 5.30Target price (US$) 7.50¹Chg to TP (%) 35.8Market cap. (US$ mn) 662.5Enterprise value (Rmb mn) 3,431Number of shares (mn) 125.00Free float (%) 20.052-week price range 14.48 - 5.25




20 June 2011


China Ming Yang Wind Power Group Ltd. MY / MY US Price (16 Jun 11): US$5.30, Rating: NEUTRAL [V], Target Price: US$7.50, Analyst: Yang Song


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 125.0 125.0 125.0 125.0EPS (Credit Suisse) 5.84 5.22 4.86 5.54Consensus EPS (Rmb) n.a. 7.37 7.82 7.07DPS (Rmb) — — — —Operating cash flow per 1.91 -4.96 4.92 7.39

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 5,518 6,516 6,933 6,732Cost of goods sold 4,392.1 5,300.7 5,606.0 5,342.9SG&A (excluding R&D) 271.9 383.2 407.8 395.9R&D costs 43.1 63.6 67.7 65.7Other operating inc/(exp.) -18.2 -3.9 -3.9 -3.9EBITDA 828.9 772.6 855.7 931.1Depr & amort (excl. goodwill) 47.2 85.7 175.7 169.3Goodwill impairment 8.8 8.8 8.8 8.8EBIT 790.5 695.7 688.9 770.6Net interest expense 35.1 -80.8 -34.4 -54.1Net non operating inc (exp) - 44,408,920,9 44,408,920,9 44,408,920,9Share of associates/JVs' equity 2.6 2.1 2.1 2.1Exceptional/extraordinary items — — — —Recurring PBT 758.1 778.6 725.4 826.9Taxes 20.9 120.7 112.4 128.2Profit after tax 737.2 657.9 612.9 698.7Other after tax income — — — —Minority interest 7.1 5.3 4.9 5.6Preferred dividends — — — —Reported net income 730.1 652.6 608.0 693.1Analyst after tax adjustment — — — —Net income (Credit Suisse) 730.1 652.6 608.0 693.1


EBIT 790.5 695.7 688.9 770.6Cash taxes paid — — — —Change in working capital -381.4 -1,354.3 -164.2 64.8Other cash & non-cash items -170.2 39.1 90.9 88.5Cash flow from operations 238.9 -619.5 615.6 924.0Capex -570.0 -533.0 -125.0 -100.0Disposals of PPE — — — —Free cash flow to the firm -331.1 -1,152.5 490.6 824.0Acquisitions — — — —Divestments — — — —Other investment/(outflows) -122.6 — — —Cash flow from investment -692.6 -533.0 -125.0 -100.0Net share issue/(repurchase) 2,206.8 — — —

Dividends paid — — — —Change in debt -30.0 — — —Other financing inflows/outflows 68.6 — — —Cash flow from financing activities 2,245.4 — — —Effect of exchange rates — — — —Movements in cash/equivalents 1,791.7 -1,152.5 490.6 824.0

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 2,486.0 1,333.4 1,824.0 2,648.0Accounts receivable 2,895.8 3,711.0 3,948.5 3,833.7Inventory 1,895.2 2,347.5 2,520.1 2,402.5Other current assets 344.6 340.3 354.8 345.0Total current assets 7,621.5 7,732.3 8,647.4 9,229.1Total fixed assets 351.3 816.3 783.3 731.7Intangible assets and goodwill 86.3 77.5 68.6 59.8Investment securities — — — —Other assets 432.6 432.6 432.6 432.6Total assets 8,491.7 9,058.7 9,932.0 10,453.2Current LiabilitiesAccounts payable 3,632.5 3,541.5 3,801.9 3,624.4Short-term debt 480.0 480.0 480.0 480.0Other short term liabilities 585.3 585.3 585.3 585.3Total current liabilities 4,697.8 4,606.8 4,867.2 4,689.7Long-term debt — — — —Other liabilities 266.7 266.7 266.7 266.7Total liabilities 4,964.5 4,873.5 5,133.9 4,956.4Shareholders' equity 3,457.3 4,110.0 4,718.0 5,411.0Minority interest 69.9 75.2 80.1 85.7Total liabilities and 8,491.7 9,058.7 9,932.0 10,453.2

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth (%)Sales 370.5 18.1 6.4 -2.9EBIT -686.1 -12.0 -1.0 11.9Net profit -429.9 -10.6 -6.8 14.0EPS 363.9 -10.6 -6.8 14.0Margins (%)EBITDA margin 15.0 11.9 12.3 13.8EBIT margin 14.3 10.7 9.9 11.4Pre-tax margin 13.7 11.9 10.5 12.3Net margin 13.2 10.0 8.8 10.3Valuation metrics (x)P/E 5.9 6.6 7.0 6.2P/B 1.2 1.0 0.9 0.8EV/sales 0.41 0.53 0.42 0.31EV/EBITDA 2.7 4.4 3.4 2.3EV/EBIT 2.9 4.9 4.3 2.7ROE analysis (%)

ROE (%) 36.5 17.2 13.8 13.7ROIC 98.7 24.2 17.2 19.2Asset turnover (x) 0.65 0.72 0.70 0.64Interest burden (x) 1.0 1.1 1.1 1.1Tax burden (x) 0.97 0.84 0.84 0.84Financial leverage (x) 2.4 2.2 2.1 1.9Credit ratiosNet debt/equity (%) -56.9 -20.4 -28.0 -39.4Net debt / EBITDA (x) -2.4 -1.1 -1.6 —Interest coverage ratio (x) 22.5 -8.6 -20.0 -14.2



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20 June 2011


Infrastructure SectorA spending spree is close to the end

Ingrid Wei – 86 21 3856 0379 – [email protected]

Earnings and target price changes

Figure 23: We lower our forecast for railway and highway investment in 2011-15E Key drivers 2011E 2012E 2013E 2014E 2015E

Railway (infrastructure) investment (Rmb bn) 600 513 468 435 389

Previous forecast 743 679 595 512 437

Highway investment (Rmb bn) 975 894 841 817 764

Previous forecast 993 983 960 902 814


Figure 24: China’s annual transport infrastructure spending, 2005-15E Total Total

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2006-10E 2011-15E

Annual investment (Rmb bn)

Highway 548 623 649 688 967 1,148 975 894 841 817 764 4,075 4,291

Rail (infrastructure) 89 155 177 338 601 709 600 513 468 435 389 1,980 2,404

Waterway/port 69 87 89 99 106 117 127 143 165 187 215 497 838

Metro 16 24 32 38 61 73 88 110 143 164 181 229 685

Total 722 889 947 1,163 1,735 2,047 1,779 1,660 1,617 1,603 1,548 6,781 8,219

YoY %

Highway 16.6 13.6 4.2 6.0 40.5 18.7 -15.1 -8.2 -5.9 -2.8 -6.6

Rail 72.2 74.6 14.1 90.5 77.9 18.1 -15.4 -14.6 -8.7 -7.1 -10.6

Waterway/port 68.9 26.2 2.0 11.4 7.3 10.5 8.3 12.9 15.1 13.7 15.0

Metro 35.7 50.7 34.0 18.8 59.5 20.0 20.0 25.0 30.0 15.0 10.0

Total 25.7 23.1 6.5 22.8 49.2 18.0 -13.1 -6.7 -2.6 -0.8 -3.4


Figure 25: Earnings and target price changes and valuations Mkt cap CS Upside/ EPS EPS chg % P/E Divd yield PB

Code Curr Price (US$ m) rating TP downside 11E 12E 11E 12E 11E 12E 11E 11E

CCCC 1800 HK HKD 6.57 13,159 N 7.48 13.9 0.74 0.85 -1.1 -1.2 7.4 6.3 3.1 1.2

CRCC 1186 HK HKD 6.45 12,252 N 7.12 10.4 0.70 0.75 -3.2 -8.4 7.8 7.0 3.6 1.0

CRGL 0390 HK HKD 3.55 13,374 N 3.90 9.9 0.40 0.42 -4.9 -10.3 7.5 6.8 2.0 0.9


Railway and highway investment, the key areas ofslowdown

China’s LGFV issue will impact local governments’ future infrastructure spending

Although we had already expected China’s annual transport infrastructure investment topeak in 2010, in particular, in the areas of railway and highway, we now view the large size

of LGFV will force banks to be more cautious on lending to local governments’

sponsored/funded infrastructure projects in future, especially projects without profit or cash

flow visibility. This will thus slow down local governments’ infrastructure spending over the

next few years.

Highway, compared to urban metro, will be more impacted, in our view, as the former has

been already well developed in the affluent regions, while the latter is at the initial stage of

development even in tier-one and tier-two cities.

Highway will be moreimpacted




20 June 2011


Figure 26: China’s highway investment by source, 2006-08 Figure 27: Sharp rise in local government debt

40.7% 38.0% 36.4%

34.8%34.2%32.8%

2.5%1.4%1.5%

9.0% 12.1%11.8%

1.0%0.8%0.9%

7.0%7.5%7.8%

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2006 2007 2008

Loans Loc al government Central fiscal spendingVehicle purchase tax Foreign investment EnterprisesOthers

16.1 18.922.3

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% of GDP

Central Govt Local Govt

Est. by the DRC

Study Group

Est. by the MOF

Study Group

Source: MOT Source: MOF study group, DRC study group, CEIC, Credit Suisse

estimates

Surging challenges force MOR to be more rational in spending

On the railway front, the Ministry of Railways faces increasing challenges of low

profitability of high speed rails, surging financial gearing and debt repayment burden. After

a few years of spending spree, MOR’s balance sheet is getting stretched. According to a

few channel sources, MOR’s total debt at the end of 2010 may reach approximately

Rmb1.5 tn. We estimate its net gearing will surge to above 85% at the end of 2010.

These challenges have forced it to be more rational on future investment spending.

According to its 12th Five-Year Plan, MOR plans to spend Rmb2.8 tn over 2011-15, lower

than the widely-talked original plan of Rmb3.0 tn to Rmb3.5 tn. Based on our discussion

with industry experts, we estimate investment on the infrastructure network to be Rmb2.4

tn, lower than our original forecast of Rmb2.9 tn. MOR has already lowered FY11 railway

infrastructure spending to Rmb600 bn from the previous Rmb700 bn.

Figure 28: Railway investment heavily relies on debt funding Figure 29: MOR’s surging net gearing

Debt (bank

loans + bonds)

44.2%

Local govnt and

enterprises15.6%

Central govnt

subsidy

1.0%

MOR (special

railway

construction)23.9%

MOR (internal

cash)

12.4%

Foreign fund

(World Bank

loan)

1.1%

Others

1.8%

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Total debt Net gearing

Rmb bn

Source: MOR, Credit Suisse estimates Source: MOR, Credit Suisse estimates

Slower new order and revenue growth

The stimulus package has pushed the base of new contracts in 2009 and 2010 very high for

construction companies. With fewer new railway/highway projects to be launched, we expect

Low profitability of high

speed rails, surging financial

gearing and debt repayment

burden

We estimate Rmb2.4 tn on

railway infrastructure

network building




20 June 2011


CRCC and CRGL to see new orders falling by 25-30% YoY in 2011 (versus previous

forecast of a fall of 13% to 15%), driven by an estimated 50% YoY decline in railway new

contracts and a 10% fall in highway, while we forecast CCCC to see a 2.3% YoY fall (versus

the previous positive growth of 1.9%) in FY11 new orders given its more diversified business

model with much smaller exposure to railway. Looking to 2012 and onwards, we expect the

railway and highway new contracts to continue falling by 8% to 10% p.a. in 2012-13.

Revenue will continue growing YoY in 2011-13 due to the strong backlog at the end of

2010. However, the YoY growth will be slowing to low-to-mid-single-digit growth on a

weaker new order growth.

Increasing working capital pressure under thetightening

We think contractors’ working capital is usually negatively impacted in a credit-tightening

environment when their customers’ funding sources are limited. All the three companies,

CRCC, CRGL and CCCC, mentioned that they are already under pressure and even MOR

has delayed its payment compared to previous occasions. We also note the pressure from

the 1Q11 results of both CRCC and CRGL. CRCC’s operating cash flow turned to a

negative Rmb4.2 bn in 1Q11 versus a positive Rmb2.8 bn in 1Q10, while CRGL’s operating

cash flow turned to a negative Rmb2 bn in 1Q11 versus a positive Rmb1.8 bn in 1Q10.

Valuations hit historical lows; no fundamental re-rating catalyst

Underperforming for such a long time and trading at the historical low forward P/Es of 7x

to 8x, the sector valuation looks undemanding and it seems most negatives are priced in

and there may be limited downside from the current share price. However, given our

forecast of the slowdown in China’s transport infrastructure spending and limited room for

margin expansion in an inflationary environment, we expect the sector’s earnings growth

to slow to single-digit in 2012-13, which means there is little chance for a re-rating, albeit

low valuation multiples.

In our view, CCCC will get less impacted by the investment slowdown than its two peers

given its more diversified business model with the least exposure to railway investment

slowdown and longer experience of operating in the more competitive port/highway

construction industries. In addition, we view the upcoming ‘A’ share IPO to help CCCC ease

working capital pressure and lower financial gearing and develop new business like BOT/BT.

Figure 30: The sector trades at the historical low

valuations

Figure 31: Construction stocks’ relative performance to

MSCI China

7.2 6.97.6

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CRGL CRCC CCCC

Current P/E Hi st P/E + 1 SD - 1SD

12m forward P/E (x)

-45%

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-5%

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5%

CRCC CCCC CRGL

1M 3M YTD 12M

Source: Company data, Credit Suisse estimates Source: Bloomberg

We prefer CCCC to others

in the sector




20 June 2011



Marine Ports & Services

China Communications

Construction Co Ltd (1800.HK / 1800 HK)

Better positioned on a more diversifiedbusiness model

■ Our preferred play in the sector: In our view, CCCC will get less impacted

by China’s railway and highway investment slowdown than its two peers

given its more diversified business model with the least exposure to railway

investment slowdown and longer experience of operating in the more

competitive port/highway construction industries. Our 2011-12E earnings are

lowered by only 1.1% and 2.3%, respectively. Our DCF-based target price isalso lowered slightly to HK$7.48 from the previous HK$7.87.

■ Stable new order growth in 4M11: According to our latest discussion with

management, we see CCCC’s new orders growing stably in 4M11. Segment

wise, despite a significant fall in railway, port, highway/bridge and dredging

grew by low double-digit YoY, while overseas was flat YoY and machinery

was up over 60% YoY mainly driven by the recovery of international port

machinery.

■ ‘A’share IPO: Management expect the IPO to be completed in 2H11,

hopefully sometimes July or August. We believe a successful IPO would

help CCCC lower financial gearing and facilitate investment in new business,

such as good-return BT and BOT projects.

■ Valuation: The stock trades at the historical low of 7.3x and 6.4x 2011-12E

earnings, compared to an EPS CAGR of 12.6%. The valuations look

undemanding to us. If we factor in a potential EPS dilution of 10% to 12%

from the ‘A’ share IPO, the stock would trade at 8.25x to 8.44x 2011E P/E,

which is still in the historical low level and looks fair to us. We maintain our

NEUTRAL rating on the stock.


468

1012

Jun-09 Oct -09 Feb-10 Jun-10 Oct -10 Feb-11

406080100120

Price (LH S) R eb ase d R el (R HS)




Performance Over 1M 3M 12MAbsolute (%) -2.2 -8.2 -6.5Relative (%) 2.7 -5.9 -12.2


Year 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 272,734.0 300,730.9 321,606.1 336,657.4EBITDA (Rmb mn) 19,489.0 22,218.5 24,798.9 25,532.7EBIT (Rmb mn) 14,241.0 16,465.4 18,624.1 19,276.0Net income (Rmb mn) 9,863.0 11,029.7 12,626.3 13,307.7EPS (CS adj.) (Rmb) 0.67 0.74 0.85 0.90Change from previous EPS (%) n.a. -1.1 -2.3

Consensus EPS (Rmb) n.a. 0.73 0.81 0.95EPS growth (%) 37.0 11.8 14.5 5.4P/E (x) 8.2 7.3 6.4 6.1Dividend yield (%) 2.9 3.3 3.7 3.9EV/EBITDA (x) 7.5 6.5 5.6 4.4P/B (x) 1.3 1.2 1.0 0.9ROE (%) 17.2 17.1 17.2 16.0Net debt/equity (%) 58.8 50.0 36.5 20.9Source: Company data, Thomson Reuters, Credit Suisse estimates.



Research Analysts

Ingrid Wei

86 21 3856 0379

[email protected]





20 June 2011


China Communications Construction 1800.HK / 1800 HK Price (16 Jun 11): HK$6.57, Rating: NEUTRAL, Target Price: HK$7.48, Analyst: Ingrid Wei


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 14,825.0 14,825.0 14,825.0 14,825.0EPS (Credit Suisse) 0.67 0.74 0.85 0.90Consensus EPS (Rmb) n.a. 0.73 0.81 0.95DPS (Rmb) 0.16 0.18 0.20 0.21Operating cash flow per 0.88 1.06 1.30 1.36

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 272,734 300,731 321,606 336,657Cost of goods sold 249,261.0 274,137.8 292,457.5 306,557.1SG&A (excluding R&D) 10,685.0 11,781.8 12,599.7 13,189.4R&D costs — — — —Other operating inc/(exp.) -1,453.0 -1,654.2 -2,075.2 -2,365.0EBITDA 19,489 22,219 24,799 25,533Depr & amort (excl. goodwill) 5,248.0 5,753.1 6,174.8 6,256.7Goodwill impairment — — — —EBIT 14,241.0 16,465.4 18,624.1 19,276.0Net interest expense 1,788.0 2,539.3 2,682.2 2,473.7Net non operating inc (exp) — — — —Share of associates/JVs' equity 103.0 103.0 108.2 —Exceptional/extraordinary items — — — —Recurring PBT 12,453.0 13,926.1 15,941.9 16,802.3Taxes 2,552.0 2,853.9 3,267.0 3,443.3Profit after tax 9,901.0 11,072.2 12,674.9 13,359.0Other after tax income — — — —Minority interest 38.0 42.5 48.6 51.3Preferred dividends — — — —Reported net income 9,863.0 11,029.7 12,626.3 13,307.7Analyst after tax adjustment — — — —Net income (Credit Suisse) 9,863 11,030 12,626 13,308


EBIT 14,241 16,465 18,624 19,276Cash taxes paid 2,289.0 2,853.9 3,267.0 3,443.3Change in working capital 61.0 -1,088.1 411.4 476.0Other cash & non-cash items 1,731.2 3,914.9 4,282.2 3,783.0Cash flow from operations 13,051.0 15,779.2 19,303.1 20,091.7Capex 15,670.0 11,000.0 9,000.0 5,000.0Disposals of PPE — — — —Free cash flow to the firm -2,619.0 4,779.2 10,303.1 15,091.7Acquisitions — — — —Divestments — — — —Other investment/(outflows) -13,000.0 -11,000.0 -9,000.0 —Cash flow from investment -15,670.0 -11,000.0 -9,000.0 -5,000.0Net share issue/(repurchase) — — — —

Dividends paid 1,845.0 2,634.9 3,016.3 3,179.1Change in debt 9,590.0 — — —Other financing inflows/outflows -1.0 — — —Cash flow from financing activities 7,744.0 -2,634.9 -3,016.3 -3,179.1Effect of exchange rates — — — —Movements in cash/equivalents 5,125.0 2,144.4 7,286.8 11,912.6

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 39,545.0 41,573.4 48,738.4 60,523.1Accounts receivable 86,424.0 86,067.6 89,344.7 91,707.4Inventory 21,473.0 22,165.4 23,646.7 24,786.7Other current assets 43,573.0 43,573.0 43,573.0 43,573.0Total current assets 191,015.0 193,379.4 205,302.7 220,590.2Total fixed assets 52,438.0 57,684.9 60,510.1 59,253.4Intangible assets and goodwill 15,906.0 15,864.0 15,822.0 15,822.0Investment securities 370.0 370.0 370.0 370.0Other assets 48,065.0 48,181.0 48,302.8 48,430.7Total assets 307,794.0 315,479.3 330,307.6 344,466.3Current LiabilitiesAccounts payable 131,625.0 130,873.0 136,042.6 140,021.4Short-term debt 42,760.0 42,760.0 42,760.0 42,760.0Other short term liabilities 16,731.0 16,731.0 16,731.0 16,731.0Total current liabilities 191,116.0 190,364.0 195,533.6 199,512.4Long-term debt 38,569.0 38,569.0 38,569.0 38,569.0Other liabilities 7,029.0 7,029.0 7,029.0 7,029.0Total liabilities 236,714.0 235,962.0 241,131.6 245,110.4Shareholders' equity 60,142.0 68,536.8 78,146.9 88,275.5Minority interest 10,938.0 10,980.5 11,029.1 11,080.4Total liabilities and 307,794.0 315,479.3 330,307.6 344,466.3

Key earnings driver 12/10A 12/11E 12/12E 12/13EPort construction revenue 0.09 0.09 0.08 —Railway construction 0.58 0.16 0.07 —Highway construction 0.04 -0.06 -0.04 —Port gp margin 0.09 0.09 0.09 —Railway gp margin 0.07 0.07 0.07 —

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 20.2 10.3 6.9 4.7EBIT 12.8 15.6 13.1 3.5Net profit 37.0 11.8 14.5 5.4EPS 37.0 11.8 14.5 5.4Margins (%)EBITDA margin 7.1 7.4 7.7 7.6EBIT margin 5.2 5.5 5.8 5.7Pretax margin 4.6 4.6 5.0 5.0Net margin 3.6 3.7 3.9 4.0Valuation metrics (x)

P/E 8.2 7.3 6.4 6.1P/B 1.3 1.2 1.0 0.9EV/sales 0.54 0.48 0.43 0.33EV/EBITDA 7.5 6.5 5.6 4.4EV/EBIT 10.3 8.8 7.5 5.8ROE analysis (%)ROE (%) 17.2 17.1 17.2 16.0ROIC 10.0 11.0 12.2 12.8Asset turnover (x) 0.89 0.95 0.97 0.98Interest burden (x) 0.87 0.85 0.86 0.87Tax burden (x) 0.80 0.80 0.80 0.80Financial leverage (x) 4.3 4.0 3.7 3.5Credit ratiosNet debt/equity (%) 58.8 50.0 36.5 20.9Net debt / EBITDA (x) 2.1 1.8 1.3 —Interest coverage ratio (x) 5.7 4.8 5.1 5.3



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20 June 2011




China Railway Construction

Corporation (1186.HK / 1186 HK)

Growth outlook, no longer attractive

■ Lower EPS and target price: We revise down our 2011-13E earnings for

CRCC by 3.2%, 8.4% and 9.1%, respectively, to reflect our more cautious

view on China’s railway and highway investment over the period. Our DCF-

based target price is also lowered to HK$7.12 from the previous HK$7.68.

■ Railway, no longer a hot spot: We estimate CRCC’s total new order will

decline by 25.1% YoY in 2011. Being one of the two largest contractors for

railway projects, CRCC will be hit more by a large slowdown of China’s railwayinvestment. We estimate CRCC’s railway new contract will decline by 50% in

2011 and another 10% in 2012 (versus our previous forecast of a fall of 30%

and 5% in the same period). New railway contracts accounted for 57.3% of

CRCC’s total new contracts in 2010. However, In 1Q11, CRCC’s new railway

contract of Rmb3.3 bn, is down more than 90% YoY. Our channel check

shows that new bids open by MOR in 2Q11 remained at a low level.

■ Highway will soft slightly, while metro a high-growth area: We expect

CRCC’s highway new contract to decline by a modest 10% in 2011, while

urban metro new orders to grow by 22% YoY. We expect China’s investment

in city metro systems to experience fast growth in the next five to ten years,

given the trend of urbanisation and currently low penetration rate.

■

Historical low valuations, but no re-rating catalyst: Underperforming forsuch a long time and trading at the historical low P/Es of 7.7x for 2011E and

7.2x for 2012E, the stock looks undemanding and it seems most negatives

are priced in and there may be limited downside from the current share price.

However, given our forecast of the slowdown in China’s transport

infrastructure spending and limited room for margin expansion in an

inflationary environment, we expect CRCC’s earnings growth to slow to

single digit in 2012-13, which means little chance for a re-rating, albeit low

valuation multiples. We maintain our NEUTRAL rating. Downside risk may

come from consensus EPS downgrade.


68

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Year 12/10A 12/11E 12/12E 12/13ERevenue (Rmb mn) 456,338.9 471,003.5 477,419.6 490,484.4

EBITDA (Rmb mn) 13,865.2 20,910.9 22,042.4 22,209.0EBIT (Rmb mn) 6,257.3 11,932.2 12,847.3 13,055.2Net income (Rmb mn) 4,368.0 8,594.6 9,222.4 9,805.9EPS (CS adj.) (Rmb) 0.35 0.70 0.75 0.79Change from previous EPS (%) n.a. -3.2 -8.4 -9.1Consensus EPS (Rmb) n.a. 0.72 0.84 0.90EPS growth (%) -27.6 96.8 7.3 6.3P/E (x) 15.1 7.7 7.2 6.7Dividend yield (%) 1.9 3.8 4.1 4.3EV/EBITDA (x) 3.7 3.3 3.2 2.9P/B (x) 1.2 1.0 0.9 0.8ROE (%) 7.9 14.1 13.6 13.1Net debt/equity (%) net cash 2.9 3.5 net cashSource: Company data, Thomson Reuters, Credit Suisse estimates.



Research Analysts

Ingrid Wei

86 21 3856 0379

[email protected]





20 June 2011


China Railway Construction Corp. 1186.HK / 1186 HK Price (16 Jun 11): HK$6.45, Rating: NEUTRAL, Target Price: HK$7.12, Analyst: Ingrid Wei


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 12,337.5 12,337.5 12,337.5 12,337.5EPS (Credit Suisse) 0.35 0.70 0.75 0.79Consensus EPS (Rmb) n.a. 0.72 0.84 0.90DPS (Rmb) 0.10 0.20 0.22 0.23Operating cash flow per 0.45 -0.50 0.93 1.27

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 456,339 471,003 477,420 490,484Cost of goods sold 428,647.1 438,512.1 444,091.8 455,754.1SG&A (excluding R&D) 21,130.2 20,064.7 20,338.1 20,894.6R&D costs — — — —Other operating inc/(exp.) 304.3 494.4 142.4 780.4EBITDA 13,865 20,911 22,042 22,209Depr & amort (excl. goodwill) 7,608.0 8,978.7 9,195.1 9,153.8Goodwill impairment — — — —EBIT 6,257.3 11,932.2 12,847.3 13,055.2Net interest expense 413.7 1,157.7 1,284.9 1,241.3Net non operating inc (exp) — — — —Share of associates/JVs' equity 1.9 1.9 1.9 1.9Exceptional/extraordinary items 395.1 — — —Recurring PBT 5,845.4 10,776.4 11,564.2 11,815.8Taxes 1,923.9 2,047.5 2,197.2 2,490.0Profit after tax 4,316.6 8,728.9 9,367.0 9,325.8Other after tax income — — — —Minority interest 70.4 134.3 144.6 154.1Preferred dividends — — — —Reported net income 4,246.2 8,594.6 9,222.4 9,171.7Analyst after tax adjustment 121.8 — — 634.1Net income (Credit Suisse) 4,368 8,595 9,222 9,806


EBIT 6,257 11,932 12,847 13,055Cash taxes paid 665.5 1,157.7 1,284.9 1,241.3Change in working capital -6,939.5 -23,867.0 -7,053.9 -3,500.5Other cash & non-cash items 7,789.3 7,750.0 7,924.3 7,297.9Cash flow from operations 5,587.1 -6,161.3 11,506.4 15,611.3Capex 11,500.0 10,000.0 10,000.0 8,000.0Disposals of PPE — — — —Free cash flow to the firm -5,912.9 -16,161.3 1,506.4 7,611.3Acquisitions — — — —Divestments — — — —Other investment/(outflows) 659.7 — — —Cash flow from investment -10,840.3 -10,000.0 -10,000.0 -8,000.0Net share issue/(repurchase) — 577.0 500.0 500.0

Dividends paid 2,114.3 2,497.2 2,679.6 2,849.1Change in debt 13,929.8 — — —Other financing inflows/outflows — — — —Cash flow from financing activities 11,815.5 -1,920.2 -2,179.6 -2,349.1Effect of exchange rates — — — —Movements in cash/equivalents 6,562.4 -18,081.5 -673.2 5,262.2

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 56,294.8 38,213.3 37,540.1 42,802.3Accounts receivable 56,531.4 58,068.9 58,859.9 60,470.7Inventory 26,615.3 24,028.1 24,333.8 24,972.8Other current assets 152,599.0 158,862.6 166,378.9 170,888.7Total current assets 292,040.5 279,172.9 287,112.8 299,134.6Total fixed assets 42,349.2 43,370.5 44,175.3 43,021.6Intangible assets and goodwill 1,272.1 1,272.1 1,272.1 1,272.1Investment securities — — — —Other assets 14,532.3 14,534.1 14,536.0 14,537.9Total assets 350,194.0 338,349.6 347,096.3 357,966.1Current LiabilitiesAccounts payable 141,196.2 122,543.1 124,102.4 127,361.4Short-term debt 17,421.7 17,421.7 17,421.7 17,421.7Other short term liabilities 104,119.8 104,119.8 104,119.8 104,119.8Total current liabilities 262,737.6 244,084.5 245,643.8 248,902.9Long-term debt 22,677.5 22,677.5 22,677.5 22,677.5Other liabilities 12,685.3 12,685.3 12,685.3 6,547.5Total liabilities 291,962.6 273,309.5 274,868.8 278,127.8Shareholders' equity 57,403.3 64,077.7 71,120.5 78,577.3Minority interest 828.1 962.4 1,107.0 1,261.0Total liabilities and 350,194.0 338,349.6 347,096.3 357,966.1

Key earnings driver 12/10A 12/11E 12/12E 12/13ERailway revenue growth 0.30 0.11 -0.01 —Highway revenue growth -0.00 -0.05 -0.04 —Metro revenue growth 0.48 0.35 0.28 —Other infra revenue — 0.05 0.05 —Railway gp margin 0.07 0.07 0.07 —

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 32.3 3.2 1.4 2.7EBIT -21.1 90.7 7.7 1.6Net profit -27.6 96.8 7.3 6.3EPS -27.6 96.8 7.3 6.3Margins (%)EBITDA margin 3.0 4.4 4.6 4.5EBIT margin 1.4 2.5 2.7 2.7Pretax margin 1.3 2.3 2.4 2.4Net margin 1.0 1.8 1.9 2.0Valuation metrics (x)

P/E 15.1 7.7 7.2 6.7P/B 1.2 1.0 0.9 0.8EV/sales 0.11 0.15 0.15 0.13EV/EBITDA 3.7 3.3 3.2 2.9EV/EBIT 8.1 5.8 5.4 4.9ROE analysis (%)ROE (%) 7.9 14.1 13.6 13.1ROIC 10.3 14.4 13.9 13.4Asset turnover (x) 1.3 1.4 1.4 1.4Interest burden (x) 0.93 0.90 0.90 0.91Tax burden (x) 0.74 0.81 0.81 0.79Financial leverage (x) 6.0 5.2 4.8 4.5Credit ratiosNet debt/equity (%) -27.8 2.9 3.5 -3.4Net debt / EBITDA (x) -1.2 0.1 0.1 —Interest coverage ratio (x) 5.3 6.0 6.4 6.5



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20 June 2011




China Railway Group Ltd(0390.HK / 390 HK)

Slower earnings growth

■ Lower EPS and target price: We revise down our 2011-13E earnings for

CRGL by 4.9%, 10.3% and 9.7%, respectively, to reflect our more cautious

view on China’s railway and highway investment over the period. Our DCF-

based target price is also lowered to HK$3.9 from the previous HK$4.43.

■ Railway, a key driver for new order decline: We estimate CRGL’s total

new order to decline by 25.1% YoY in 2011. Being one of the two largest

contractors for railway projects, CRGL will be hit by a large slowdown inChina’s railway investment. We estimate CRGL’s railway new contract to

decline by 50% in 2011 and another 10% in 2012 (vs our previous forecast

of a fall of 30% and 5% in the same period). Railway new contracts

accounted for 59.1% of CRGL’s total new contracts in 2010. In 1Q11,

CRGL’s new railway contract of Rmb12 bn was down more than 80% YoY.

Our channel check shows that new bids open by MOR in 2Q11 remained at

a low level.

■ Highway will soften slightly, while metro a high-growth area: We expect

CRGL’s highway new contract to decline by a modest 10% in 2011, while

urban metro new order to grow by 25% YoY. We expect China’s investment

in city metro systems to experience fast growth in the next five to ten years,

given the trend of urbanisation and currently low penetration rate.

■ Historical low valuations, but no re-rating catalyst: Underperforming for

such a long time and trading at the historical low P/Es of 7.4x for 2011E and

6.9x for 2012E, the stock looks undemanding and it seems most negatives

are priced in. However, given our forecast of the slowdown in China’s

transport infrastructure spending and limited room for margin expansion in

an inflationary environment, we expect CRCC’s earnings growth to slow to

single digit in 2012-13, which means little chance for a re-rating, albeit low

valuation multiples. We maintain our NEUTRAL rating. Downside risk may

come from consensus EPS downgrade.


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EBITDA (Rmb mn) 17,136.7 21,670.8 23,917.7 23,777.7EBIT (Rmb mn) 11,221.0 14,115.3 15,756.9 16,503.8Net income (Rmb mn) 7,198.9 8,532.0 9,048.0 9,683.0EPS (CS adj.) (Rmb) 0.34 0.40 0.42 0.45Change from previous EPS (%) n.a. -4.9 -10.3 -9.7Consensus EPS (Rmb) n.a. 0.44 0.49 0.53EPS growth (%) 18.8 18.5 6.0 7.0P/E (x) 8.7 7.4 6.9 6.5Dividend yield (%) 1.9 2.1 2.3 2.4EV/EBITDA (x) 5.7 5.4 4.7 4.1P/B (x) 0.94 0.85 0.77 0.70ROE (%) 11.3 12.2 11.7 11.3Net debt/equity (%) 38.7 56.4 44.8 33.7Source: Company data, Thomson Reuters, Credit Suisse estimates.



Research Analysts

Ingrid Wei

86 21 3856 0379

[email protected]





20 June 2011


China Railway Group Ltd 0390.HK / 390 HK Price (16 Jun 11): HK$3.55, Rating: NEUTRAL, Target Price: HK$3.90, Analyst: Ingrid Wei


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 21,299.9 21,299.9 21,299.9 21,299.9EPS (Credit Suisse) 0.34 0.40 0.42 0.45Consensus EPS (Rmb) n.a. 0.44 0.49 0.53DPS (Rmb) 0.1 0.1 0.1 0.1Operating cash flow per -0.05 -0.25 0.80 0.77

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 456,102 468,986 490,308 510,293Cost of goods sold 428,987.0 440,144.3 458,922.7 477,003.7SG&A (excluding R&D) 15,003.0 15,426.8 16,128.2 16,785.6R&D costs — — — —Other operating inc/(exp.) 891.0 -700.0 -500.0 —EBITDA 17,137 21,671 23,918 23,778Depr & amort (excl. goodwill) 5,915.7 7,555.5 8,160.8 7,273.9Goodwill impairment — — — —EBIT 11,221.0 14,115.3 15,756.9 16,503.8Net interest expense 1,115.0 2,475.4 2,792.3 2,629.6Net non operating inc (exp) 161.0 300.0 -215.0 -215.0Share of associates/JVs' equity — — — —Exceptional/extraordinary items 373.0 — — —Recurring PBT 10,267.0 11,939.8 12,749.5 13,659.2Taxes 2,337.0 2,507.4 2,677.4 2,868.4Profit after tax 8,303.0 9,432.5 10,072.1 10,790.7Other after tax income — — — —Minority interest 813.0 900.5 1,024.1 1,107.8Preferred dividends — — — —Reported net income 7,490.0 8,532.0 9,048.0 9,683.0Analyst after tax adjustment -291.1 — — —Net income (Credit Suisse) 7,199 8,532 9,048 9,683


EBIT 11,221 14,115 15,757 16,504Cash taxes paid 1,960.0 2,507.4 2,677.4 2,868.4Change in working capital -14,031.0 -22,332.8 -1,205.3 -1,643.1Other cash & non-cash items 3,599.0 5,380.1 5,153.5 4,429.3Cash flow from operations -1,171.0 -5,344.8 17,027.6 16,421.6Capex 16,116.0 11,000.0 10,000.0 8,000.0Disposals of PPE — — — —Free cash flow to the firm -17,287.0 -16,344.8 7,027.6 8,421.6Acquisitions — — — —Divestments — — — —Other investment/(outflows) -1,152.0 — — —Cash flow from investment -17,268.0 -11,000.0 -10,000.0 -8,000.0Net share issue/(repurchase) 749.0 — — —

Dividends paid 3,975.0 1,335.6 1,416.4 1,515.8Change in debt 27,336.0 20,000.0 — —Other financing inflows/outflows -189.0 — — —Cash flow from financing activities 23,921.0 18,664.4 -1,416.4 -1,515.8Effect of exchange rates — — — —Movements in cash/equivalents 5,482.0 2,319.6 5,611.2 6,905.8

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 54,860.0 57,179.6 62,790.8 69,696.5Accounts receivable 84,530.0 83,518.1 87,315.1 90,874.1Inventory 30,026.0 30,146.9 31,433.1 32,671.5Other current assets 129,238.0 133,079.1 137,304.3 141,952.0Total current assets 298,654.0 303,923.6 318,843.2 335,194.2Total fixed assets 42,476.0 47,191.6 50,241.4 50,967.5Intangible assets and goodwill 22,407.0 21,135.9 19,925.2 19,925.2Investment securities — — — —Other assets 25,599.0 25,599.0 25,599.0 25,599.0Total assets 389,136.0 397,850.1 414,608.9 431,685.9Current LiabilitiesAccounts payable 209,308.0 189,925.3 198,028.3 205,830.4Short-term debt 40,444.0 60,444.0 60,444.0 60,444.0Other short term liabilities 14,648.0 14,648.0 14,648.0 14,648.0Total current liabilities 264,400.0 265,017.3 273,120.3 280,922.4Long-term debt 42,915.0 42,915.0 42,915.0 42,915.0Other liabilities 15,734.0 15,734.0 15,734.0 8,100.0Total liabilities 315,415.0 316,032.3 324,135.3 331,937.4Shareholders' equity 66,581.0 73,777.4 81,409.0 89,576.2Minority interest 7,140.0 8,040.5 9,064.6 10,172.4Total liabilities and 389,136.0 397,850.1 414,608.9 431,685.9

Key earnings driver 12/10A 12/11E 12/12E 12/13ERailway construction 0.50 0.09 0.02 —Highway construction 0.02 -0.03 -0.04 —Other construction 0.38 0.26 0.21 —Railway gp margin 0.05 0.06 0.06 —Highway gp margin 0.05 0.05 0.05 —

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 36.5 2.8 4.5 4.1EBIT 26.3 25.8 11.6 4.7Net profit 18.8 18.5 6.0 7.0EPS 18.8 18.5 6.0 7.0Margins (%)EBITDA margin 3.8 4.6 4.9 4.7EBIT margin 2.5 3.0 3.2 3.2Pretax margin 2.3 2.5 2.6 2.7Net margin 1.6 1.8 1.8 1.9Valuation metrics (x)

P/E 8.7 7.4 6.9 6.5P/B 0.94 0.85 0.77 0.70EV/sales 0.21 0.25 0.23 0.19EV/EBITDA 5.7 5.4 4.7 4.1EV/EBIT 8.7 8.2 7.1 5.8ROE analysis (%)ROE (%) 11.3 12.2 11.7 11.3ROIC 8.6 8.7 9.5 9.8Asset turnover (x) 1.2 1.2 1.2 1.2Interest burden (x) 0.91 0.85 0.81 0.83Tax burden (x) 0.81 0.79 0.79 0.79Financial leverage (x) 5.3 4.9 4.6 4.3Credit ratiosNet debt/equity (%) 38.7 56.4 44.8 33.7Net debt / EBITDA (x) 1.7 2.1 1.7 —Interest coverage ratio (x) 4.5 3.6 3.6 3.8



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Dry Bulk Shipping SectorWeaker demand aggravates industry oversupply

Sam Lee – 852 2101 7186 – [email protected]

Earnings and target price changes:

Figure 32: A table on drivers

Key drivers FY11 FY12 FY13

BDI (new) 1,350 1,500 2,500

BDI (old) 1,800 2,000 2,500

Global bulk demand growth (%) 5.5 4.3 4.0

Global fleet growth (%) 14.2 12.0 8.6

Source: Credit Suisse

Figure 33: Earnings and target price changesEPS TP EPS P/E Div.

CS Price Chg(%) (%) Up/dn EPS grth (%) (x) yld (%) ROE P/B

Company Ticker rating Local Target FY11 FY12 Chg (%) FY11 FY12 FY11 FY12 FY11 FY12 FY11 (%) (x)Ch Cosco 1919 HK U 5.78 5.20 nm (42) (21) (10) 0.0 0.2 n.a n.a NM 23.2 0 (0.4) 1.1


Further slowdown in China iron ore import

Iron ore trade demand has been the key growth driver for global bulk trade demand growth,

and China imports accounted for 63% global iron ore trade in 2010. That said, China

demand has been weak and import was flat YoY. Our commodity analyst Trina Chen

expects only low single-digit steel production growth for 2011-12E, on credit tightening,

government control on capacity, electricity restrictions and the weakening property market.

On the other hand, domestic iron ore production is at peak level in May (growing average

12% YoY in Apr/May). As a contrast, China iron ore import was down 1% in Apr/May. The

fact that iron ore inventory at Chinese ports rose to a record 83.3 mn tonnes in May also

doesn't help import as well.

Figure 34: China iron ore production hit record in May Figure 35: Iron ore inventory at Chinese ports at record

high in May

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Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates




20 June 2011


As a result, China iron ore import was flat at 615 mn tonnes in 2010, and again not

growing in April and May. In our current model, we have generously assumed 5% China

iron ore import growth in 2011-12E, driven by re-accelerating FAI growth. However, with

the recent cut in China GDP projections from 8.8% to 8.7% for 2011E and from 8.9% to

8.5% for 2012E, we think risk to our demand forecast is rising.

On the supply side, fleet growth averaged 12% YTD despite 30%+ of new ships not being

delivered on schedule. We expect overall fleet to grow 14% in 2011 and 12% in 2012,

significantly above historical trends.

Figure 36: China iron ore import not growing in Apr/May Figure 37: Dry bulk vessels delivery to remain high

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1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

Capesize Panamax Handymax Handysize

(mn tons) Forecast


BDI has averaged 1,366 YTD, lower than our previous average estimate of 1,800. With

shipping supply growth continued to be at 12-14% in 2011-12E, any demand slowdown

will only worsen the oversupply situation. We have downgraded our 2011-12E BDI

forecast to 1,350-1,500 points from 1,800-2,000 points.

Earnings cut for China Cosco; remain cautious onearnings loss

For China Cosco, 34% of revenue, and 39% of operating profit were derived from bulk

shipping in FY10. Moreover, CCH is leveraged to the spot market, and we think its BDI

break-even is high at 2,000+ points. CCH already made Rmb503 mn in 1Q11, when its

container division was still profitable. Thus, our BDI forecast for 2011-12E thus imply loss

making for its bulk shipping to continue.

Based on our lower BDI forecast, we cut CCH’s blended bulk freight rates by 15-19% in

FY11-13E. Moreover, container freight rates have been weaker than expected and we

thus also reduce that by 4% in FY11-13E. In addition, fuel price remains stubbornly high

with spot price at US$670/tonne. We raise FY11-13 fuel price assumptions by 5-13% to

US$630/tonne. As a result, we now expect CCH to make a loss of Rmb187 mn in FY11E(versus previous forecast of Rmb1.93 bn). We also cut CCH’s FY12-13E earnings by 42%

and 13% to Rmb2.12 mn and Rmb5.52 bn.




20 June 2011



Marine

China COSCO Holdings(1919.HK / 1919 HK)

Weaker demand aggravates oversupply

■ Cutting BDI assumptions. Dry bulk freight rates have been depressed by

industry oversupply, with capesize daily rates around cash cost break-even

of around US$9,000/day. CS economists recently downgraded China GDP,

and we think weaker steel production and iron-ore import demand from

China will worsen the operating environment in 2011-12E. We have thus

downgraded our 2011-12 BDI forecast to 1,350-1,500 points from 1,800-

2,000 points.

■ Earnings cut, expecting FY11E loss. 34% of CCH’s revenue, and 39% of

operating profit were derived from bulk shipping in FY10. Moreover, CCH is

leveraged to the spot market, and we think its BDI break-even is high at

2000+ points. CCH already made Rmb503 mn in 1Q11 when its container

division was still profitable. Thus, our lower BDI forecast for 2011-12E imply

continued loss-making for its bulk shipping division. If container freight rates

fail to recover in 2H11 and 2012, CCH could be overall loss-making in

FY12E as well.

■ Cut CCH’s blended bulk freight rates: Based on our lower BDI forecast, we

cut CCH’s blended bulk freight rates by 15-19% in FY11-13E. Moreover,

container freight rates have been weaker than expected and we thus also

reduce that by 4% in FY11-13E. In addition, fuel price remains stubbornly high

with spot price at US$670/tonne. We raise FY11-13 fuel price assumptions by

5-13% to US$630/tonne. As a result, we now expect CCH to make a loss of

Rmb187 mn in FY11E (vs previous forecast of Rmb1.93 bn). We also cut

CCH’s FY12-13E earnings by 42% and 13% to Rmb2.12 mn and Rmb5.52 bn.

■ Stocks have corrected but still not cheap. CCH’s current 12-month

forward P/B of 1.1x is still expensive among its dry bulk and container

shipping peers. With projected small loss in FY11E and mediocre FY12E

RoAE of 3%, we think CCH should trade at book value. Our new target price

HK$5.20 (from HK$6.60) is based on a target P/B of 0.9x.


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406080100120

Pr ice ( LH S) Reb ased Rel ( RHS )







EBITDA (Rmb mn) 12,884.0 2,970.5 5,681.7 10,796.1EBIT (Rmb mn) 9,431.6 -366.8 2,344.4 7,458.9Net income (Rmb mn) 6,858.5 -187.1 2,115.4 5,520.9EPS (CS adj.) (Rmb) 0.67 -0.02 0.21 0.54Change from previous EPS (%) n.a. -42.5 -12.6Consensus EPS (Rmb) n.a. 0.26 0.38 0.49EPS growth (%) n.a. n.a. n.a. 161.0P/E (x) 7.1 NM 23.2 8.9Dividend yield (%) 1.9 0 0.9 2.3EV/EBITDA (x) 5.7 23.6 11.7 4.3P/B (x) 1.1 1.1 1.0 0.9ROE (%) 15.5 -0.4 4.6 11.0Net debt/equity (%) 22.2 16.1 9.0 net cashSource: Company data, Thomson Reuters, Credit Suisse estimates.



Research Analysts

Sam Lee

852 2101 7186

[email protected]

Rating UNDERPERFORM*Price (16 Jun 11, HK$) 5.78Target price (HK$) (from 6.60) 5.20¹Chg to TP (%) -10.0Market cap. (HK$ mn) 59,050.1Enterprise value (Rmb mn) 69,990Number of shares (mn) 10,216.27Free float (%) 35.852-week price range 9.79 - 5.78




20 June 2011


China COSCO Holdings 1919.HK / 1919 HK Price (16 Jun 11): HK$5.78, Rating: UNDERPERFORM, Target Price: HK$5.20, Analyst: Sam Lee


Per Share Data 12/10A 12/11E 12/12E 12/13ENo. of shares (weighted 10,216.3 10,216.3 10,216.3 10,216.3EPS (Credit Suisse) 0.67 -0.02 0.21 0.54Consensus EPS (Rmb) n.a. 0.26 0.38 0.49DPS (Rmb) 0.09 — 0.04 0.11Operating cash flow per 1.08 0.63 0.54 1.14

Income statement (Rmb mn) 12/10A 12/11E 12/12E 12/13ETotal revenue 96,439 85,180 93,455 110,930Cost of goods sold 84,052.5 82,917.0 88,160.8 99,148.5SG&A (excluding R&D) 4,944.0 4,366.9 4,791.1 5,686.9R&D costs — — — —Other operating inc/(exp.) -1,989.5 -1,736.5 -1,841.3 -1,364.2EBITDA 12,884 2,971 5,682 10,796Depr & amort (excl. goodwill) 3,452.4 3,337.4 3,337.3 3,337.2Goodwill impairment — — — —EBIT 9,431.6 -366.8 2,344.4 7,458.9Net interest expense 158.0 87.5 70.7 123.9Net non operating inc (exp) — — — —Share of associates/JVs' equity 1,351.2 999.5 1,184.6 —Exceptional/extraordinary items — — — —Recurring PBT 9,273.6 -454.4 2,273.7 7,335.0Taxes 1,189.0 — 113.7 1,100.3Profit after tax 8,084.6 -454.4 2,160.0 6,234.8Other after tax income — — — —Minority interest 1,226.1 -267.3 44.7 713.9Preferred dividends — — — —Reported net income 6,858.5 -187.1 2,115.4 5,520.9Analyst after tax adjustment — — — —Net income (Credit Suisse) 6,858 -187 2,115 5,521


EBIT 9,432 -367 2,344 7,459Cash taxes paid 283.7 — 113.7 1,100.3Change in working capital -1,699.6 -2,573.3 -8.1 539.2Other cash & non-cash items 3,559.4 9,386.9 3,342.0 4,698.0Cash flow from operations 11,007.7 6,446.7 5,564.6 11,595.9Capex 8,496.7 — — —Disposals of PPE 495.6 — — —Free cash flow to the firm 2,511.1 6,446.7 5,564.6 11,595.9Acquisitions — — — —Divestments — — — —Other investment/(outflows) -2,879.0 737.6 770.4 510.3Cash flow from investment -10,880.1 737.6 770.4 510.3Net share issue/(repurchase) 3,955.4 — — —

Dividends paid 625.5 1,131.0 229.5 676.1Change in debt 1,591.6 604.9 943.0 1,102.3Other financing inflows/outflows -2,121.4 -1,396.5 -2,045.9 -2,978.8Cash flow from financing activities 2,800.1 -1,922.6 -1,332.3 -2,552.6Effect of exchange rates -474.9 — — —Movements in cash/equivalents 2,452.9 5,261.7 5,002.7 9,553.6

Balance sheet (Rmb mn) 12/10A 12/11E 12/12E 12/13ECash and cash equivalents 47,248.7 51,812.6 56,815.3 66,368.9Accounts receivable 10,987.2 6,811.5 7,473.2 8,870.6Inventory 2,116.9 2,263.0 2,534.6 2,940.1Other current assets 151.9 151.9 151.9 151.9Total current assets 60,504.8 61,039.0 66,974.9 78,331.4Total fixed assets 68,680.5 59,439.2 56,105.6 52,772.0Intangible assets and goodwill 210.5 206.7 203.0 199.4Investment securities 2,734.8 2,734.8 2,734.8 —Other assets 35,747.1 40,407.8 45,233.0 23,459.7Total assets 149,541.8 141,959.9 145,759.4 154,762.6Current LiabilitiesAccounts payable 21,565.1 15,240.6 16,272.0 18,563.5Short-term debt 1,669.4 1,474.5 1,617.7 1,920.2Other short term liabilities 5,214.0 5,310.3 5,415.1 5,530.4Total current liabilities 28,448.6 22,025.4 23,304.8 26,014.1Long-term debt 54,927.5 55,727.3 56,527.1 57,326.8Other liabilities 5,189.9 4,817.2 4,606.2 4,541.5Total liabilities 88,566.0 82,569.9 84,438.0 87,882.4Shareholders' equity 46,508.6 45,402.0 47,517.4 52,615.2Minority interest 14,467.3 13,988.4 13,803.6 14,264.5Total liabilities and 149,541.8 141,960.4 145,759.1 154,762.1

Key earnings driver 12/10A 12/11E 12/12E 12/13EAverage Freight Rates 871.10 911.42 929.65 —Volume handled (TEUs) 5,679,20 6,303,91 7,375,58 —Container shipping net - - - —Cosco Pacific net profit 1,076.54 847.21 1,016.67 —

— — —

Key ratios and valuation 12/10A 12/11E 12/12E 12/13EGrowth(%)Sales 40.9 -11.7 9.7 18.7EBIT 272.1 -103.9 739.1 218.2Net profit 191.8 -102.7 1,230.7 161.0EPS — — — 161.0Margins (%)EBITDA margin 13.4 3.5 6.1 9.7EBIT margin 9.8 -0.4 2.5 6.7Pretax margin 9.6 -0.5 2.4 6.6Net margin 7.1 -0.2 2.3 5.0Valuation metrics (x)

P/E 7.1 -262.0 23.2 8.9P/B 1.1 1.1 1.0 0.9EV/sales 0.76 0.82 0.71 0.42EV/EBITDA 5.7 23.6 11.7 4.3EV/EBIT 7.8 -190.8 28.3 6.2ROE analysis (%)ROE (%) 15.5 -0.4 4.6 11.0ROIC 11.0 -0.5 3.3 9.9Asset turnover (x) 0.64 0.60 0.64 0.72Interest burden (x) 1.0 1.2 1.0 1.0Tax burden (x) 0.9 1.0 1.0 0.9Financial leverage (x) 2.5 2.4 2.4 2.3Credit ratiosNet debt/equity (%) 22.2 16.1 9.0 -4.4Net debt / EBITDA (x) 1.1 3.2 1.0 —Interest coverage ratio (x) 59.7 -4.2 33.2 60.2



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35

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2006 2007 2008 2009 2010 2011

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20 June 2011


China Basic Materials SectorNormalising demand

Trina Chen – 852 2101 7031 – [email protected]

We maintain our estimate that China’s commodity demand will continue expanding at 4-

9% CAGR in 2011-2015E, driven by a normalisation in property construction post 2011-12; continued double-digit growth in the consumption segment such as home appliances

and autos, partly offset by structural deceleration in infrastructure investment from the high

base in 2009-10E as the economic ‘structural transformation’ is gradually played out.

We believe construction demand for commodities will underperform manufacturing

demand structurally in the coming years. This results in demand growth in base metals

outperforming that in steel and cement, and flat steel outperforming long steel. We

maintain our lower-than-consensus steel demand outlook (750 mn tonnes by 2015) for

China, which if it takes place, would have negative implications for steel-making raw

materials, in our view.

Nevertheless, we also highlight that the supply picture is improving, with decelerating new

capacity addition, closure of old capacity, and continued industry consolidation. This would

improve industry’s ability to protect margins in a soft demand growth environment, animprovement we are already seeing in sectors such as the cement industry.

Figure 38: Construction demand versus total (%)

0%

20%

40%

60%

80%

100%

Steel Cement Al Cu

Construction demand vs total (%)

Source: MYSTEEL, Antaike, Credit Suisse estimates

Destocking in soft demand

We think 2011E will remain to be a year with soft demand growth, partly due to high base

from 2009-2010. Both our monthly channel checks and recent chats with traders and

distributors suggest that end demand remains soft on the ground, as decelerating real

demand couples with destocking and a weak season ahead. The positives, if any, are

falling inventory across the board from end goods to metals and steel, and the stabilisingtrend in order books. While we sense an inflection point towards the end of summer, the

soft real demand may hinder the magnitude of a potential rebound. We view current

valuations has factored in a soft landing scenario, with near-term downside risks. And thus

we would demand more attractive valuations on basic material equities to justify a positive

risk-reward stance.

In the near term, we see upside risk in the thermal coal sector, range trading for cement,

and downside risk in base metals and steel. Our top picks are CNBM, CR Cement and

Chinacoal. Our less favoured stocks are Jiangxi Copper, Yanzhou, and Angang.




20 June 2011


Telecoms: structural positivesSlowdown to have a limited impact on telecoms

Colin McCallum, CA – 852 2101 6514 – [email protected]

We have long viewed the primary divers of returns on capital in the telecoms industry to be

secular, rather than cyclical. While nominal GDP growth contributes to rising affordabilityfor telecoms services – and therefore contributes to rising penetration, rising usage and

rising revenues – we believe secular factors such as the introduction of well capitalised

new entrants, the creation of additional secular growth curves such as the advent of

mobile data usage via smartphones, and declining handset price points due to vendor

competition and rising global scale, are more important factors.

For example, the China cellular industry restructuring announced in May 2008, and the

subsequent issuance of 3G licences, resulted in a classic industry supply shock; the

cellular industry in China shifted from being a two-player market to a three-player market.

This, in turn, had three key (negative) impacts for the returns on capital:

■

rising capex as three rival nationwide networks were constructed (on both 2G and 3G),

■ lower revenues (than might have been the case under a duopoly) as tariff discounts

and airtime giveaways became more widespread, and

■ lower EBITDA margins as handset subsidies were introduced.

However, we believe this cellular industry supply shock is now behind us. Notwithstanding

lower GDP growth, there is still a revenue growth opportunity in China, given headline

penetration of 62.7% and ‘traffic’ penetration of only 49.0%. Furthermore, while we

forecast that voice revenues will grow at a CAGR of 5.6% from FY10 to FY13, we expect

data access revenues to grow at a CAGR of 18.6%. Importantly, the 9.6% overall service

revenue growth is permitting all three cellular players to grow EBITDA and net profit into

FY11, as the capacity built in the 2008 ‘supply shock’ is utilised.

Figure 40: China voice revenues still growing … Figure 41: … but data is where the real opportunity lies

321 334 340 344 348

20 29 37 44 515157

71 85 96

-

100

200

300

400

500

600

FY09A FY10A FY11E FY12E FY13E FY10-13E CAGR

China Mobile China Telecom China Unicom

5.6%

131 151172

201237

1019

25

31

37

19

26

34

46

53

-

50

100

150

200

250

300

350

FY09A FY10A FY11E FY12E FY13E FY10-13E CAGR

China Mobile China Telecom China Unicom

18.6%


Secular drivers are, in our

view, more important thanthe rate of GDP growth

The industry ‘supply shock’

is now three years behind

us

The revenue pie in China is

growing …




20 June 2011


Figure 42: Aggregate cellular industry capex Figure 43: Aggregate cellular industry cash flow

166.3 169.4147.3 153.4 151.5 146.5

38.761.5

46.7 52.9 48.8

23.6

53.5

27.7 23.3 24.9 26.0

50.3

27.4%

31.0%

45.6%

33.7%

36.0%

51.5%

0

50

100

150

200

250

300

FY08 FY09 FY10 FY11E FY12E FY13E

20%

25%

30%

35%

40%

45%

50%

55%

60%

China Mob ile China Unicom China Telecom Industr y capex to sales

50.2 59.692.1 94.8 105.6 122.7

(12.0)(37.3) (21.2) (19.3) (9.4)

6.0

(51.7)

(16.4)

5.3

(0.4)(5.2)(11.5)

-100

-50

0

50

100

150

FY08 FY09 FY10 FY11E FY12E FY13E FY10-13E

CAGR

China Mobile China Unicom China Telecom

35.0%


We are also becoming more optimistic on the prospects of the fixed line business, again

due to secular factors. The two fixed line operators in China enjoy a duopoly on the

provision of broadband services in China. Indeed, given that China Telecom has a

stronger network coverage reach in the southern provinces versus China Unicom’s better

reach in the northern provinces, in many areas the two players represent de facto fixed

line monopolies. With an average FY10 broadband ARPU of Rmb78.3 (US$12.0) per

month and Rmb57.9 (US$8.9) for China Telecom and China Unicom, respectively,broadband services represent a key driver of revenues and returns on invested capital.

Figure 44: Broadband industry revenue and revenue market share forecasts FY10-15

2009 2010 2011E 2012E 2013E 2014E 2015E CAGR (%)

Revenue (Rmb mn)

China Telecom (xDSL) 47,807 54,965 60,825 64,882 66,425 66,682 67,514 4.2

China Unicom (xDSL) 23,898 29,822 34,050 36,504 38,557 40,613 42,189 7.2

Total 71,705 84,787 94,875 101,386 104,982 107,295 109,703 5.3

Broadband as % fixed line revenue

China Telecom (xDSL) 27.7 33.2 36.9 39.4 40.4 40.9 41.5

China Unicom (xDSL) 29.3 36.6 41.7 44.7 46.9 48.8 50.2


We note that broadband revenue reached 33.2% of China Telecom’s recurring fixed line

revenue in FY10, and 36.6% of China Unicom’s. Thus, after stripping out the Xiaolingtong

revenues, China Telecom’s fixed line revenue declined by only 0.1% in FY10, while

Unicom’s actually increased by 2.8%. We view this as an important inflection point.

Looking forward, we expect China Telecom and China Unicom’s fixed line revenues to be

flat into FY11 and FY12 (rising if the Xiaolingtong revenues are stripped out).

Figure 45: Fixed line capex (Rmb mn) and capex to sales Figure 46: Fixed line cash flow generation (Rmb mn)

80.2

89.0

66.5

73.1

63.8

55.3

30.2%

34.2%

26.4%

28.9%

25.1% 21.7%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

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FY08A FY09A FY10 FY11 FY12 FY13

0.0%

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15.0%

20.0%

25.0%

30.0%

35.0%

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fi xed l ine capex capex to sa l es ra ti o

8.6%

57.9

49.3

39.645.2

26.5

42.2

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY08A FY09A FY10 FY11 FY12 FY13 FY10-13E

CAGR

Operating free cashflow


… while broadband

revenues expand




20 June 2011


No material stock by stock impact of GDP slowdown

With good visibility of cash flows, driven by secular factors, the telecoms sector as a whole

tends to outperform in times of global financial stress and/or concerns over end-demand

for Asia’s export industries. We therefore raise the sector to OVERWEIGHT. We have an

OUTPERFORM rating on China Unicom and NEUTRAL ratings on China Mobile and

China Telecom.

We do not envisage that a GDP growth slowdown will affect our forecasts materially, given

the pre-eminence of the secular/ structural drivers, and we therefore leave our projections

and DCF-based target prices unchanged.

We further note that balance sheets in the industry are relatively strong, particularly given

that the secular 3G capex ‘hump’ is increasingly behind the operators. While China Mobile

has a net cash position, China Unicom had a net debt-to-EBITDA ratio of only 1.2x as at

December 2010 and China Telecom had a net debt-to-EBITDA ratio of only 0.6x as at

December 2010.

Figure 47: China telecoms sector – comparative multiples Current Target Upside P/E (x) EV/EBITDA (x) FCF yield (%) Div yield (%)

price (HK$) price (HK$) (%) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E

China Mobile 70.25 86.00 22.4 9.3 9.2 3.6 3.3 6.9 8.0 4.6 4.7China Unicom 16.62 19.00 14.3 68.2 27.6 6.3 5.3 (3.9) (1.4) 0.5 1.3

China Telecom 4.65 4.56 -1.9 17.0 14.8 4.3 5.5 7.2 10.3 1.8 1.8

Asia ex Japan integrated 26.5 16.8 6.0 5.8 5.6 6.9 4.2 4.6

Asia ex Japan wireless 11.5 10.6 5.2 4.7 6.5 8.1 4.7 5.0


How clients should be positioned

Within the sector, our DCF-based target prices given in the figure above currently imply

the highest upside for China Mobile, followed by China Unicom and China Telecom. Given

China Mobile’s large cash pile (HK$14.80/share) and relatively high cash flow yield it is

arguably the most defensive of the three stocks at present, though it faces some near-term

structural issues in competing for the data growth opportunity due to its use of TD-SDCMAtechnology for 3G services.

Unicom is best-placed to increase its share of cellular revenues

The fact that data is becoming more meaningful in the China market (3.8% 3G penetration

as at 2010, rising to 10.2% in 2011) plays to Unicom’s strengths. We have identified four

key drivers for rising 3G net addition numbers: (1) improved W-CDMA handset supply and

distribution channels; (2) a superior data experience for users; (3) an improving voice/2G

coverage experience; and (4) more aggressive marketing, in the form of lower thresholds

and more willingness to subsidise. Unicom is of course highly leveraged at the top line to

success in this area, given average 2G ARPU levels of Rmb38, versus Rmb126 for newly-

acquired 3G subscribers. We forecast that Unicom will grow cellular revenue at 20%

during FY10-FY13 and that its revenue market share will likely expand from 13.4% in

FY10 to 17.6% in FY13. Introduction of the MNP would only accelerate this. Our DCF-based target price of HK$19.00/share and OUTPERFORM rating are maintained.

China Mobile’s share of the revenue pie is declining, but its balance sheet is strong

China Mobile can, we believe, continue to grow in China’s three-player cellular market,

though with a 78.8% revenue market share we expect it to grow more slowly than

competitors. Growth will also be crimped relative to competitors due to the use of home-

grown TD technology. Our extensive recent tests show that users in Beijing and Shanghai

can expect a ‘reasonable’ surfing experience on TD, but not an excellent one. Unicom’s

W-CDMA network delivers 2-10x faster speeds. China Mobile’s Wi-Fi network delivers

faster speeds than TD, but the coverage is still very patchy (hence China Mobile’s rising




20 June 2011


capex). LTE provides a more lasting solution but its full commercial launch, with

smartphones, might only make an impact in FY13. On the other hand, China Mobile has

by far the strongest balance sheet position and the stock can be expected to perform well

in a falling stock market. Our DCF-based target price for China Mobile is HK$86 and we

rate the company a NEUTRAL.

Telecom’s asset purchase likely earnings accretive, but value destructive

China Telecom’s key consolidated earnings driver cellular business is the improving scaleof the cellular division, which is set to reach net profit breakeven in FY11. This is set to

continue, and the intended acquisition of the CDMA network from its unlisted parent in late

FY12 is likely to be earnings accretive from FY13 (though we have factored in

HK$0.51/share of value destruction; investors should consider the capex of the CDMA

network, and the fact that it will replace existing lease fees, rather than just the non-cash

depreciation charges).

China Telecom’s fixed line business (contributing 72.9% of revenues in FY11) is also

stabilising due to broadband growth, and the slow pace of reform by the cable operators in

China defers a potential competitive threat. Given China Telecom’s relatively strong

balance sheet, and the recent stock price decline, we rate China Telecom a NEUTRAL,

with a target price of HK$4.56.




20 June 2011


Valuation multiples with regional comparisons

Figure 48: Regional comparative multiples Normalised FCF Div.

Closing Target P/E EV/EBITDA yield (%) yield (%)

Code Curr. price Rating price 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E

Integrated operators

China Telecom 0728.HK HK$ 4.65 N 4.56 17.0 14.8 4.3 5.5 7.2 10.3 1.8 1.8China Unicom 0762.HK HK$ 16.62 O 19.00 68.2 27.6 6.3 5.3 (3.9) (1.4) 0.5 1.3

HTHK 215 HK HK$ 2.45 O 2.90 14.0 11.4 7.5 6.5 6.2 7.7 5.0 6.6

KDDI 9433 JP ¥ 574,000 O 670,000 9.2 8.0 3.2 2.7 12.2 13.6 2.6 2.8

KT 030200 KS W 36,800 R R 6.8 6.3 3.0 2.8 14.1 15.9 7.9 8.5

NTT 9432 JP ¥ 3,810 O 4,700 9.5 8.6 2.6 2.4 15.6 17.4 3.7 3.9

Softbank 9984 JP ¥ 2,987 O 4,500 13.5 12.1 4.6 3.8 7.1 9.1 0.2 0.2

PCCW 8 HK HK$ 3.09 N 4.00 12.8 10.5 7.7 7.4 11.5 11.0 5.5 6.7

CTI 1137 HK HK$ 4.93 O 7.10 12.5 11.5 5.9 5.5 4.5 6.6 6.0 6.9

PLDT TEL PM P 2,348 O 2,800 12.2 12.1 6.0 5.4 6.4 8.4 8.2 8.3

SingTel ST SP S$ 3.08 N 3.62 11.6 10.5 6.1 5.6 8.5 8.8 5.5 6.2

SKB 033630 KS W 4,260 N 4,800 83.0 22.1 3.9 3.5 3.0 7.7 - -

Telekom Malaysia T MK RM 3.84 U 3.25 29.1 22.5 5.4 5.0 2.4 5.6 5.1 5.1

Telstra TLS AU A$ 3.05 O 3.30 11.6 10.7 4.9 4.7 11.1 10.6 9.2 9.2

True Corp TRUE TB Bt 3.92 U 2.85 25.0 19.3 5.9 5.6 5.1 4.7 - -

TT&T TTNT TB Bt 0.10 U 0.11 n.m. n.m. 7.1 6.4 243.5 259.6 - -

NJA average – integrated 26.5 16.8 6.0 5.8 5.6 6.9 4.2 4.6

Mobile operators

AIS ADVANC TB Bt 98.50 O 128.00 11.5 11.0 5.6 5.4 11.1 11.1 8.7 9.1

AXIATA AXIATA MK RM 4.93 O 6.30 14.2 12.7 6.8 6.1 6.0 7.6 2.2 2.4

Bakrie BTEL IJ Rp 360.00 U 185.00 n.m. n.m. 10.3 9.6 1.5 3.0 - -

Bharti BHARTI IN Rs 376.75 O 450.00 14.6 10.6 7.2 5.7 3.1 8.1 2.8 4.4

China Mobile 941 HK HK$ 70.25 N 86.00 9.3 9.2 3.6 3.3 6.9 8.0 4.6 4.7

DiGi DIGI MK RM 28.72 O 29.60 17.1 16.0 8.6 8.2 6.1 6.4 5.8 6.2

Excelcom EXCL IJ Rp 6,200 O 7,200 13.4 11.6 5.8 5.2 6.1 8.3 2.6 3.4

Globe GLO PM P 875 O 1,000 12.2 12.0 4.8 4.8 5.8 1.2 7.2 7.3

IDEA IDEA IN Rs 74.20 O 95.00 19.2 11.3 6.5 4.8 (0.2) 8.5 0.3 1.1

Indosat ISAT IJ Rp 5,150 O 7,900 23.4 13.7 5.0 4.2 2.0 14.0 2.3 4.4

LGT 032640 KS W 5,460 N 6,600 6.6 6.1 3.1 2.7 12.5 15.7 4.6 5.5

Maxis MAXIS MK RM 5.52 O 6.10 17.8 17.6 10.4 10.3 5.1 5.4 7.2 7.2

M1 M1 SP S$ 2.45 N 2.66 13.5 12.5 7.4 7.0 7.1 7.6 6.0 6.7

NTT DoCoMo 9437 JP ¥ 143,800 N 150,000 11.6 11.3 3.7 3.5 9.0 9.3 3.9 3.9

PT Telkom TLKM IJ Rp 7,250.00 O 9,750 11.4 10.5 5.2 4.8 8.6 9.9 4.9 5.5

Reliance RCOM IN Rs 93.55 N 120.00 7.1 5.4 5.4 4.4 16.1 22.2 3.5 7.3

SKT 017670 KS W 153,500 O 201,000 7.0 6.6 3.5 3.3 5.9 8.0 6.1 6.5

SmarTone 315 HK HK$ 12.28 U 12.00 13.9 11.8 8.5 6.9 5.3 6.4 7.2 8.5

StarHub STH SP S$ 2.74 U 2.31 15.2 14.2 8.1 7.8 5.2 5.5 7.3 7.3

TAC DTAC TB Bt 59.75 O 68.00 13.4 16.1 5.5 5.6 10.2 9.5 13.4 7.4

NJA average – mobile 11.5 10.6 5.2 4.7 6.5 8.1 4.7 5.0Asia average – telecoms 16.0 12.4 5.0 4.6 7.5 8.9 4.1 4.3

Note: 1) Rating: O = Outperform; N = Neutral; U = Underperform; R = Restricted, 2) The averages are based on market capitalisation., 3) The

PE for non-Asian stocks are based on Credit Suisse adjusted EPS., 4) The financial years of KDDI, NTT, NTT DoCoMo, Softbank, Bharti,

Reliance and SingTel are ended in March. For the sake of comparison, the FY05 of these companies in this matrix represents FY3/06 of their

financial years and etc., 5) FCF yield = (EBITDA - interest exp. - tax - capex) / mkt cap.





20 June 2011


Insurance SectorRelatively defensive in a slowdown

Arjan van Veen – 852 2101 7508 – [email protected]

Figure 49: Insurance Valuation Table

Company Ticker CS TP PE EPS EV VNB EV* VNBPrice (%) Up/dn (x) (local) (local)* P/EV* (x) multiple (x) (%) growth (%)

T = Dec 10 Rating Local Target Chg (%) T+1 T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+1

China Life 2628.HK NTRL 25.65 30.00 0.0 17 16.4 1.57 2.00 14.23 16.03 1.8 1.6 12.1 9.1 14 17

Ping An 2318.HK RSTR 75.40 0.0 21.0 3.59 4.43 35.18 40.96 2.1 1.8 14.7 10.7 13 18

China Pacific 2601.HK OPFM 30.30 41.00 0.0 35 16.3 1.86 2.21 17.27 19.09 1.8 1.6 12.8 9.2 14 25

China Taiping 0966.HK NTRL 18.70 22.00 0.0 18 23.1 0.81 1.06 12.59 14.81 1.5 1.3 17.4 8.9 31 25

PICC* 2328.HK NTRL 11.98 11.00 0.0 -8 17.2 0.70 0.81 3.37 4.66 3.6 2.6 na na 28 na


Relative to other cyclical sectors, the insurance industry is less impacted by any slowdown

in the Chinese economy. The key drivers for insurance companies are:

■ Demand for savings products (correlated to GDP/disposable income and

demographics)

■ Demand for insurance (i.e., related to wealth/income and other factors such as

number of motor vehicles)

■ Interest rates – Insurance earnings are highly leveraged to interest rates (detailed

below), with rising rates positive for insurers.

While there is some longer-term correlation to GBP growth, we highlight that the insurance

industry (both life and P&C) has continued to grow reasonably robustly even during

periods of weaker growth. P&C tends to be a little more cyclical as this is mainly (~75%)

motor vehicle insurance in China; it reacts quicker to economic cycles.

Figure 50: Life insurance less correlated …

Life insurance – premiums (Rmb bn) and growth (% p.a.)

Figure 51: … while P&C a little more cyclical

P&C insurance – premiums (Rmb bn) and growth (% p.a.)

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

0%

10%

20%

30%

40%

50%

60%

Premiums Growth 10yr CAGR (%pa)

growth (%pa)

10yr CAGR (%pa)

Bancassurance

(mainly single

premiums)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

0%

5%

10%

15%

20%

25%

30%

35%

40%

Premiums Growth 10yr CAGR (%pa)

Source: CIRC, Credit Suisse estimates Source: CIRC, Credit Suisse estimates

Leverage to rising rates

The main driver for insurance companies, in our view, is the prospect of further interest

rate increase and a steepening of the yield curve. In this tightening cycle, we have seen

some flattening of the yield curve.




20 June 2011


Currently, the impact of continuously falling average (three-year) interest rates is negatively

impacting the earnings of the insurers (2H10 in particular). In addition, the somewhat flat

yield curve and high bank deposits are also posing some near-term margin strain on the

insurers (i.e., forcing increased crediting rates without fully offset from higher yields).

We believe both these headwinds will start to disappear from 2H11 onwards, with average

yield starting to rise and we should also start to see a steepening of the yield curve at

some stage.

Liability reserves calculations are done using 750-day (three-year) moving average

interest rates, which are still decreasing during 2H10, as highlighted below. Assuming flat

rates from here, these moving average starts should be positive again in 2H11.

Figure 52: Change in 750-day moving average bond yields (%)Cash rate 1-yr bond 3-yr bond 5-yr bond 10-yr bond

3Q10 -0.03 -0.11 -0.12 -0.12 -0.11

4Q10 -0.02 -0.12 -0.10 -0.08 -0.061Q11 -0.02 -0.02 -0.03 -0.03 -0.02

2Q11 -0.02 -0.03 -0.04 -0.04 -0.04

3Q11 -0.02 -0.02 0.01 0.01 0.02

4Q11 0.00 0.13 0.14 0.11 0.08

Source: Reuters, Credit Suisse estimates

We deem a moderate tightening environment as the ideal scenario for the listed Chinese

life insurers, with the following impacts specifically for insurers:

(1) Medium term – improving investment returns. Insurers effectively earn the ‘spread’

between return on their assets (weighted to bonds) and what is credited to customers

– with higher spreads usually achievable in higher interest rate environments.

(2) Mature guaranteed portfolios highly leveraged. On products where insurers

guarantee the rate of return, the sensitivity to rising rates is material (and non-linear)

as insurers do not need to pass through any rise in yields.

Ping An and CPIC have large historical portfolios with guarantees averaging above

5% (pre-July 1999: 2.5% maximum guarantee cap). As such, these have the highest

sensitivity to rising rates as highlighted in Figure 54. While the China Life pre-1999portfolio is not part of the listed entity, it does sell low guaranteed products in rural

areas (as does CPIC) and, as such, has some reasonably strong leverage as well.

We note that the embedded value sensitivities in Figure 54 are for a 25 bp rise in

investment yields, which could also lead to changes in risk discount rates and falls in

capital values which offset this.

Figure 53: China 10-year bond yield up 57 bp in 2H10 …CPIC quarterly EPS (2009-2010)

Figure 54: … with strong value metric sensitivitySensitivity to 25 bp rise in investment yield

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

D e c - 0 3

J un- 0 4

D e c - 0 4

J un- 0 5

D e c - 0 5

J un- 0 6

D e c - 0 6

J un- 0 7

D e c - 0 7

J un- 0 8

D e c - 0 8

J un- 0 9

D e c - 0 9

J un-1 0

D e c -1 0

3yr bond yield 10yr bond yield

10yr bond yield

3yr bond yield

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

EV VNB

China Life Ping An China Pacific China Taiping AIA

Source: Reuters, Credit Suisse estimates Source: Company data, Credit Suisse estimates

We deem interest rates will

become a net positive from

late 2011




20 June 2011


Sensitivity differences are as follows:

■

Embedded value – Ping An and China Pacific have the highest sensitivity to rising

rates, given they have the highest guaranteed portfolios (although we note they

already assume rising bond yields over the next five years or so). China Life is the

next highest as it has a portfolio of low guaranteed business sold in rural areas.

■

Value of new business – Given lower current profit margin (due to lower scale and

distribution channel mix), China Taiping is the most sensitive to rising rates. Othersare roughly similar.

Shorter-term headwinds from increased crediting rates

We highlight that while longer term rising rates are positive for insurers, investors must

also consider the returns available on competing products such as bank deposits

(particularly important for bancassurance channel).

As highlighted below, the five-year bank deposit rate is now around 5%, which is well

above the 10-year bond yields (around 4%) and the credit rate on most life insurance

policies.

Figure 55: Bank deposit rate exceeding credit rates …Ping An universal life crediting rate vs bank deposit rate

Figure 56: … and ‘spread’ to earnings rate shrinking10-year government bond (+150 bp) vs 5-year deposit rate

2.0

3.0

4.0

5.0

6.0

M a y - 0 4

S e p - 0 4

J a n - 0 5

M a y - 0 5

S e p - 0 5

J a n - 0 6

M a y - 0 6

S e p - 0 6

J a n - 0 7

M a y - 0 7

S e p - 0 7

J a n - 0 8

M a y - 0 8

S e p - 0 8

J a n - 0 9

M a y - 0 9

S e p - 0 9

J a n - 1 0

M a y - 1 0

S e p - 1 0

J a n - 1 1

C r e d i t i n g v s d e p o s i t r a t e ( % )

P in g A n i nd iv id ua l 5 y r d ep os it 3 y r d epo si t

2.0

3.0

4.0

5.0

6.0

7.0

M a y - 0 4

S e p - 0 4

J a n - 0 5

M a y - 0 5

S e p - 0 5

J a n - 0 6

M a y - 0 6

S e p - 0 6

J a n - 0 7

M a y - 0 7

S e p - 0 7

J a n - 0 8

M a y - 0 8

S e p - 0 8

J a n - 0 9

M a y - 0 9

S e p - 0 9

J a n - 1 0

M a y - 1 0

S e p - 1 0

J a n - 1 1

B o n d y i l e d a n d d e p o s i t r a t e ( % )

10 yr + 150 bps 5 yr deposit

Source: Reuters, Credit Suisse estimates Source: Company data, Credit Suisse estimates

As such, we deem that while this issue remains, insurers may be forced to raise crediting

rates without full offset from rising asset yields on their own portfolios (noting large bond

yield holdings).

P&C insurance more impacted by shorter yields

Property & Casualty insurers have positive leverage to bond yields in that insurance

premiums are generally paid at the beginning of the year and hence the insurer earns

interest on the premiums until it needs to pay the claim.

Insurers generally try to match the duration of their assets and liabilities (asset liability

management or ALM), with mismatches often penalised by regulator’s minimum capital

calculations (which often involve stress testing the portfolio). As such, the type of businessa P&C insurer writes will determine the key bond yield to examine.

For short-term (tail) businesses such as motor insurance, the policy duration is usually one

year and reporting delays are minimal (for the property part) and as such the one-year

bond benchmark is likely to be the most relevant.

For longer-term (tail) businesses, which are generally liability (also know as casualty)

insurance, premiums are also generally annual, but the reporting delay can be long. The

most common type of liability insurance is worker’s compensation (or employer’s liability)

which insures for, among other things, personal injury while at work. The most extreme

P&C insurers benefit more

immediately from rising

rates than their life

insurance peers




20 June 2011


obvious example is asbestos, where the time period between exposure (when an employee

is insured) and symptoms of related diseases developing can be as long as 40 years.

Given property and casualty insurers invest in the shorter end of the yield curve (as 75%

of their portfolio is short tail motor), they benefit more immediately from interest rate risesthan their life insurance peers.

Figure 57: Chinese government bond yields have moved more at the short end

1yr bond 3yr bond 5yr bond 10yr bond31-Dec-09 1.55 2.40 2.95 3.60

30-Jun-10 1.87 2.45 2.69 3.33

31-Dec-10 2.95 3.51 3.56 3.90

24-May-11 3.06 3.30 3.58 3.95

∆ 2011 YTD 0.11 -0.21 0.02 0.05

∆ 2H10 1.08 1.06 0.87 0.57

Source: Reuters, Credit Suisse estimates

For a motor portfolio, an increase in the one-year bond yield by 100 bp would lead to a

profit increase of ~5% (assuming a combined ratio of 95%).

Figure 58: Three-year bonds 100 bp in 2H10 …Government bond yields (%)

Figure 59: … with profit sensitivity highProfit sensitivity to 50 bp change in investment yield

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

D e c - 0 3

J un- 0 4

D e c - 0 4

J un- 0 5

D e c - 0 5

J un- 0 6

D e c - 0 6

J un- 0 7

D e c - 0 7

J un- 0 8

D e c - 0 8

J un- 0 9

D e c - 0 9

J un-1 0

D e c -1 0

3yr bond yield 10yr bond yield

10yr bond yield

3yr bond yield

Short-tail interest rate sensitivity

@3% @4%

Premium 100 100Claims + expenses 95 95Underwriting profit 5 5Investment income 1.5 1.8Profit (pre-tax) 6.5 6.8Change in profit 3.8%Capital 50 50Interest rate 3.0% 3.5%

Source: Reuters, Credit Suisse estimates Source: Credit Suisse estimates




20 June 2011

China Market Strategy 64Pacific Asset Management (Pamria, LLC) Two Union Square 601 Union Street Suite # 4200 Seattle, WA 98101

(206) 933-1600 Direct (206) 600-3175 Fax China: JinMao Tower, Suite #31/F +182-0117-7074 Shanghai



20 June 2011

China Market Strategy 65Pacific Asset Management (Pamria, LLC) Two Union Square 601 Union Street Suite # 4200 Seattle, WA 98101

(206) 933-1600 Direct (206) 600-3175 Fax China: JinMao Tower, Suite #31/F +182-0117-7074 Shanghai



20 June 2011


Companies Mentioned (Price as of 16 Jun 11) For details on all companies mentioned in this report, see Figures 9, 11, 12, 13, 15, 18, 39, 48, 49.

Disclosure AppendixImportant Global Disclosures

Vincent Chan & Peggy Chan, CFA each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed inthis report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensationwas, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's totalrevenues, a portion of which are generated by Credit Suisse's investment banking activities.Analysts’ stock ratings are defined as follows:Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceivedrisk) over the next 12 months.Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months.Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29 th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**,with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities.Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry

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20 June 2011


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china slowdown: where to strike when hunting for extraordinary value

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