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					March 12, 2012

China Strategy

A-share Strategy 2Q2012: Ongoing policy
tailwind

                                                                                                                                                         Equity Research

Policy fine-tuning should continue to provide support                                                                          Hanfeng Wang, Ph.D, CFA
We have identified three A-share market up/down sub-cycles, coinciding                                                         +86(10)6627-3318 hanfeng.wang@ghsl.cn
with China’s easing/tightening policy cycles and several rounds of DM                                                          Beijing Gao Hua Securities Company Limited

monetary easing since late 2008. The policy fine-tuning in China and new
                                                                                                                               Helen Zhu
DM monetary easing since late last year marked the start of the third of                                                       +852-2978-0048 helen.zhu@gs.com
these market sub-cycles, and increase our confidence in our constructive                                                       Goldman Sachs (Asia) L.L.C.
stance, especially in the near term. We reiterate our mid-year/year-end
CSI300 index target of 2,950/3,200, which suggest further 10%/19% market                                                       Timothy Moe, CFA
                                                                                                                               +852-2978-1328 timothy.moe@gs.com
upside, respectively.
                                                                                                                               Goldman Sachs (Asia) L.L.C.

Earnings risks reducing, liquidity gradually improving                                                                         Christopher Eoyang
We have more confidence in our 17.4%/10.1% 2011/2012 top-down                                                                  +65-6889-1199 christopher.eoyang@gs.com
                                                                                                                               Goldman Sachs (Singapore) Pte
earnings growth estimates for CSI300 after seeing ongoing policy easing,
and we introduce our top-down 2013 earnings estimate of 16.6%. Liquidity                                                       Ben Bei
should continue to improve gradually as we expect policy to turn more                                                          +852-2978-1220 ben.bei@gs.com
accommodative as inflation continues to moderate, although the renewed                                                         Goldman Sachs (Asia) L.L.C.
DM easing should add to medium-term inflation pressure in China.
                                                                                                                               Chenjie Liu
                                                                                                                               +86(10)6627-3324 chenjie.liu@ghsl.cn
Sector strategy: adjust up beta slightly                                                                                       Beijing Gao Hua Securities Company Limited
We upgrade insurance to overweight, and downgrade health care to
neutral, basically adjusting up the beta of our sector allocation. Overall we
like a mixture of domestic cyclicals (coal, securities, insurance), and
consumption cyclicals (auto, home appliance, retailing, etc), and
continue to underweight defensive sectors such as telecom/utility and
some cyclical sectors where fundamentals are still weak (steel, chems).
 Policy cycles vs. A-share market cycles since late 2008
                                       GDP Consensus Forecast                 CSI300 Index (RHS)
   10.5       (%)                                                                                                      4,000

   10.0   2008                                     2010
                                                                                                                       3,500
    9.5

                                                                                                2011
    9.0
                                                                                                                       3,000
                                                                                                       2012
    8.5

                                    Easing     Tightening            Easing        Tightening                          2,500
    8.0

                                                                                                                  Easing
    7.5
                                                                                                                       2,000
    7.0                      2009


    6.5                                                                                                                1,500
     Aug-08         Feb-09          Aug-09      Feb-10      Aug-10            Feb-11     Aug-11               Feb-12


Source: WIND, Gao Hua Securities Research, Goldman Sachs Global ECS Research



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The Goldman Sachs Group, Inc.                                                                                                                          Global Investment Research
March 12, 2012                                                                                                          China




China’s policy fine-tuning and DM easing increase confidence
                                 Instead of containing general views and focus sections, in this quarterly outlook report we
                                 examine how the A-share market has reacted to the domestic policy cycles in China and
                                 the several rounds of monetary easing in the advanced economies (DMs) since late 2008.
                                 China has started to fine-tune the tightening policy stance and the central banks in DMs
                                 have embarked on a new round of monetary easing in the past several months, and based
                                 on the experiences learnt from the past A-share market reactions to domestic policy
                                 cycles/DM easing since late 2008, we revisit our short-term and medium-term views, and
                                 adjust our sector preferences accordingly.

                                 Remain positive. We identify three sub-cycles in A-share market performance since 2008
                                 which coincide with domestic policy cycles and several rounds of DM monetary easing.

                                 (1) China’s policy changes towards a more accommodative stance, together with a round
                                 of DM easing, have usually led to market rally, but induced rising inflation pressure
                                 (property prices) in the medium-term.

                                 (2) Market peaked out when the government got cautious towards the rising inflation
                                 (and/or property prices) and adjusted policy stance accordingly.

                                 (3) China’s policy fine-tuning and the DM monetary easing in the past several months
                                 marked the start of the third market sub-cycle, and increase our confidence in our near-
                                 term positive views.

                                 Despite a possible short-term profit-taking, we feel comfortable with our mid-year/year-end
                                 CSI300 index target 2,950/3,200, which suggest further c. 10% market upside in the coming
                                 several months and c. 19% return for the rest of the year.

                                 Earnings: downside risks reducing. We maintain our top-down earnings forecast of
                                 17.4%/10.1% in 2011E/2012E for CSI300. We think the new round of policy easing in China
                                 and DMs in the past several months should reduce the earnings downside risks
                                 significantly and increases our confidence in our earnings forecast. We also introduce our
                                 2013E top-down earnings forecast for CSI300 of 16.6%, supported a relatively stable top-
                                 line growth and slight margin expansion in non-financial sectors.

                                 Liquidity/Valuation: We believe on the macro level, inflation should increasingly become
                                 less of a concern and consequently monetary policy should continue to turn gradually
                                 accommodative, which support continuously improving liquidity conditions.

                                 On the micro level the value of non-tradable share becoming tradable should be less in the
                                 coming several months (compared with the level in the past several months), and
                                 investment account openings suggest retail investor interest in the equity market is rising
                                 gradually. These suggest market liquidity should continue to improve slowly in the coming
                                 months. Admittedly the DM easing in the past several months should reduce the room for
                                 China’s policy easing as it could potentially add to China’s medium-term inflation pressure,
                                 which may cap potential room for liquidity improvement in the future. But so far this has
                                 not been a concern. We therefore maintain our CSI300 index target multiple at 11.5x 12-
                                 month forward P/E (Growth slower, policy friendlier, October 25, 2011).

                                 Sector strategy: adjusting up beta slightly. We adjusted our sector preferences
                                 slightly in our note What to do while awaiting a tailwind (February 22) and we further
                                 adjust up the beta of our sector preferences in this report by upgrade the insurance sector
                                 to overweight (OW) and downgrade the healthcare sector to Neutral. Overall we like a
                                 mixture of domestic cyclicals (coal, securities, insurance) and consumption cyclicals
                                 (auto, home appliance, retailing, etc). We underweight the defensive sectors such as
                                 telecom/utility, and some cyclical sectors the fundamentals of which are still weak (steel,
                                 chemicals).


Goldman Sachs Global Investment Research                                                                                       2
March 12, 2012                                                                                                               China




The policy cycles vs. the A-share market cycles
                                 In this section we examine how the new round of DMs’ monetary easing, together with
                                 China’s own fine-tuning in policy (starting from late last year) would affect our near-term
                                 and medium-term A-share market views based on the experiences from the past several
                                 domestic policy cycles in China and DM easing.



                                 How does competitive monetary easing in DMs affect China?
                                 DM monetary easing affects China in two ways:

                                 On one hand, a round of monetary easing in DMs should be expansionary on net for the
                                 world as a whole therefore should be supportive to China’s external demand and the
                                 overall economic growth (see Competitive monetary easing is not a zero-sum game,
                                 February 22, 2012).

                                 On the other hand, the expansionary monetary easing in DMs conducted in a
                                 competitive way should also bring some risks to the inflation outlook in China, especially
                                 when overall capacity utilization in the economy is relatively high. Rising inflation pressure
                                 should engender policy tightening, which in return would affect economic growth.

                                 Therefore whether the competitive monetary easing in DMs is good to China or not quite
                                 depends on the tradeoff between the benefit of boosting growth and the side effect of
                                 stoking inflation.

                                 1)   As there tends to be a lag between the start of DM monetary easing and the final
                                      emerging of inflation pressure in China, the competitive monetary easing in DMs is
                                      usually positive at the initial stage of the easing. However the effect should fade or
                                      even turn negative when inflation pressures do rise.

                                 2)   Additionally, the positive impact on China market from DMs’ competitive easing also
                                      depends on China’s initial inflation level and property prices. The higher the initial level
                                      of inflation and/or property prices in China, the less positive the impact of DMs’ easing
                                      on China’s A-share would be, as inflationary pressure from DMs’ easing limits
                                      potential room for domestic policy easing in China, and making any pro-growth policy
                                      adjustments likely to be very measured and incremental in order not to fuel inflation.



                                 A-share market cycles since late 2008: driven by domestic policy
                                 cycles and several rounds of DM monetary easing
                                 By observing the last several rounds of DM monetary easing and China’s policy changes
                                 we find that since late 2008 China’s A-share market cycles have been driven by two main
                                 factors (Exhibit 3):

                                          China’s domestic policy cycles (including monetary policies which aims to manage
                                           inflation/inflation expectation, and property related policies, and cool speculative
                                           purchase of housing to contain property rises).

                                          The several rounds of monetary easing in the advanced economies (DMs).

                                 Keeping housing prices affordable in the name of maintaining social harmony is a key
                                 priority for the Chinese government in macro management, and as such property
                                 tightening policy has been an important element of China’s overall macro policies since
                                 late 2008.

                                 In Exhibit 1, we illustrate the mechanism that has driven A-share market cycles since late
                                 2008.


Goldman Sachs Global Investment Research                                                                                        3
March 12, 2012                                                                                                               China




                                 1)   A round of monetary easing in DMs together with China’s domestic policy loosening
                                      has tended to boost growth or alleviate growth concerns, and increase risk appetite,
                                      thus lead to an equity market rally in the short run. At the same time, the easing results
                                      in rising inflation (and/or inflation expectation, usually driven by rising commodity
                                      prices) and housing prices pressure.

                                 2)   Policy stance then shift towards tightening once the government becomes more
                                      cautious on the momentum of inflation pressure (and/or housing prices). Market
                                      inflection point usually appears when investors perceive there is a shift in policy stance.
                                      In the meantime, growth concerns gradually emerge and market growth forecast
                                      begins to be revised downward.

                                 3)   The market bottoms when inflation pressure abates (and rising housing prices
                                      pressure seems to be contained, at least temporarily) and investors feel there should
                                      be a change towards pro-growth policy stance. Meanwhile market forecasts of growth
                                      tend to bottom.

                                 4)   And then another market cycle begins once domestic policy easing gets more
                                      perceptible, and the trend should be strengthened if there is a new round of monetary
                                      easing in DMs.

                                 Admittedly since late 2008 other considerations such as the LGFV issue in China and the
                                 EU debt crisis have also been important factors driving the market but these issues are
                                 directly or indirectly linked to the domestic and external policy cycles, thus we simplify the
                                 framework and incorporate these issues into the overall easing/tightening policy cycles.

                                 Based on the framework above, we divide the A-share market performance since late 2008
                                 into three sub-cycles, which coincide with the policy cycles (Exhibit 2)

                                 1)   The first sub-cycle started from late-2008/early 2009, peaked in 3Q2009 and ended in
                                      mid-2010;

                                 2)   And the second sub-cycle started at mid-2010, peaked in late 2010, and ended at in
                                      late-2011/early 2012;

                                 3)   The start of China’s domestic policy fine-tuning since late 2011, and the gradual
                                      adjustments in property tightening policies, together with the new round of monetary
                                      easing introduced by the central banks in DMs in the past few months marked the start
                                      of the third A-share market sub-cycle.

                                 In Exhibit 3, we illustrate the details of the various key variables within each of the cycles,
                                 including inflation level, property prices, commodity prices (crude oil), domestic financial
                                 conditions, growth expectations, market index level and sector performances, etc.

                                 We have some general observations below:

                                 1)   The market was up at the initial stage of policy easing, and then peaked out when
                                      inflation concerns (and/or property prices concern) arose, which induced changes in
                                      policy stances;

                                 2)   The magnitude of the upward stage of the market in the first sub-cycle was much
                                      larger and lasted much longer than in the second sub-cycle, as the initial inflation level
                                      and property prices level were much lower at the start of the first sub-cycle than in the
                                      second (Exhibit 3);

                                 3)   Intuitively, cyclical sectors outperformed defensive sectors from the start of the easing,
                                      while defensive sectors outperformed when tightening concerns rose (Exhibit 3).

                                 4)   Overall market valuation became lower and lower since the index peak in 3Q2009, and
                                      the current index valuation was even lower than the 2008 trough level. We analyzed
                                      the cyclical and structural factors behind this declining valuation in one of our previous
                                      reports (Liquidity constraints result in lower market valuation, September 16, 2011).

Goldman Sachs Global Investment Research                                                                                           4
March 12, 2012                                                                                                             China




                                 What are the differences between the current sub-cycle and the
                                 previous two sub-cycles?
                                 While we identify such cyclical market movements with the policy cycles, we believe there
                                 are some notable differences that could potentially lead to slightly different market
                                 implications in this cycle vs. in the two previous sub-cycles:

                                 1)   The likely speeding up of resource pricing mechanism reform may add additional
                                      inflationary pressures in China, especially over the short term. This is more so than in
                                      the past two cycles, with the government emphasizing price mechanism reform more
                                      than in past cycles and reflected in the government’s relative high 4% inflation target
                                      for this year as per the government’s working report (high considering the average CPI
                                      yoy is already at 3.85% in January and February and the base for the rest of the year is
                                      high).

                                      Compared with major DMs, China’s current inflation level deviates most from the long-
                                      term average. (Exhibit 4)

                                 2)   China’s property prices have risen significantly vs. those in early 2009, or in mid-2010,
                                      and significantly outpaced GDP/income growth since early 2009(Exhibit 5), which has
                                      led to even lower housing affordability and means any adjustments in the current
                                      property tightening policy are likely to be measured and gradual, given that a further
                                      broad rise in property prices could well create social discontent.

                                 Therefore potential policy adjustments should be tempered by the higher property prices
                                 than in the past two sub-cycles, and the renewed round of monetary easing in DMs in the
                                 past several months further reduces room for China policy easing in the medium-term.

                                 Implications: based on the interactions between policy cycles and A-share market cycles,
                                 we believe that China’s policy adjustments towards easing which started late last year,
                                 together with the new round of the DMs’ monetary easing increases our confidence in our
                                 short-term constructive views, as it should help reduce growth concerns significantly.

                                 In the medium-term (6-12 months) given the current higher inflation level and property
                                 prices than at the beginning of last two sub-cycles, we think the China’s policy room for
                                 easing should be smaller, and the pace should be slower than in the past two sub-cycles,
                                 which should cap the potential room for improvement in liquidity and therefore cap
                                 medium-term market valuation normalization. Additionally the new round of DM monetary
                                 easing in the past several months should compress the room for China potential easing in
                                 the medium term.

                                 In the following section we will update our views on earnings, valuation and index targets
                                 based the conclusions set out above




Goldman Sachs Global Investment Research                                                                                          5
March 12, 2012                                                                                                                                              China




                                     Exhibit 1: An illustration of the mechanism whereby policy cycles haven drive A-share
                                     market cycles since late 2008



                                                                                             Global/domestic
                                                                                                 easing




                                                             Inflation/inflation                                             Growth forecast
                                                            expectation decines                                               bottoms out

                                                              Property prices
                                                                                                                                  Market rises
                                                             contained/decline



                                                                 Growth forecast                                             Inflation/inflation
                                                                    peaks out                                                expectation rises

                                                                 Market declines                                            Property price rises




                                                                                            Domestic tightening




                                     Source: Gao Hua Securities Research, Goldman Sachs Global ECS Research




Exhibit 2: An illustration of policy cycles vs. market cycles since 2008: the key policy changes (China’s monetary policy
changes, property policies, and DM monetary easing), changes in growth expectations, and A-share market cycles



                                                    GDP Consensus Forecast                             CSI300 Index (RHS)
                             (%)
                 10.5                          First sub-cycle                                    Second sub-cycle                               Third
                                                                                                                                                   4,000

                          2008                                        2010
                 10.0

                                                                                                                                                    3,500
                  9.5
                                                                                                                           2011

                  9.0
                                                                                                                                                    3,000
                                                                                                                            2012
                  8.5
                                                                 Tightening
                                                                                            Easing
                                                                                                              Tightening                            2,500
                  8.0
                                                 Easing                                                                                          Easing
                                                                                            China monetary policy changes
                  7.5
                                                                                             DMs' monetary easing
                                                                                                                                                    2,000
                                                                                            China property policy changes
                  7.0
                                       2009

                  6.5                                                                                                                               1,500
                    Aug-08         Feb-09        Aug-09            Feb-10          Aug-10            Feb-11          Aug-11              Feb-12

Source: CEIC, Wind, Gao Hua Securities Research, Goldman Sachs Global ECS Research




Goldman Sachs Global Investment Research                                                                                                                       6
March 12, 2012                                                                                                                                                                           China




Exhibit 3: An overall view of the A-share market sub-cycles since late 2008: inflation/property prices/policy
variables/index level/sector performance, etc.


                                                              First Market Cycle                                         Second Market Cycle                          Third Cycle


Phases                                    Easing begins       Tightenning begins       Index Low         Easing Begins    Tightenning begins         Index low             Easing begins

Time window                            Late 2008/Early 2009        3Q2009               Mid-2010           Mid-2010           Late 2010             Early-2012          Late 2011/Early 2012

CPI inflation (yoy %)                         -1.6%                  0.6%                 2.9%               2.9%                3.6%                  4.5%                    4.5%


Property price index (2009/01=100)            100.0                 117.9                 151.1              151.1              156.7                  154.9                   154.9


Crude oil prices($/b, Brent)                   51.4                  75.0                 78.1               78.1                94.2                  125.2                   125.2

GS FCI                                        108.0                 104.3                 108.1              108.1              107.5                  110.1                   110.1

Interbank liquidity (SHIBOR 3m, %)            1.38%                 1.76%                2.63%              2.63%               4.62%                  5.28%                   5.28%


                                                                Peak or upward                                              Peak or upward
Growth forecast (GDP consensus)            Bottom out                                    Decline          Bottom out                                  Decline               Bottom out
                                                              momentum weakens                                            momentum weakens


CSI300 Index Inflection point (local
                                             1627.8                 3787.0               2502.2             2502.2              3548.6                2290.6                   2290.6
peak/bottom of the index)

CSI300 12-m Forward PE                        13.7x                 18.6x                 12.7x              12.7x              13.9x                   9.6x                    9.6x
Market return (CSI300 Index, %)                                    132.7%                -33.9%                                 41.8%                 -35.4%                   14.2%
                                                               From late 2008 to   From 3Q2009 to mid-                   From mid-2010 to late From late 2010 to early Sector performance 2012
Sector return (Relative Perf %)
                                                                   3Q2009                 2010                                  2010                    2012                      ytd
Oil,gas& petrochemical                                             -31.1%                -13.3%                                 -21.3%                 19.1%                    -5.5%
Coal                                                               131.5%                -12.5%                                  19.5%                  7.4%                    1.2%
Chemical                                                           -83.8%                 -2.0%                                  36.0%                 -9.6%                    1.4%
Construction Materials & Others                                    67.4%                   3.9%                                  21.3%                  4.9%                    2.9%
Non-ferrous metal & Others                                         184.8%                -10.4%                                  57.1%                -15.5%                    11.6%
Steel                                                              44.0%                 -17.7%                                  -9.5%                 -2.0%                    -2.2%
Capital Goods                                                      29.3%                  10.1%                                  31.1%                 -8.0%                    3.1%
Construction&Other Industrial                                        5.0%                  7.1%                                 -11.5%                 -7.9%                    0.3%
Airlines                                                           36.8%                  28.7%                                  25.5%                -23.1%                    -1.2%
Shipping&Other transportation                                      -53.5%                 -3.7%                                 -18.5%                 -1.1%                    -4.1%
Transportation Infratructure                                       -45.9%                 -4.3%                                 -17.1%                 -4.6%                    0.3%
Auto&parts                                                         136.6%                 16.1%                                  24.8%                 -5.3%                    4.5%
Consumer Durables                                                   -7.0%                 24.6%                                  12.6%                  9.9%                    10.0%
Textile&Apparel                                                     -4.8%                  3.7%                                  -5.9%                 -4.5%                    -1.5%
Hotel &tourism&Others                                               -1.8%                  7.2%                                  -3.1%                 -1.8%                    -2.8%
Media                                                              40.1%                   6.3%                                  -2.5%                -18.8%                    1.2%
Retailing                                                           -5.7%                 29.9%                                   5.8%                -10.0%                    -5.4%
Food&beverage                                                      -41.5%                 25.4%                                   5.6%                 27.0%                    -7.0%
Health Care                                                        -28.2%                 47.4%                                   9.7%                 -5.9%                    -6.9%
Banks                                                              -42.2%                  8.4%                                 -25.2%                 23.0%                    -6.6%
Securities& Others                                                 -28.1%                -12.8%                                  -1.3%                 -9.9%                    9.4%
Insurance                                                            3.0%                 14.2%                                 -27.1%                 -1.5%                    -3.4%
Property                                                           42.6%                 -10.9%                                 -13.2%                  1.1%                    6.1%
IT&equipment/components                                            -14.9%                 19.8%                                   3.7%                 -5.7%                    -2.8%
Telecom                                                            -65.6%                  2.1%                                 -34.5%                 22.4%                   -19.5%
Utilities                                                          -51.0%                 -1.4%                                 -25.9%                 8.1%                     -8.7%


Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS Research




Goldman Sachs Global Investment Research                                                                                                                                                       7
March 12, 2012                                                                                                                                                                                        China




Exhibit 4: China’s current inflation level is much higher                                  Exhibit 5: China’s property prices have risen a lot vs. the
than at the start of last two market sub-cycles, and                                       start of last two market sub-cycles, which should cap the
deviates the most from historical average among the                                        room for property policy adjustments.
major economies.


                                                                                           220                                 Beijing             Shanghai             Tianjin             Chongqing
                 Inflation deviation from long-term average, 3MA                                     (Jan 2007=100)
 4                                                                                                                             Shenzhen            Guangzhou            Hangzhou            Nanjing
           (%)
                           US
                                                                                           200
 3                         Japan                                                                                               Wuhan               Chengdu
                           EU
 2                         China                                                                                                                                                       China monetary
                                                                                           180
                                                                          China monetary                                                                                               easing
                                                                                                                                                                    China monetary
                                                                          easing
 1                                                                                                                                                                  easing
                                                China monetary                             160
 0                                              easing


 -1                                                                                        140                           China monetary
                                                                                                                         easing
 -2
                                                                                           120

 -3

                                                                                           100
 -4
                   China monetary
 -5                easing
                                                                                            80
      Sep-08     Mar-09      Sep-09   Mar-10     Sep-10          Mar-11       Sep-11             Jan-07               Jan-08              Jan-09               Jan-10              Jan-11               Jan-12



Source: CEIC, Gao Hua Securities Research, Goldman Sachs Global ECS                        Source: CREIS, Gao Hua Securities Research, Goldman Sachs Global ECS
Research                                                                                   Research




More confidence in our near-term positive views
                                           The policy easing in China and DMs in the past several months has increased our
                                           confidence in our positive views towards the market, especially in the near term. We
                                           maintain our mid-year/year-end index targets for CSI300 of 2,950/3,200, which implies a
                                           further c. 10% market upside by mid-year and an additional 8% return in 2H2012.

                                           The return we expect in 2H2012 should be less than in 1H2012 reflecting our views that the
                                           new round of DM easing should squeeze China’s room for policy easing, as it would add to
                                           medium-term inflationary pressure and therefore reduce the possibility of a further
                                           substantial medium-term improvement in liquidity.



                                           Earnings growth: downside risks reducing, introducing 2013E top-
                                           down earnings forecast
                                           Lower earnings downside risks vs. several months ago. We maintain our
                                           17.4%/10.1% CSI300 top-down earnings growth forecasts for 2011E/2012E. Earnings
                                           forecast downside risks have been diminishing, as:

                                           1)     The gradual changes in China’s policy since late 2011 has reduced the risks of an
                                                  economic hard-landing substantially. The recent macro and sector data suggest that
                                                  the overall economic growth should gradually stabilize, and the recent policy
                                                  adjustments in the property sector should also help to partly clear the uncertainties
                                                  over the property sector(such as the PMI data, and the recent transaction volume in
                                                  property sector, etc);

                                           2)     The pick-up of strength in economic activities in major DMs since 4Q2011, and the
                                                  recent round of DM monetary easing should further lessen the risks to the external
                                                  demand of China, which would help to reduce the downside risks to our earnings

Goldman Sachs Global Investment Research                                                                                                                                                                   8
March 12, 2012                                                                                                            China




                                      forecasts, given the importance of external demand to China. The February PMI export
                                      new order index rebounded meaningfully from the January level (Exhibit 6), which
                                      indicates the export growth should rebound in the coming several months.

                                 Introducing 2013E top-down CSI300 earnings forecast: we forecast CSI300 earnings
                                 should grow by 16.6% in 2013E (16.5% for the financials sector and 16.7% for the non-
                                 financial sectors). We update our top-down earnings forecast model (see Growth amid
                                 challenges, January 17, 2010, for the details of our model set-up) (Exhibits 8/9). The model
                                 suggests the bottom-line of the non-financial sectors should grow by 16.7% in 2013E,
                                 supported by top-line growth of 15.1% and a net margin of 5.7%, which should expand
                                 slightly from the 5.6% level in 2012E (Exhibit 10).

                                 We think the 16.6% 2013E earnings growth forecast is not aggressive, as:

                                 1)   Both the top-line growth and margin assumptions for the non-financial sectors are not
                                      aggressive vs. historical performance. The top-line growth for the non-financial sectors
                                      we forecast is 15.1% vs. the historical average of 24% (Exhibit 8), and the net margin is
                                      5.7%, vs. the historical average of 7.3%, a slight expansion from the level in 2012E but
                                      still below the historical average (Exhibit 9).

                                 2)   For the heavily weighted financial sectors, our banking team (Ning Ma & Richard Xu)
                                      recently raised their bottom-up earnings estimates for banks by around 5%, and for
                                      2013E on average they forecast 17% growth for the sector (Stay positive on improving
                                      liquidity/NPLs; raising earning/targets, March 8, 2012). This should provide some
                                      support to our overall growth forecast given the banking sector’s earnings contribution
                                      (more than 30%) to the index.

                                 3)   Our 2012E/2013E top-down forecast is still lower than WIND consensus. The bottom-up
                                      WIND consensus suggests CSI300 earning should grow by 20.7%/18.3% 2012E/2013E,
                                      10ppt/1.7ppt higher than our top-down earnings forecast, respectively. Based on the
                                      stocks covered by Goldman Sachs/Gao Hua Securities, for all sectors except energy,
                                      we forecast lower earnings than WIND consensus (Exhibit 11)



                                 Liquidity improvement: gradual and slow
                                 The overall liquidity improvement has been gradual and slow and should continue to be so,
                                 given the potentially slower-than-expected policy adjustments:

                                 1)   On the macro level, liquidity improvement in the interbank market and in the real
                                      economy should be gradual, as policy fine-tuning should continue but only in a very
                                      measured way, and the policy changes should be contingent on the government’s
                                      perception of the growth outlook and the job market situation.

                                          So far the growth outlook has become much less uncertain than several months
                                           ago, and the job market has remained largely stable (as suggested by various
                                           media reports, such as SINA), which we believe would not justify any urgent and
                                           substantial change in policy stance.

                                           Policy adjustments so far has been slower and less than expected. The RRR cut in
                                           February came later than the market previously expected, and January bank loans
                                           were much lower than the number expected at the year beginning. There are
                                           media reports (SINA) suggesting that February banks loan may continue to
                                           disappoint.

                                           Consequently the yield on the commercial discount bills, an indicator of the
                                           liquidity condition in the real economy, has been declining slowly from highs in
                                           around 13% in late 3Q2011 to around 5.1% recently, which is still restrictive
                                           (Exhibit 12).


Goldman Sachs Global Investment Research                                                                                      9
March 12, 2012                                                                                                              China




                                          As discussed above, the recent round of DM monetary easing should also reduce
                                           the scope and need for policy easing in China in the medium term.

                                 2)   On the micro level, the funds flow should turn more favorable, but only gradually.

                                      (1) Less pressure from non-tradable shares turning tradable: the pace of non-
                                          tradable shares becoming tradable should slow in the coming months, especially
                                          in the small-mid enterprise board (SME). We estimate the monthly value of shares
                                          turning tradable should be around Rmb72bn (vs. the average daily turn over of
                                          around Rmb140bn ytd) on average in coming months vs Rmb113 bn on average in
                                          the past three months (Exhibit 13).

                                      (2) Share reductions from the company management/major shareholders:
                                          may increase if the market rebounds further. The pace of shares being sold by the
                                          company managements or major shareholders had slowed as the market declined
                                          to extremely low valuations in 4Q2011 and early this year. In some weeks there
                                          had even been net purchase of shares by company management/major
                                          shareholders. However, the volume of net shares reduction has increased
                                          significantly in the past several weeks when the market rebounded ( Rmb1.2bn
                                          daily average in the past week vs. A-share average daily turnover of around
                                          Rmb140bn ytd), which suggest the pressure of share reduction by company
                                          managements/major shareholders may rise if the market continues to rebound
                                          (Exhibit 14).

                                      (3) Retail investors: retail interest in equity investment is rising, but is more
                                          momentum driven.

                                           The market rally since mid-Jan has attracted retail investors’ interest, with an
                                           increase in the number of investment account openings since early February. At
                                           the same time, the yield on bank wealth management products, which had
                                           competed for retail fund with the equity market last year, has declined since late
                                           last year. Historically retail investor money flows are more momentum driven, and
                                           interest in equity markets is sustained only after a period of persistent market rally
                                           (Exhibit 15).



                                 Valuation and index target: remain positive despite some medium-
                                 term concerns
                                 We maintain our index target multiple. We introduced our 12m forward P/E index
                                 target multiple of 11.5x for CSI300 in our annual outlook report published October 25, 2011.
                                 The index target multiple is much lower than the CSI300 historical valuation average of
                                 19.0x 12m forward P/E, and represents some valuation normalization from the relatively
                                 low valuation level (10.5x) we saw late last year. However it does not suggest substantial
                                 valuation expansion given the various cyclical and structural factors that we expect to cap
                                 the potential valuation expansion (Liquidity constraints results in lower valuation,
                                 September 16, 2011).

                                 So far this year, A-share liquidity conditions have improved gradually, consistent with our
                                 expectations and we expect this to continue, which would support moderate valuation
                                 expansion for the rest of the year. As such, we maintain our index target valuation multiple
                                 of 11.5x 12m forward P/E for CSI300.

                                 Admittedly the DM monetary easing introduced in the past several months should increase
                                 the medium-term inflation pressure and reduce room for China policy easing in the
                                 medium-term. Any tighter than expected policy would lead to less liquidity improvement
                                 and therefore lower market valuation. In Exhibit 17, we can see that CSI300 P/E valuation is
                                 negatively correlated with the yield on the commercial discount bills, which tracks liquidity


Goldman Sachs Global Investment Research                                                                                       10
March 12, 2012                                                                                                                 China




                                 in the real economy. However, this has not been a market concern so far and should not be
                                 a problem given that China’s inflation should continue to moderate in the coming several
                                 months. As such we do not revise our index target multiple for now.

                                 Remain positive. We maintain our mid-year/year-end index target 2,950/3,200 for CSI300
                                 as the policy easing in China so far and the new round of DM monetary easing increase our
                                 confidence in our constructive stance, especially in the near term. The new round of policy
                                 easing should help to reduce growth concerns significantly, and should continue to
                                 support liquidity improvement.

                                 Although the renewed round of DM monetary easing in the past several months may add
                                 inflationary pressure in China and complicate China’s policy situation in the medium-term,
                                 China’s inflation should continue to decline with its relatively weak economic activity in
                                 coming months. In short, monetary easing in DMs is a medium-term risk but not an
                                 imminent issue.

                                 Index path: turning more constructive near-term than several months ago (Exhibit 18).

                                 We held a constructive views towards A-share market in 2012 in our annual outlook report
                                 (Growth slower, policy friendlier, October 25, 2011), and expected more market return in
                                 1H2012 than in 2H2012. At the year beginning we noted that a market rebound would be
                                 likely after the long and deep corrections in A-share in 2H2011, but liquidity would need to
                                 be loosened further for more pronounced market returns (Liquidity should be loosened
                                 further, January 4, 2012).

                                 The market rebound since mid-Jan has been stronger than we expected, supported by the
                                 favorable global market environment and gradually improving domestic liquidity.

                                 Going forward, while some profit taking is possible as some leading sectors have gained
                                 more than 20% ytd, we think there will be some further market upside over 3-6 months
                                 given that: the overall market valuation is still low; domestic liquidity should continue to
                                 improve gradually, and uncertainty in DMs has fallen after further DMs’ monetary easing.
                                 Our mid-year index target for CSI300 suggests c. 10% upside.

                                 Risk to our views:

                                 1)   Growth recovery, especially in FAI-related sectors are less than we expect.
                                      Although recent data suggest transaction volume recovery in the property sector in
                                      February is better than previously anticipated, we see few signs that property FAI-
                                      related sectors are recovering firmly. Our materials analyst has cautioned that the price
                                      and volume recovery in the cement sector should be slower than he previously
                                      expected (Sentiment very weak; 2Q demand rebound likely smaller magnitude,
                                      February 14, 2012). If this turns out to be representative for all the FAI related sectors, it
                                      would pose downside risks to our constructive market views.

                                 2)   Inflation declines less than expected/rises earlier than expected: our
                                      economists expect inflation should continue to moderate, which should support the
                                      view that policy adjustments toward a more accommodative stance should continue in
                                      the coming several months. As inflation is one of the government’s the most important
                                      policy targets, stickier inflation would allow less room for policy adjustments, and
                                      therefore cap potential liquidity improvement.

                                 3)   DM growth momentum. Ytd, growth momentum in DMs has been firmer than
                                      general expectations, and consequently leading indicators suggest China’s export
                                      growth should rebound sequentially in coming months. However whether this firmer
                                      growth can be sustained is not certain, and might pose a risk to China’s external
                                      demand if DM growth momentum falters.




Goldman Sachs Global Investment Research                                                                                         11
March 12, 2012                                                                                                                                                                                                       China




Exhibit 6: The February PMI export new order index                                           Exhibit 7: The recent rising transaction volume in the
rebounded meaningfully, indicating export growth                                             property sector, and the volume in recent weeks seems
should rebound in the coming several months                                                  to be better-than-expected


      50                            Export growth yoy (3-m rolling)                    70      (K sqm)                                                                                                           (Rmb/sqm)
              (%)                                                                                                   Tier 1 aggregate volume (LHS)                         Tier 2 cities aggregate volume (LHS)
                                                                                 (%)
                                                                                              7,000                 Tier 3 cities aggregate volume (LHS)                  Tier 1 cities aggregate ASP (RHS)           22,000
                                    PMI_export new order (RHS)
      40                                                                               65                           Tier 2 cities aggregate ASP (RHS)                     Tier 3 cities aggregate ASP (RHS)
                                                                                                                                                                                                                      20,000
                                                                                              6,000
                                                                                       60                                                                                                                             18,000
      30

                                                                                       55     5,000                                                                                                                   16,000
      20
                                                                                                                                                                                                                      14,000
                                                                                       50
                                                                                              4,000
      10                                                                                                                                                                                                              12,000
                                                                                       45
                                                                                                                                                                                                                      10,000
                                                                                              3,000
       0
                                                                                       40                                                                                                                             8,000

      -10                                                                                     2,000                                                                                                                   6,000
                                                                                       35

                                                                                                                                                                                                                      4,000
      -20                                                                              30     1,000
                                                                                                                                                                                                                      2,000

      -30                                                                               25
                                                                                                   0                                                                                                                  0
         2005-01    2006-01   2007-01   2008-01   2009-01    2010-01   2011-01   2012-01
                                                                                                   Jan-10        Apr-10     Jul-10       Oct-10         Jan-11        Apr-11       Jul-11      Oct-11       Jan-12


Source: CEIC, Gao Hua Securities Research, Goldman Sachs Global ECS                          Source: CEIC, Gao Hua Securities Research, Goldman Sachs Global ECS
Research.                                                                                    Research.




Exhibit 8: Top-line growth forecast for the non-financial                                    Exhibit 9: The margin forecast for non-financial sectors
sectors


 50                                                                                          12%
                                Residual %                                                                                              Residual                               Net Margin (Estimated)
                                Revenue Growth (% Actual)                                                                               Net Margin (Actual)                    Historical average(Actual)
                                Revenue Growth (% Estimated)
 40                             Historical average(% Actual)                                 10%




                                                                                             8%
 30


                                                                                             6%
 20


                                                                                             4%
 10


                                                                                             2%
  0


                                                                                             0%
-10


                                                                                             -2%
                                                                                                   1997   1998    1999    2000   2001   2002   2003     2004   2005    2006    2007   2008    2009   2010 2011E 2012E 2013E



Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS                          Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
Research.                                                                                    Research .




Goldman Sachs Global Investment Research                                                                                                                                                                                  12
March 12, 2012                                                                                                                                                                                                                                                                                          China




Exhibit 10: Introducing 2013E top-down CSI300 earnings                                Exhibit 11: GS bottom-up earnings forecast vs. WIND
forecast                                                                              consensus by sector (2012E)


  Top-down      Non-Financial                Non-Financial        Total Earnings                               GS earnings forecast vs. Wind consensus_by sector
  Estimates                                                                              10%
                Revenue Growth (%)           Margin (%)           Growth (%)
                                                                                         5%
        2011E               26.7                     6.2                  17.4
        2012E               17.3                     5.6                  10.1           0%


        2013E               15.1                     5.7                  16.6           -5%

  Bottom-up                                                                             -10%
  Estimates
                                                                                        -15%
        2011E               21.5                     5.9                  10.9
                                                                                        -20%




                                                                                                                                                                       Industrials




                                                                                                                                                                                                                Utilities



                                                                                                                                                                                                                            Financials



                                                                                                                                                                                                                                              Information Technology
                                                                                                                                                         Overall




                                                                                                                                                                                                                                                                                                          Consumer Staple
                                                                                                     Energy



                                                                                                                Basic Materials




                                                                                                                                                                                       Consumer Discretionary
                                                                                                                                  Health Care




                                                                                                                                                                                                                                                                           Telecommunication Services
        2012E               14.2                     6.2                  20.7
        2013E               14.5                     6.4                  18.6




Source: Gao Hua Securities Research, Goldman Sachs Global ECS Research                Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
                                                                                      Research.




Exhibit 12: The yield on commercial discount bills                                    Exhibit 13: Less pressure from non-tradable shares
declined to 5.1% recently, suggesting improving liquidity                             turning tradable, especially in SME & GEM
conditions


 14                                                                                       300                                                   Non-tradable shares becoming tradable shares (Overall
                           The yield on the commercial discount bills                                         (Rmb bn)                          ex. SME&GEM)
        (%)
                                                                                                                                                Non-tradable shares becoming tradable shares
 12                                                                                                                                             (SME&GEM)
                                                                                          250


 10
                                                                                          200


  8
                                                                                          150

  6
                                                                                          100

  4                                                                          (5.1%)

                                                                                               50
  2

                                                                                                0
  0                                                                                                 Jan-11      Apr-11                          Jul-11             Oct-11            Jan-12                     Apr-12               Jul-12                            Oct-12
  2007-03        2008-03           2009-03       2010-03        2011-03



Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS                   Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
Research                                                                              Research




Goldman Sachs Global Investment Research                                                                                                                                                                                                                                                                          13
March 12, 2012                                                                                                                                                                                                China




Exhibit 14: Share reduction from company management                                                    Exhibit 15: The yield on bank wealth management
and major shareholders may increase if the market                                                      products has declined since late last year
rebounds further


 0.015%                            Net Reduction as % of A share float market cap              2,900
                                                                                                       10                                The yield on bank wealth management products (%)                           10
                                   CSI300 (RHS)                                                               (%)
                                                                                                                                         CPI yoy (RHS)                                                 (%)
                                                                                               2,800    9
 0.010%
                                                                                                                                                                                                                    8

                                                                                               2,700    8
 0.005%
                                                                                                                                                                                                                    6
                                                                                               2,600    7

 0.000%
                                                                                                        6                                                                                                           4
                                                                                               2,500

-0.005%
                                                                                                        5
                                                                                               2,400                                                                                                                2

-0.010%                                                                                                 4
                                                                                               2,300
                                                                                                                                                                                                                    0
                                                                                                        3
-0.015%                                                                                        2,200
      Sep-11           Oct-11        Nov-11         Dec-11         Jan-12           Feb-12
                                                                                                        2                                                                                                           -2
                                                                                                         Jan-06             Jan-07        Jan-08            Jan-09           Jan-10          Jan-11     Jan-12


Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS                                    Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
Research                                                                                               Research




Exhibit 16: The number of investment account openings                                                  Exhibit 17: The CSI300 PE valuation is negatively
has turned higher, along with the SHCOMP index                                                         correlated with the yield on the commercial discount bills


 450                                                                                           3,100                         CSI300 PE valuation vs. yield on the commercial
          (thousand)                       Retail investor account openings_weekly                                                            discount bills
 400                                                                                           3,000
                                           SHCOMP (RHS)                                                     22.0         (CSI300 12-m forward PE, x)

                                                                                               2,900
 350                                                                                                        20.0
                                                                                                                                            CSI300 PE valuation vs. yield on the commercial discount bills
                                                                                               2,800
 300                                                                                                        18.0
                                                                                               2,700
 250                                                                                                        16.0
                                                                                               2,600
 200                                                                                                        14.0
                                                                                               2,500

 150                                                                                                        12.0
                                                                                               2,400

 100                                                                                                        10.0
                                                                                               2,300

  50                                                                                           2,200         8.0

                                                                                                                                                       (Corporate bills discount rate %)
   0                                                                                           2,100         6.0
   2011-01      2011-03         2011-05     2011-07      2011-09      2011-11        2012-01                       0.0          2.0         4.0            6.0         8.0            10.0      12.0         14.0



Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS                                    Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
Research                                                                                               Research




Goldman Sachs Global Investment Research                                                                                                                                                                            14
March 12, 2012                                                                                                                             China




                                 Exhibit 18: Index targets: more confident in the near-term constructive views than several
                                 months ago



                                                                                 CSI300 Index Path by end-2012
                                               3,500.0
                                                                                                                                 3,200.0
                                                                                                                                (+19%~)
                                               3,300.0


                                               3,100.0                                                            2,950.0
                                                                                                                (3m, +10%)
                                                                                                                            3,050.0
                                               2,900.0                                                                    (6m, +14%)


                                               2,700.0


                                               2,500.0


                                               2,300.0


                                               2,100.0
                                                    Jan-11              Jul-11              Jan-12               Jul-12


                                 Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS Research




Sector strategy: adjusting up beta slightly
                                 We adjusted our sector preferences slightly in February (What to do while awaiting a
                                 tailwind, February 22, 2012) and we further adjust up the beta of our sector preferences in
                                 this report by upgrading the insurance sector to overweight (OW) and downgrading the
                                 healthcare sector to Neutral.

                                 Overall we like a mixture of domestic cyclicals (coal, securities, insurance), and
                                 consumption cyclicals (auto, home appliance, retailing, etc). We are neutral on banks/
                                 food & beverage /health care, and underweight on defensive sectors such as
                                 telecom/utility, and some cyclical sectors where fundamentals are still weak (steel,
                                 chemicals).

                                 Upgrade Insurance from Neutral to Overweight:

                                 1)   The worst should be over for the sector, although immediate improvement is not
                                      apparent yet:

                                          Premium growth outlook should improve when liquidity gradually loosens,
                                           especially the yield on bank wealth management products (which have been
                                           competing for funds with insurance products) is now coming down gradually
                                           (Exhibit 15/19).

                                          Investment yield should improve going forward. On the equity investment side,
                                           the A-share market has been down more than 20% in the past year and valuation
                                           is still low after the recent rebound, which should provide a good starting point for
                                           insurers to enhance the return on their equity investment. Overall improving
                                           liquidity should also be favorable for bond investment, especially compared with
                                           in 3Q2011 when bond market suffered a serious correction.




Goldman Sachs Global Investment Research                                                                                                     15
March 12, 2012                                                                                                              China




                                          Sector valuation is close to historical low (14.3x 12m forward P/E, and 2.0x P/B),
                                           and also has lagged their companion H-shares ytd; consequently A-share
                                           insurance companies are now trading at a discount to H-share counterparts.

                                          The sector has underperformed the market for quite a long time (Exhibit 24) and it
                                           should therefore be one of the under-owned sectors.



                                 Downgrade healthcare from Overweight to Neutral as:

                                     Policy headwind still remains, which should induce further downside risks to earnings.
                                      Earnings for the sector have been revised down gradually since 3Q2011 due to the
                                      government’s medicine price cutting policies. Our health care analysts expect further
                                      earnings risk after a possible new round of price cuts in 4 major categories of drugs, as
                                      reported by China Business News (see New price cuts on 4 drug types; smaller
                                      premiums for MNCs/JVs, March 1, 2012).

                                     Valuation is not demanding (16.6x 12-m forward PE) but valuation expansion should
                                      be less likely as we see no potential earnings upgrade.

                                 Healthcare outperformed the market in 2H2011, but has underperformed ytd amid the
                                 market rebound (Exhibit 26); we believe with the policy headwinds and low possibility of
                                 sector valuation expansion, the sector performance should continue to be lackluster.

                                 We do not downgrade the sector to Underweight as the healthcare sector is still one of the
                                 major long-term beneficiaries of the aging population and rising income level.

                                 Maintain other sector ratings

                                 And we maintain all the other sector ratings unchanged. Specifically,

                                 1)   We remain OW on coal sector.

                                          The weakness in spot coal prices and high coal inventory level several weeks ago
                                           led to market concerns over the sector’s fundamental. But in the past several
                                           weeks the spot coal prices began to stabilize or even rebounded in some areas,
                                           and the inventory level began to decline, which suggest the demand is recovering
                                           gradually and support our relative favorable view towards the sector (Exhibits 27
                                           and 28);

                                          Valuation /positioning remains supportive. The sector is now trading at 11.5x P/E,
                                           which is higher than at the year beginning but not demanding vs. its historical
                                           trading range. Interest in the sector has been rising due to its outperformance ytd,
                                           but overall positioning does not yet look crowded.

                                 2)   Property and property FAI related sectors: Neutral
                                          We believe the fundamentals of the property sector are improving and valuations
                                           are supportive. We remain Neutral as the sector has already outperformed ytd,
                                           and it was one of the over-weighted sectors in 4Q2011 (Exhibit 30) and the sector
                                           may have become even more crowded due to its outperformance ytd.

                                          For the property FAI related sectors, such as building materials/machinery, etc, we
                                           are still Neutral. We cannot yet turn positive as we believe the FAI growth should
                                           continue to slow down, and sector fundamentals remain weak according to our
                                           sector analysts (such as Commentary: China February excavator sales snapshot,
                                           March 7, 2012). We believe the recent pick-up in the transaction volume in the
                                           property sector should help alleviate the concerns over these property-FAI related
                                           sectors and we suggest waiting for better signs of stabilizing fundamentals.

                                 See Exhibits 31/32 for an overview of our sector ratings.


Goldman Sachs Global Investment Research                                                                                        16
March 12, 2012                                                                                                                                                                                       China




Exhibit 19: Insurance sector: premium growth improved                                           Exhibit 20: The overall improving liquidity condition
recently                                                                                        should be favorable for bond investment


200                             Premium revenue                                           50     5.3                                        Government bond maturity yield, 1-yr %
                                                                                                           (%)
          (Rmb bn)              Premium revenue growth yoy (RHS)             (%)                                                            Government bond maturity yield, 10-yr %
180                                                                                              4.8                                        Interest rate 1-yr, %
                                                                                          40
160                                                                                              4.3


140                                                                                       30
                                                                                                 3.8

120
                                                                                          20     3.3

100
                                                                                                 2.8
                                                                                          10
 80
                                                                                                 2.3
 60                                                                                       0
                                                                                                 1.8
 40
                                                                                          -10    1.3
 20

                                                                                                 0.8
  0                                                                                       -20    2006-01-04        2007-01-04       2008-01-04       2009-01-04     2010-01-04   2011-01-04         2012-01-04
      Jan-09         Jul-09      Jan-10     Jul-10      Jan-11     Jul-11           Jan-12

Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS                             Source: Bloomberg, Gao Hua Securities Research, Goldman Sachs Global ECS
Research.                                                                                       Research




Exhibit 21: The Insurance sector 12-m forward PE just                                           Exhibit 22: Also the Insurance sector 12-m forward PB
picked up from previous historical low, and is not
demanding


                                                                                                4.5                                Insurance sector 12-m forward PB                           1.7
   35                         Insurance                                                2.2             (x)                                                                            (x)
                                                                                                                                   Relative valuation to CSI300 Index (RHS)
               (X)                                                           (X)
   30                         Relative valuation to CSI300 Index (RHS)                          4.0
                                                                                                                                                                                              1.6
                                                                                       2.0

   25                                                                                                                                                                                         1.5
                                                                                       1.8      3.5


   20                                                                                                                                                                                         1.4

                                                                                       1.6      3.0

   15                                                                                                                                                                                         1.3

                                                                                       1.4      2.5
   10                                                                                                                                                                                         1.2

                                                                      14.3X
      5                                                                                1.2      2.0
                                                                                                                                                                                              1.1


                                                                                                                                                                                 (2.0 x)
      0                                                                                1.0      1.5                                                                                           1.0
       08-12                    09-12                10-12                  11-12                 Dec-08         Jun-09         Dec-09      Jun-10        Dec-10       Jun-11    Dec-11



Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS                             Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
Research.                                                                                       Research.




Goldman Sachs Global Investment Research                                                                                                                                                                 17
March 12, 2012                                                                                                                                                                            China




Exhibit 23: A-share insurance companies are trading at                                     Exhibit 24: The Insurance sector has underperformed the
discount to H-shares counterpart, and the valuation gap                                    market ytd.
expanded ytd


 10%
                        Insurance A-H premium/discount (Market cap weighted)               110.0    (Dec 13 2010=100)               Insurance sector                                          110.0
              (%)
                                                                                                                                    Insurance sector relative performance vs.
  5%                                                                                                                                CSI300
                                                                                           100.0                                                                                              100.0

  0%

                                                                                            90.0                                                                                              90.0
 -5%

                                                                                            80.0                                                                                              80.0
-10%


-15%                                                                                        70.0                                                                                              70.0


-20%
                                                                                            60.0                                                                                              60.0

-25%
                                                                                            50.0                                                                                              50.0
                                                                                                Dec-10      Feb-11      Apr-11     Jun-11      Aug-11      Oct-11        Dec-11      Feb-12
-30%
   2010-1-1         2010-7-1         2011-1-1           2011-7-1          2012-1-1


Source: Bloomberg, Gao Hua Securities Research, Goldman Sachs Global ECS                   Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
Research.                                                                                  Research.




Exhibit 25: Healthcare sector valuation is not demanding,                                  Exhibit 26: Healthcare persistently outperformed the
but valuation expansion is less likely as we see no                                        market by late November 2011, but has underperformed
potential earnings upgrade                                                                 since then


                                                                                                                                   Health care sector index
  32                   Health Care                                                   2.6   115.0                                                                                              115.0
                                                                                                         (Juan 30 2011=100)        Health care sector relative performance vs. CSI300
              (X)      Relative valuation to CSI300 Index (RHS)          (X)
  30                                                                                       110.0
                                                                                     2.4                                                                                                      110.0
  28
                                                                                           105.0
                                                                                     2.2
  26                                                                                                                                                                                          105.0
                                                                                           100.0
                                                                                     2.0
  24
                                                                                                                                                                                              100.0
                                                                                            95.0
  22                                                                                 1.8

  20                                                                                        90.0
                                                                                     1.6                                                                                                      95.0

  18
                                                                                            85.0
                                                                                     1.4
                                                                                                                                                                                              90.0
  16
                                                                                            80.0
                                                                                     1.2
  14                                                                 16.6X                                                                                                                    85.0
                                                                                            75.0
  12                                                                                 1.0
    08-12                 09-12                 10-12                   11-12
                                                                                            70.0                                                                                              80.0
                                                                                                Jun-11     Jul-11    Aug-11      Sep-11     Oct-11   Nov-11     Dec-11      Jan-12      Feb-12



Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS                        Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
Research.                                                                                  Research.




Goldman Sachs Global Investment Research                                                                                                                                                       18
March 12, 2012                                                                                                                                                                       China




Exhibit 27: The spot coal prices has begun to stabilize or                                 Exhibit 28: And coal inventory has begun to decline
even rebounded in some areas


                                                                                                                             Domestic trade            Foreign trade
   1200                                  Datong quality mix(5800kcal/kg)                      1000  10ths tons
           Rmb/t
   1100                                  Shanxi quality mix(5500kcal/kg)                       900                           Total inventory

   1000                                  Shanxi mix(5000kcal/kg)                                  800 
    900 
                                                                                                  700 
    800 
                                                                                                  600 
    700 
                                                                                                  500 
    600 
                                                                                                  400 
    500 
                                                                                                  300        Coal Inventory in 
    400 
                                                                                                  200        Qinhuangdao
    300 
    200                                                                                           100 

    100                                                                                             0 
       11‐08     04‐09   09‐09   02‐10     07‐10    12‐10     05‐11    10‐11       03‐12             03‐08      09‐08   03‐09       09‐09      03‐10     09‐10     03‐11   09‐11     03‐12




Source: SXCoal-Port coal price, Wind, Gao Hua Securities Research, Goldman                 Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
Sachs Global ECS Research.                                                                 Research.




Exhibit 29: The coal sector is now trading at 11.5x P/E,                                   Exhibit 30: Mutual funds positions in the property sector
which is higher than at the year beginning but not                                         increased in 4Q2011
demanding


                                                                                           12.0                           Property sector position in mutual funds                    4,000
     60                              Coal             Average                                       (%)                                                                    (Index)
               (X)                                                                                                        Property sector index (RHS)
                                                                                                                                                                                      3,500
     50                                                                                    10.0

                                                                                                                                                                                      3,000

     40                                                                                     8.0
                                                                                                                                                                                      2,500


     30                                                                                     6.0                                                                                       2,000


                                                                                                                                                                                      1,500
     20                                                                                     4.0

                                                                                                                                                                                      1,000

     10                                                                                     2.0
                                                                                                                                                                                      500
                                                                           11.5X
      0                                                                                     0.0                                                                                       0
       04-01     05-01   06-01   07-01    08-01     09-01    10-01     11-01   12-01           Mar-06          Mar-07      Mar-08           Mar-09        Mar-10       Mar-11




Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS                        Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS
Research                                                                                   Research




Goldman Sachs Global Investment Research                                                                                                                                                  19
March 12, 2012                                                                                                                                                              China




Exhibit 31: Sector allocation (I): we further adjust up the beta of our sector preferences in this report by upgrading
insurance to overweight (OW) and downgrading healthcare to Neutral (continued on next page)


                                                         PE(x) PB(x)
                           Index Previous New
  Sectors                 Weightin rating                2012E 2012E                                                  Remarks
                                          rating

                                                                       Coal demand should remain stable and tranportation bottleneck should support coal price. Supply for
  Coal                       6.7      OW        OW       12.0   2.2    coke coal should be tighter than thermal coal, having been trading at premium over thermal coal.
                                                                       Sector valuation not demanding.



                                                                       Historically brokerage firms' valuations bottom out earlier than the market. Valuation not demanding,
  Securities& Others         5.6      OW        OW       22.5   1.8    the sector is the long-term beneficiary of China's deepening financial reform, which we expect to be
                                                                       high on the agenda. Policy on product innovation should become more supportive.



                                                                       Sector valuation is not demanding. Investment yield could not be even worse than in the last year, and
  Insurance                  4.3     Neutral    OW       15.0   2.1    with the yield on bank wealth management product declining, the premium growth should turn around
                                                                       in the coming several quarters.



                                                                       Sales numbers are gradually improving. Fiercer competition may erode sector margin but valuation is
  Auto&parts                 2.0      OW        OW       11.6   1.9
                                                                       still attractive. Policies are becoming more friendly than in the past year.



                                                                       Valuation is gradually becoming attractive and brand names continue to enjoy secular uptrend in
  Retailing                  2.6      OW        OW       14.9   2.5    China. We like those local leading retailing names in central and western of China, and some leading
                                                                       names in some niche markets, such as the fresh food retailing.



                                                                       Valuation is still within the reasonable range and correlation between demand for consumer durables
                                                                       and propety sales is less than expected; rural penetration improvement/consumption upgrade
  Consumer Durables          2.3      OW        OW       11.1   2.1
                                                                       underpins the demand sustainability. Risk to the sector includes greater-than-expected slowdown in
                                                                       broad sales.



                                                                       Brand names continue to enjoy secular uptrend in China, and valuation is within reasonable range.
  Textile&Apparel            0.4      OW        OW        6.3   1.2
                                                                       Stable export growth is another earnings driver.




                                                                       Policy headwinds increase earnings risks, sector valuation not demanding, but room for expansion
  Health Care                4.6      OW       Neutral   17.7   3.0    should also be capped due to no earnings upgrade potential. Still a long-term beneficiary of China's
                                                                       growing income and aging population.


  Construction&Other                                                   Valuation is not expensive, but growth is sensitive to rising input cost as the industry margin is
                             3.1      UW        UW        8.2   1.1
  Industrial Services                                                  generally low. May get more bullish if we were to see a trend of margin improvement.


                                                                       Demand is weakening and earnings risks arises, valuation not attractive given the highly cyclical
  Chemical                   2.4      UW        UW       15.2   2.9
                                                                       feature, prefer resource-based names.


                                                                       Valuation is reasonable but sliding demand/competition remains an industry concern, difficult to
  Steel                      2.3      UW        UW       13.5   1.0
                                                                       improve margins.

                                                                       China Unicom is trying to gain market share and should hold an advantage over the other two players,
  Telecom                    1.0      UW        UW       22.8   0.9    but earnings growth could be sacrificed. Valuation has turned lower but is not yet attractive. Less
                                                                       bearish on telecom equipment plays.

                                                                       Valuation is not attactive and earnings growth of the sector very much depends on tariff policy and
  Utilities                  2.2      UW        UW       14.6   2.0
                                                                       further resource price reform, which is uncertain at the moment.

  OW Sectors                          24.0      23.7
  Neutral Sectors                     65.1      65.4
  UW Sectors                          11.0      11.0


Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS Research




Goldman Sachs Global Investment Research                                                                                                                                       20
March 12, 2012                                                                                                                                                                   China




Exhibit 32: Sector allocation (II): we further adjust up the beta of our sector preferences in this report by upgrading
insurance to overweight (OW) and downgrading healthcare to Neutral


                                                          PE(x) PB(x)
                              Index Previous New
  Sectors                    Weightin rating              2012E 2012E                                                   Remarks
                                             rating

                                                                        Earnings have been strong so far, and valuation is not demanding. But the sector is still among the
  Food&beverage                7.5    Neutral   Neutral   17.8   5.0    most crowded due to its outperformance in 2H2011, and risks of price intervention are rising after retail
                                                                        prices surged.



                                                                        Current valuation for the sector not demanding, already factoring in a very depressed scenario for the
                                                                        property sector. Also, the government has begun to fine-tune property tightening policies. But whether
  Property                     4.9    Neutral   Neutral    8.7   1.4
                                                                        the sales volume recovery can be sustained remains uncertain, and the sector is among one of the
                                                                        most crowded according to the disclosures made by mutual funds early this year.



                                                                        Slower property FAI growth should be the main theme, which should lead to slower demand for
  Construction Materials &
                               1.7    Neutral   Neutral    8.7   1.9    building materials. Valuation is not demanding but earnings downgrade risks remain. We may wait for
  Others
                                                                        a clearer signs of fundamental change before turning positive.



  Non-ferrous metal &                                                   Although valuations have came down, it is high compared with other cyclical sectors. Demand growth
                               8.1    Neutral   Neutral   20.1   2.8
  Others                                                                may dissappoint as the persistent property tightening in China may lead to weaker FAI growth.



                                                                        Traffic volume growth should be stable, but lacks positive catalysts. High oil price is another risk
  Airlines                     1.0    Neutral   Neutral    8.8   1.4
                                                                        factor.


  Transportation
                               0.8    Neutral   Neutral   13.2   1.3    Earnings growth is stable and low, valuation is reasonably low, but ther is a lack of sector catalysts
  Infratructure


                                                                        Valuation is relatively high compared with growth; brand names continue to enjoy secular uptrend in
  Hotel &tourism&Others        0.7    Neutral   Neutral   14.6   3.4
                                                                        China.



                                                                        Low growth and high valuation. Continue to benefit from the government's supporting policy for the
  Media                        0.4    Neutral   Neutral   23.1   1.9    cultural industry. Bottom-up stock selection should be quite important as companies within this sector
                                                                        tend to have varying fundamentals.




                                                                        Worries over the asset quality amid the slower growth and the impact of the LGFVs remain, although
                                                                        we believe risks of massive write-off should be controllable by the Chinese government. Valuation is
  Banks                        17.7   Neutral   Neutral    5.9   1.2
                                                                        lower than historical trough levels, which is supportive, and the earnings outlook should be stable.
                                                                        Small and mid-sized banks should have higher beta than large banks.



                                                                        Unattractive growth profile but the sector has underperformed the market for a while and valuation is
  Oil,gas& petrochemical       2.2    Neutral   Neutral   10.4   1.5    not demanding. We believe cost pass-through should be more likely when inflation pressure gradually
                                                                        peaks. More bullish on oil services/engineering plays.



                                                                        The sector fundamentals seems not to have stabilized yet. Rising labor cost generates demand for
  Capital Goods                11.5   Neutral   Neutral   13.5   2.3    capital goods as a substitute for labor, which is a mid- to long-term trend in China. Further slowdown
                                                                        in FAI growth/property FAI remains a concern.



                                                                        Subsectors with different fundamentals, but overall the earnings downgrade risk remains, and
  IT&equipment/compone
                               2.4    Neutral   Neutral   16.7   3.1    valuation is not supportive. There are signs of sector fundamental bottoming out. Some of the names
  nts
                                                                        benefit from strong growth in consumer electronics/touch screen mobile phone etc.




  Shipping&Other                                                        Turn neutral as we begin to see signs of strengthening global growth,and China's policy turns more
                               1.8    Neutral   Neutral   16.1   1.4
  transportation                                                        pro-growth. But the industry over-capacity remains overhang.


  OW Sectors                           24.0      23.7
  Neutral Sectors                      65.1      65.4
  UW Sectors                           11.0      11.0


Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS Research.




Prices in this report are based on the market close of March 9, 2012




Goldman Sachs Global Investment Research                                                                                                                                           21
March 12, 2012                                                                                                                                       China




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March 12, 2012                                                                                                                                        China




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Goldman Sachs Global Investment Research                                                                                                                24
March 12, 2012                                                                                                                                         China




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Goldman Sachs Global Investment Research                                                                                                                  25

				
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