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10 April 2012
Asia Pacific/China
Equity Research
Strategy
China Market Strategy
Research Analysts
STRATEGY
Peggy Chan, CFA
852 2101 6305
peggy.chan@credit-suisse.com
Banks: Better among the worse
Vincent Chan
852 2101 6568 Figure 1: 4Q11 net profit growth has turned negative
vincent.chan@credit-suisse.com
428
90
61
60
43
27 29 28 25
30 20
12
1
0
-6
-30 -23
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
Quarterly net profits YoY %
Note: Based on 867 A-share companies that have reported quarterly profits since 1Q08.
Source: Wind, Credit Suisse estimates
■ Deteriorating operating leverage. The full-year 2011 (particularly 4Q11)
results of Chinese companies revealed that corporate profitability was
negatively impacted by the slowing economy. Sales growth of A-share
companies fell to 15% in 4Q11 from around 25% in previous quarters . As a
result, margins were hurt and resulted in a 6% earnings decline in that quarter.
■ 1Q12 is likely to be weak. January and February 2012 financial indicators
of all industrial and state-owned non-financial enterprises are very weak. We
see the likelihood of another earnings decline in 1Q.
■ Banking system risks have reduced. Operating cash-flow situation has
improved along with liquidity. The local government debt maturity has largely
been extended and risks from the property sector seem more manageable.
■ Increase banks to OVERWEIGHT. Based on the above factors and after a
sharp share price correction, we slightly increase the banks sector from a
marginal Underweight to a marginal OVERWEIGHT. However, we are still
rather sceptical about the sectors that are geared heavily towards the fixed
asset investment cycle.
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR
OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683.
U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Focus charts and tables
Figure 2: Summary of 2011 results
Rmb bn / % % YoY % HoH
1,238 China (1,052), HK (171) and US (15) listed Chinese companies reported
Sales (non-financials including property) 17,780 23 10
Net profit 2,139 13 (11)
(Non-financials including property) 1,217 7 (10)
1,052 A shares reported
Return on equity (ROE) (%) 14.0 (0.3) (3.0)
(Non-financials including property) (%) 10.7 (1.3) (1.9)
Non-financials (including property) - 1,028 companies
Net margin (%) 5.0 (1.1) (1.0)
Operating margin (%) 6.8 (1.3) (1.9)
Operating cash flow 1,002 (7) 96
Capital expenditure 1,425 20 37
Net debt/equity (%) 15.9 2.5 (0.2)
Source: Wind, Credit Suisse estimates
Figure 3: China A shares’ quarterly sales YoY growth (%) Figure 4: Non-financials’ margins (%) and ROE (%)
44 47 (%)
41
38 14 14
40 32
29 31 30
27 26 25 12 12
10 10
20 15
8 8
6
2 6 6
0 4 4
2 2
-9
-20 -12 0 0
2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11
Quarterly sales YoY % R OE Operating m argin Net margin
Note: Based on 867 A-share companies that have reported quarterly Note: Based on 845 non-financial A-share companies that have
profits since 1Q08. Source: Wind, Credit Suisse estimates reported quarterly profits since 1Q08. Source: Wind, Credit Suisse
estimates
Figure 5: Quarterly operating cash flow (Rmb bn) Figure 6: Financial indicators of all industrial enterprises
(Jan-Feb 2012)
(R m b bn) Jan-Feb 2012 YoY%
All industrial enterprises
450
Sales revenue 13.4
400
Profit -5.2
350
Account receivable 18.1
300 Finished Goods Inventory 18.3
250 Pre-tax profits by selected sectors
200 Oil & gas 15.5
150 Food processing 13.3
100 Chemicals -28.8
50 Steel -94.0
General equipment -4.6
0
Electric machinery -3.4
Dec 09
Dec 10
Dec 11
Mar 09
Jun 09
Sep 09
Mar 10
Jun 10
Sep 10
Mar 11
Jun 11
Sep 11
Electronics -40.8
Power supply 21.1
Note: Based on 1,031 non financial (including real estate) A-share Source: CEIC
companies since 2009. Source: Wind, Credit Suisse estimates
China Market Strategy 2
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Banks: Better among the worse
Deteriorating operating leverage
The full-year 2011 (particularly 4Q11) results of Chinese companies revealed that the Poor profitability and 1Q12
slowdown of the Chinese economy had a significant negative impact on profitability. When is likely to continue to be
sales growth of Chinese companies slowed from around 25% in previous quarters to weak
around 15% in 4Q11, the operating margins took a deep dive and resulted in an earnings
decline in 4Q11. Given that the financial indicators for January and February 2012 of all
industrial and all state-owned non-financial enterprises (both industrial and services
sector) are very weak, one should expect 1Q12 results to be similarly weak, with a very
good chance that we will see an earnings decline in 1Q12 again.
The major positive right now is that with the gradual, though selective, easing from 4Q11 Positive news to the banks
onwards, the conditions of market liquidity have started to improve, reflected in signs of
improving operating cash-flow in 4Q11. Besides, the local government debt maturity has
largely been extended and risks from the property sector seem more manageable. These
factors are positive to the banking sector. However, we are still rather sceptical about
sectors that are geared heavily towards the fixed asset investment cycle.
Increase banks to OVERWEIGHT
Given the above, we add a little more weight to banks—increase the sector to Changes to our model
OVERWEIGHT (though marginally). We have trimmed our holdings in CCB and ICBC and portfolio
added China Merchant. To finance the move, we remove Sichuan Pharmaceutical (1%)
from the health care sector. One more change that we make to the portfolio is that we
replace China Southern (1%)—as we have dropped coverage—with China COSCO (1%).
Overall, we continue to be OVERWEIGHT on the ‘broad consumer sector’ (that we define
as discretionary, staples, healthcare and technology), banks (marginally), insurance and
utilities. On the other hand, we are UNDERWEIGHT on cyclical sectors such as energy,
materials, industrials and real estate. We are MARKET WEIGHT on telecoms.
Actual versus CS estimates
Compared with our forecasts, around 37% of the companies in our universe missed our More misses than beats and
expectations and only 27% were above expectations. As a result, more analysts have our analysts have revised
revised down their estimates. Only 17% of the company estimates were revised up versus down their estimates
43% which were cut. Since end-January, we have revised up our net profit forecasts by
11% and 0.7% for 2012 and 2013, respectively, mainly due to a substantial ~40% upgrade
in banks due to a lower credit cost assumption. Excluding banks, our net profit forecasts
for 2012 and 2013 are revised down by 4.2% and 4.1%, respectively, driven by the energy
and materials sectors. Consensus forecasts regarding EPS growth are 10.9% and 12.2%
for 2012 and 2013, respectively, for MSCI China; our estimates are lower at 9.4% and
8.4%, mainly due to the discrepancies in the financial sector.
China Market Strategy 3
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Deteriorating operating leverage
The full-year (FY) 2011 (particularly 4Q11) results of Chinese companies revealed that the Chinese corporate
slowdown of the Chinese economy had a significant negative impact on profitability. Most profitability has slowed in
importantly, it seems to confirm our view that due to their high growth/high capex strategy, 4Q11
Chinese companies are not well prepared to handle even a mild slowdown in revenue
growth. When sales growth of Chinese companies slowed from around 25% in previous
quarters to around 15% in 4Q11, the operating margins took a deep dive and resulted in
an earnings decline in 4Q11. Given that the financial indicators for January and February
2012 of all industrial and all state-owned non-financial enterprises (both industrial and
services sector) were very weak, one should expect 1Q12 results to be similarly weak,
with a very good chance that we will see an earnings decline in 1Q12 again.
Figure 7: Financial indicators of all industrial enterprises (Jan-Feb 2012)
1Q12 results are also likely
Jan-Feb 2012 YoY (%)
be weak
All industrial enterprises
Sales revenue 13.4
Profit -5.2
Account receivable 18.1
Finished goods inventory 18.3
Pre-tax profits by ownership
State-owned or controlled -19.7
Collective 17.6
Shareholding -2.5
Foreign and Hong Kong/Taiwan/Macau funded -18.9
Private 24.4
Pre-tax profits by selected sectors
Oil & gas 15.5
Food processing 13.3
Chemicals -28.8
Steel -94.0
General equipment -4.6
Electric machinery -3.4
Electronics -40.8
Power supply 21.1
Source: CEIC
Figure 8: Financial indicators of all state-owned enterprises (Jan-Feb 2012)
Jan-Feb 2012 YoY (%)
All SOEs
Sales revenue 9.9
Cost of sales 16.9
Cost of sales: Operational 16.8
Cost of sales: Selling 15.3
Cost of sales: Administrative 11.9
Cost of sales: Financial 34.6
Pre-tax profits -10.9
Inventory 21.0
Central SOE: Sales revenue 13.5
Central SOE: Pre-tax profits -11.5
Local SOE: Sales revenue 6.4
Local SOE: Pre-tax profits -10.0
Source: CEIC
China Market Strategy 4
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
The major positive right now is that with the gradual, though selective, easing from 4Q11 Improving cash flow
onwards, the conditions of market liquidity have started to improve, reflected in signs of situation has relieved some
improving operating cash-flow in 4Q11. Under these circumstances, the most important asset quality risks to the
implication for the market is that the near-term asset quality risks to the banking system is banks
probably reduced, at least from the manufacturing sector. Credit risks arising from local
Near-term risk from local
governments and real estate market are probably different types of risks. Given that the
government debt is not that
local government debt maturity has largely been extended, the near-term risk from this
high
sector is not too high. So, the biggest remaining risk the banks should largely focus on is
the property sector. In contrast, just six months ago, the risks were everywhere.
According to official statistics, of the Rmb54.8 tn outstanding RMB loans in China as of the Risks from the property
end of 2011, Rmb3.5 tn (6.4% of total) are loans to developers and Rmb7.2 tn (13.1% of sector is manageable
total) are mortgages. It is entirely possible that another Rmb3-4 tn loans are granted
indirectly to property investors/speculators through normal corporate loans, but it is
reasonable to expect that direct property exposure of banks should be kept around 25% of
their total loans. Indirect exposure, like granting corporate loans based on land/property as
collateral, could be much larger though. Assuming that Chinese economy maintains a
nominal GDP growth of around 10%, corporate loans (even including those which use
land/property as collateral or those partly used for property speculation) should be
relatively safe as companies/local governments could still generate some cash flow to
cover their debt servicing charges and will still try to prevent default on banks under these
circumstances. Based on experiences in other Asian countries, mortgage should still be
relatively safe now, considering the limited correction in property prices and employment is
still strong. So, the major near-term risk will be in the form of property development loan,
but their absolute size is relatively small.
Based on this rationale, and after the sharp correction of banking stocks’ prices, we Increase banks to a
slightly increase banks from a marginal Underweight to a marginal OVERWEIGHT. marginal OVERWEIGHT
However, we are still rather sceptical about sectors that are geared heavily towards the
fixed asset investment cycle.
Poor profitability
As of end of March, over 1,200 or 80% of Chinese companies by market cap have Profitability hurt by
reported their full-year 2011 results. After enjoying strong sales growth for a number of weakening demand.
years, Chinese corporates were eventually hurt by weak demand in 2011 when total
profits only grew by 13% (7% only for non-financials) YoY—close to flat or negative growth
in real terms. The picture looks more ugly on a quarterly basis when in 4Q, net profits fell
6% YoY and sales growth fell below 20% to 15%. Margins suffered as a result of the
negative operating leverage and operating cash flow declined; but the situation appears to
have improved with China’s liquidity situation in 4Q11.
China Market Strategy 5
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Figure 9: 2011 net profit of 1,496 Chinese companies listed in China, Hong Kong and the US
No. of Market cap Net income (Rmb bn) YoY HoH Contribution (%)
cos (Rmb bn) 2011 (%) of total 2010 2H11 (%) (%) YoY HoH
Consumer discretionary 200 1,850 118 6 104 60 13 2 5 5
Automobiles and components 45 674 54 3 48 28 13 7 2 2
Consumer Durables & Apparel 76 450 28 1 26 13 5 (12) 1 1
Retailing 49 526 27 1 22 13 21 (10) 2 1
Consumer staples 81 1,119 41 2 37 19 12 (10) 2 2
Food and staples retailing 20 192 8 0 10 3 (15) (31) (1) 0
Food, beverage and tobacco 58 840 30 1 25 15 21 (5) 2 1
Energy 34 4,416 368 17 343 176 7 (8) 10 17
Coal and consumable fuels 18 1,046 81 4 70 39 15 (6) 4 4
Oil and gas 16 3,370 287 13 273 137 5 (9) 5 13
Financials 111 8,253 1,042 49 850 494 23 (10) 76 48
Banks 13 5,852 846 40 656 400 29 (10) 75 39
Diversified financials 11 368 21 1 23 12 (8) 21 (1) 1
Insurance 5 1,085 55 3 67 17 (18) (54) (5) 3
Real estate 82 948 120 6 104 65 16 16 7 5
Health care 66 605 27 1 21 15 27 19 2 1
Industrials 313 3,090 188 9 202 82 (7) (23) (5) 9
Capital goods 240 2,185 135 6 119 60 13 (19) 6 7
Transportation 67 877 52 2 82 21 (36) (33) (12) 3
Information technology 122 1,410 46 2 40 24 16 9 3 2
Materials 250 2,457 131 6 119 50 10 (39) 5 7
Chemicals 113 714 29 1 27 11 7 (41) 1 2
Construction materials 33 382 41 2 25 21 67 0 6 2
Metals and mining 84 1,293 60 3 64 18 (7) (57) (2) 4
Telecommunication services 6 2,029 149 7 141 74 5 (2) 3 7
Utilities 55 648 29 1 29 14 (0) (8) (0) 1
Grand total 1,238 25,876 2,139 100 1,886 1,007 13 (11) 100 100
Ex-financials (incl. property) 1,209 18,571 1,217 57 1,140 578 7 (10) 31 56
Source: Wind, Credit Suisse estimates
Our universe, which includes 1,238 Chinese companies (1,052 are A-share stocks, 171 Chinese companies’ 2011
are Hong Kong listed (excluding dual-listed H shares) and the top 15 US-listed Chinese net profit grew 13% YoY
companies with a total market cap of Rmb20 tn (US$3 tn)), reported a total net profit of and down 11% HoH in 2H11
Rmb1.6 tn—a growth of 13% from 2010. Excluding financials (including property), total net
profit only grew 7% YoY. Around 66% of the market’s net profit came from financial
services (49%) and energy (17%) sectors, with financial services contributing to 76% of
the growth.
Examining growth by sector, construction materials (up 67%), banks (up 29%) and
healthcare (up 27%) posted the strongest growth. On the other hand, sectors that showed
significant earnings decline were transportation (down 36%) and insurance (down 18%).
China Market Strategy 6
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Figure 10: Chinese companies’ 2011 net profit YoY growth (%)
75 67
50
29 27
21 21
25 16 16 15 13 13 13
7 5 5 5
0
0
-7 -8
-25 -15 -18
-36
-50
Construction Materials
Health Care
Real Estate
Food & Staples Retailing
Transportation
Information Technology
Automobiles & Components
Utilities
Retailing
Metals & Mining
Insurance
Consumer Durables & Apparel
Capital Goods
Diversified Financials
Banks
Coal & Consumable Fuels
All shares
Chemicals
Telecommunication Services
Oil & Gas
Food, Beverage & Tobacco
Source: Wind, Credit Suisse estimates
Quarterly profits: First earnings decline since 2009
There was a significant slowdown in the second half of the year with net profits falling 11% 4Q11 profit of A-share
HoH in 2H11 (down 10% for non-financials). Net profits of around 867 A-share companies companies fell 6% YoY
that have reported quarterly results since 1Q08 fell 6% YoY from a year ago; it was the
first earnings decline since the global financial crisis in 2008-09. Among the major sectors
in the A-share market, materials and industrials saw the sharpest deterioration in 4Q11
(Figure 12).
Figure 11: China A share companies’ quarterly earnings year-on-year growth (%)
428
90
61
60
43
27 29 28 25
30 20
12
1
0
-6
-30 -23
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
Quarterly net profits YoY %
Note: Based on 867 A-share companies that have reported quarterly profits since 1Q08
Source: Wind, Credit Suisse estimates
China Market Strategy 7
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Figure 12: Chinese A shares companies’ quarterly earnings year-on-year growth (%) by sector
YoY (%) 4Q11 3Q11 2Q11 1Q11 4Q10 3Q10 2Q10 1Q10
Consumer discretionary 16.2 19.9 17.2 33.1 37.4 37.5 65.7 112.4
Consumer staples 22.9 5.8 50.3 27.8 31.9 35.8 43.5 36.4
Energy (14.4) 6.0 (0.3) 18.4 59.3 17.4 6.6 46.9
Financials 16.0 17.8 29.7 27.2 23.6 28.0 22.4 39.2
Health care 16.2 7.2 32.7 10.7 (9.0) (30.7) 28.6 49.5
Industrials (50.8) (13.5) (2.1) 27.7 89.5 133.6 96.5 184.3
Information technology (24.7) (16.5) 22.4 38.2 90.8 165.8 120.3 982.6
Materials (83.4) 59.6 50.3 24.2 125.8 (18.8) 212.8 turnaround
Telecommunication services (94.1) 115.2 76.0 (86.3) 240.6 (72.9) (54.2) (67.7)
Utilities (12.5) (31.5) 19.3 (24.8) 84.7 (20.7) (22.4) 26.8
Grand total (6.0) 11.8 20.1 24.6 42.6 28.1 29.5 60.5
Note: (1) Based on 867 A-share companies that have reported quarterly profits since 1Q08. (2) The telecoms sector only accounted for less than
1% of total profits in the A-share market.
Source: Wind, Credit Suisse estimates
Sales growth fell to 15% only
Top-line for non-financials (including property) reached Rmb17.8 tn, up 23% YoY in 2011
and 10% HoH in 2H11. Mirroring the net profits trend, the growth momentum slowed in the
second half of the year and especially in 4Q. Quarterly growth was only 15% YoY—the
lowest level since 2008 if we exclude the financial crisis period.
Figure 13: 2011 sales of 1,496 Chinese companies listed in China, Hong Kong and the US
2011 sales were up 23%
Sales (Rmb bn) YoY HoH
YoY
2010 2009 2H10 (%) (%)
Consumer discretionary 2,144 1,793 1,097 20 5
Automobiles and components 937 824 480 14 5
Consumer durables & apparel 583 492 284 19 (5)
Retailing 548 415 290 32 12
Consumer staples 763 609 400 25 10
Food and staples retailing 289 237 148 22 5
Food, beverage and tobacco 457 358 243 28 13
Energy 5,326 3,999 2,748 33 7
Coal and consumable fuels 540 404 281 34 9
Oil and gas 4,786 3,595 2,467 33 6
Financials (real estate only) 626 513 378 22 53
Health care 260 198 138 31 13
Industrials 3,872 3,438 2,027 13 10
Capital goods 3,124 2,782 1,631 12 9
Transportation 740 649 391 14 12
Information technology 457 340 271 35 46
Materials 2,531 2,012 1,309 26 7
Chemicals 563 426 289 32 6
Construction materials 298 215 164 38 22
Metals and mining 1,616 1,323 828 22 5
Telecommunications services 1,228 1,056 650 16 12
Utilities 573 470 300 22 10
Ex. financials (incl. property) 17,780 14,428 9,318 23 10
Source: Wind, Credit Suisse estimates
China Market Strategy 8
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Figure 14: China A-share companies’ quarterly sales year-on-year growth (%)
However, the growth
44 47 momentum has slowed
41
38 significantly in 4Q11
40
32 31
29 30
27 26 25
20 15
6
2
0
-9
-12
-20
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
Quarterly sales YoY %
Note: Based on 845 non-financial A-share companies that have reported quarterly profits since 1Q08
Source: Wind, Credit Suisse estimates
Among different sectors, construction materials posted the strongest growth of 38% YoY.
The energy sector (coal and oil), which accounts for 30% of total sales, is the major driver
of the market’s sales growth. Excluding the sector which grew 33% YoY, sales growth for
the market would only be 19%. On the other hand, capital goods (up 12%), autos (up
14%) and transportations (up 14%) witnessed the slowest growth.
Figure 15: Chinese companies’ 2011 sales YoY growth (%)
38
40
35 34 33 32
35 32 31
30 28
23
25 22 22 22 22
19
20 16
14 14
15 12
10
5
0
Construction Materials
Health Care
Food & Staples Retailing
Real Estate
Transportation
Information Technology
Utilities
Automobiles & Components
Retailing
Metals & Mining
Consumer Durables & Apparel
Capital Goods
Ex-financials (incl. prop.)
Coal & Consumable Fuels
Telecommunication Services
Oil & Gas
Chemicals
Food, Beverage & Tobacco
Source: Wind, Credit Suisse estimates
China Market Strategy 9
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Margins and return on equity (ROE)
On the back of weak sales and even weaker net profit growth, margins and ROE suffered. Margins and ROE suffered
The net profit and operating margins for non-financials (including property) in 2011 were due to weaker sales and
5.0% and 6.8%, respectively, down by 1.1 pp and 1.3 pp YoY. profits
Figure 16: Net profit and operating margins—Chinese (A share) companies
Net margin (%) YoY HoH Operating margin (%) YoY HoH
2011 2010 2H11 (pp) (pp) 2011 2010 2H11 (pp) (pp)
Consumer discretionary 4.6 4.8 4.5 (0.3) (0.1) 6.8 6.6 6.6 0.1 (0.3)
Automobiles and components 4.7 4.8 4.7 (0.1) 0.0 7.7 7.4 7.6 0.3 (0.1)
Consumer durables & apparel 4.0 4.4 4.0 (0.4) (0.1) 5.1 4.9 4.9 0.2 (0.5)
Retailing 3.9 4.1 3.5 (0.2) (0.9) 5.4 5.7 4.7 (0.3) (1.3)
Consumer staples 5.9 5.7 5.5 0.2 (0.9) 7.4 7.0 6.7 0.4 (1.4)
Food and staples retailing 3.1 3.1 2.4 0.0 (1.5) 4.1 4.2 3.2 (0.1) (2.0)
Food, beverage and tobacco 7.8 7.4 7.5 0.4 (0.7) 9.6 8.8 9.1 0.8 (1.1)
Energy 5.7 7.5 5.3 (1.8) (0.7) 8.0 10.4 7.0 (2.4) (1.9)
Coal and consumable fuels 14.7 17.1 13.7 (2.4) (2.2) 21.0 24.0 18.5 (2.9) (5.3)
Oil and gas 4.6 6.3 4.3 (1.7) (0.6) 6.4 8.8 5.7 (2.4) (1.5)
Financials (real estate only) 14.4 15.1 13.8 (0.7) (1.9) 22.3 22.8 21.6 (0.5) (2.0)
Health care 11.9 12.7 10.7 (0.9) (2.4) 14.6 15.2 13.1 (0.7) (3.1)
Industrials 4.2 5.2 3.6 (1.0) (1.3) 5.5 6.4 4.5 (1.0) (2.1)
Capital goods 3.8 3.6 3.3 0.2 (1.0) 4.7 4.5 3.9 0.2 (1.7)
Transportation 6.0 12.1 4.6 (6.2) (3.0) 8.6 14.8 6.7 (6.2) (4.0)
Information technology 6.2 7.9 5.8 (1.7) (1.0) 6.0 7.8 5.2 (1.8) (2.0)
Materials 4.1 5.0 2.9 (0.9) (2.6) 5.4 6.2 3.7 (0.8) (3.5)
Chemicals 4.8 5.8 3.5 (1.0) (2.8) 6.0 6.5 4.1 (0.5) (3.9)
Construction materials 14.9 13.4 13.5 1.5 (3.2) 18.3 15.9 15.8 2.4 (5.6)
Metals and mining 2.7 3.8 1.4 (1.1) (2.6) 3.8 5.0 2.2 (1.2) (3.3)
Telecommunication services 0.7 0.7 0.5 (0.1) (0.3) 2.2 2.2 1.2 (0.1) (2.0)
Utilities 3.2 4.5 3.1 (1.3) (0.1) 3.9 5.7 3.2 (1.8) (1.5)
Ex. financials (incl. property) 5.0 6.1 4.5 (1.1) (1.0) 6.8 8.1 5.9 (1.3) (1.9)
Source: Wind, Credit Suisse estimates
Figure 17: China non-financial A share companies’ quarterly margins (%) and ROE (%) Sharp decline in margins in
4Q11
(%)
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
ROE Operating margin Net margin
Based on 845 non-financial A-share companies that have reported quarterly profits since 1Q08
Source: Wind, Credit Suisse estimates
The margin squeeze mostly happened in 2H11 and it was across sectors. The operating
margins for non-financials were down 1.9 pp HoH and the sectors that were hit the most
were construction materials, coal, transportation and chemicals.
China Market Strategy 10
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Figure 18: Operating margins—2H11 HoH change
Operating margins were
(HoH, p.p.)
down 1.9pp HoH in 2H11
1
0
-1
-2
-3
-4
-5
-6
Transportation
Health Care
Information Technology
Utilities
Total (non-Fin)
Metals & Mining
Real Estate
Retailing
Capital Goods
Automobiles & Components
Consumer Durable s & Apparel
Coal & Consumable Fuels
Chemicals
Telecommunication Services
Oil & Gas
Food, Beverage & Tobacco
Ⅲ Ⅱ
Construction Materials
Food & Staples Retailing
Source: Wind, Credit Suisse estimates
In 2011, the ROE for the whole universe was 0.3 pp lower than 2010’s at 14.0%. For non- 2011 ROE for A-share
financials including property, the ROE was down 1.3 pp to 10.7%. Half-on-half, the ROE companies was 14.0%
declined 3.0 pp for the market and was down 1.9 pp for non-financials (including property).
Figure 19: Return on equity (ROE)—Chinese (A share) companies
(%) 2011 2010 2H11 YoY (pp) HoH (pp)
Consumer discretionary 12.5 13.7 13.0 (1.2) (1.1)
Automobiles and components 13.6 15.8 14.8 (2.2) (1.0)
Consumer durables & apparel 11.0 11.8 10.4 (0.8) (2.0)
Retailing 13.3 13.7 12.4 (0.3) (3.3)
Consumer staples 13.0 13.5 12.9 (0.6) (1.7)
Food and staples retailing 9.2 10.8 7.4 (1.6) (4.1)
Food, beverage and tobacco 14.7 14.7 15.4 (0.0) (0.8)
Energy 13.5 14.7 13.1 (1.1) (1.5)
Coal and consumable fuels 16.0 15.8 15.5 0.1 (2.4)
Oil and gas 12.8 14.3 12.4 (1.5) (1.3)
Financials 17.9 17.1 16.9 0.7 (4.1)
Banks 19.4 18.1 18.4 1.3 (4.5)
Diversified financials 9.8 11.8 11.3 (2.0) 2.3
Insurance 10.4 14.5 6.6 (4.1) (8.5)
Real estate 11.0 11.2 13.6 (0.2) 4.2
Health care 12.4 13.3 11.8 (1.0) (2.3)
Industrials 9.8 12.3 8.7 (2.5) (2.7)
Capital goods 11.4 11.6 10.6 (0.1) (2.8)
Transportation 7.0 13.5 5.7 (6.5) (2.9)
Information technology 9.8 10.8 11.3 (1.1) 2.1
Materials 8.6 9.6 6.2 (1.0) (5.5)
Chemicals 9.4 10.8 7.0 (1.4) (5.8)
Construction materials 17.4 15.2 17.2 2.2 (2.9)
Metals and mining 6.6 8.2 3.5 (1.6) (6.3)
Telecommunication services 0.7 0.6 0.5 0.1 (0.3)
Utilities 4.7 6.0 4.8 (1.3) 0.1
Grand total 14.0 14.3 13.2 (0.3) (3.0)
Ex. financials (incl. property) 10.7 12.0 10.2 (1.3) (1.9)
Source: Wind, Credit Suisse estimates
China Market Strategy 11
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Operating cash flow (OCF), capex and gearing
China corporates’ cash-flow situation was poor in 2011 and was 7% lower than 2010; 2011 operating cash flow
however, it was mainly due to a small increase in payables rather than a sizeable increase was down 7% YoY
in inventory and receivables (see supplemental details in Figure 21).
Figure 20: Operating cash flow—Chinese companies
Operating cash flow (Rmb bn) YoY HoH
2011 2010 2H11 (%) (%)
Consumer discretionary 69 75 58 (9) 432
Automobiles and components 37 42 28 (13) 194
Consumer durables & apparel 7 21 6 (64) 185
Retailing 21 13 18 64 523
Consumer staples 26 24 11 9 -20
Food and staples retailing 4 4 2 (13) 2
Food, beverage and tobacco 22 19 9 14 -24
Energy 583 598 336 (2) 36
Coal and consumable fuels 132 98 48 34 -43
Oil and gas 451 499 288 (10) 76
Financials (Real estate only) (24) (32) (7) n.m. n.m.
Health care 8 12 6 (31) 104
Industrials 84 156 121 (46) n.m.
Capital goods (11) 40 70 n.m. n.m.
Transportation 95 115 51 (18) 14
Information technology 9 11 18 (15) n.m.
Materials 111 93 48 20 -23
Chemicals 26 27 11 (3) -27
Construction materials 20 14 11 40 38
Metals and mining 65 49 26 32 -33
Telecommunication services 69 68 34 2 -5
Utilities 66 68 39 (2) 42
Ex. financials (incl. property) 1,002 1,072 664 (7) 96
Source: Wind, Credit Suisse estimates
Sectors where OCF deteriorated most quickly were industrials and consumer durables,
and apparel. The capital goods sector’s OCF turned negative from positive previously.
While the real estate sector has always experienced a negative outflow, the trend (less
negative than last year) seems to have improved a bit.
Figure 21: Supplemental details from the cash flow statement—non-financials companies
(Rmb bn) 2011 2010 YoY (%) 1H11 2H11 HoH (%)
Net profit before minority interests 783 755 4 374 409 (8)
Depreciation 538 478 13 281 257 10
Investment loss (94) (78) - (48) (46) -
Decrease in inventory (512) (479) - (174) (338) -
Decrease in accounts receivables (369) (348) - (9) (360) -
Increase in accounts payables 446 563 (21) 126 319 (60)
Operating cash flow 1,002 1,072 (7) 664 338 96
Source: Wind, Credit Suisse estimates
While we think that China’s liquidity condition has improved, as evidenced by the falling
trade bills interest rates (Figure 23) in 4Q, the operating cash flow condition has also
improved and increased by 13% YoY in 4Q.
China Market Strategy 12
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10 April 2012
Figure 22: Quarterly operating cash flow (Rmb bn)
(Rmb bn)
450
400
350
300
250
200
150
100
50
0
Dec 09
Dec 10
Dec 11
Mar 09
Jun 09
Sep 09
Mar 10
Jun 10
Sep 10
Mar 11
Jun 11
Sep 11
Note: Based on 1,031 non financial (incl. real estate) A-share companies since 2009.
Source: Wind
Figure 23: Six-month trade bills yield
6M Bills Yield (%, Pearl Riv er Delta)
14
12
10
8
6
4
2
0
Mar 07 Aug 07 Jan 08 May 08 Oct 08 Mar 09 Jul 09 Nov 09 Apr 10 Aug 10 Dec 10 May 11 Nov 11
Source: Wind
Companies that did not control their investment despite weak demand, the capex (using 2011 capex was 20% higher
cash flow from investing activities as a proxy) for the full year increased 20% from 2010. than 2010 despite weaker
As a result, the net debt-to-equity ratio for non-financials (including property) was higher at demand
15.9% (up 2.5% YoY and down 0.2% HoH).
China Market Strategy 13
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Figure 24: Capex—Chinese companies
2011 2010 2H11 YoY (%) HoH (%)
Consumer discretionary 95 79 58 21 59
Automobiles and components 30 31 23 (3) 196
Consumer Durables & Apparel 40 28 21 45 6
Retailing 17 13 11 27 114
Consumer staples 30 18 17 66 32
Food and staples retailing 7 6 3 30 (14)
Food, beverage and tobacco 22 12 13 85 53
Energy 577 462 347 25 50
Coal and consumable fuels 138 48 71 190 5
Oil and gas 439 414 276 6 69
Financials (real estate only) 12 10 5 25 (18)
Health care 16 11 9 47 44
Industrials 259 215 147 20 32
Capital goods 138 123 71 13 7
Transportation 120 92 75 31 68
Information technology 26 24 14 9 16
Materials 212 165 113 28 14
Chemicals 64 33 37 95 33
Construction materials 32 42 14 (23) (21)
Metals and mining 106 80 58 33 20
Telecommunication services 83 71 46 16 27
Utilities 115 130 66 (12) 36
Ex-financials (incl. property) 1,425 1,185 824 20 37
Source: Wind, Credit Suisse estimates
Figure 25: Net debt to equity (%)—Chinese A-share companies
YoY (pp) HoH (pp)
Net gearing is lower YoY
(%) 2011 2010 2H11
and HoH at 12.2%
Consumer discretionary (23) (31) (25) 7.3 1.7
Automobiles and components (28) (37) (31) 9.5 3.4
Consumer Durables & Apparel (14) (28) (20) 13.8 5.9
Retailing (57) (50) (51) (6.9) (5.2)
Consumer staples (27) (21) (30) (5.5) 3.0
Food and staples retailing (31) (29) (40) (2.3) 9.0
Food, beverage and tobacco (25) (19) (25) (6.7) (0.0)
Energy 10 8 7 2.2 2.5
Coal and consumable fuels (5) (5) (8) (0.3) 2.7
Oil and gas 14 11 12 3.1 2.6
Financials (Real estate only) 16 14 15 2.0 0.9
Health care (23) (22) (26) (1.7) 2.6
Industrials 9 3 13 5.9 (3.9)
Capital goods 3 (10) 8 13.0 (4.7)
Transportation 19 23 22 (4.1) (2.4)
Information technology (19) (27) (15) 8.8 (3.8)
Materials 32 33 32 (0.5) 0.6
Chemicals 30 28 24 2.0 6.0
Construction materials 29 43 40 (13.9) (11.2)
Metals and mining 33 32 32 0.7 0.9
Telecommunication services 9 7 8 1.4 0.4
Utilities 180 170 178 10.3 1.7
Ex-financials (incl. property) 15.9 13.4 16.0 2.5 (0.2)
Note: Negative numbers represent net cash
Source: Wind, Credit Suisse estimates
China Market Strategy 14
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Increase banks to OVERWEIGHT
We add a little more weight to banks—increase the sector to OVERWEIGHT (though Increasing banks to OW and
marginally). Within banks, we trim CCB and ICBC to 9%, from 13% and 10% weights adding CMB
previously, and add one more bank—China Merchant—with a weightage of 6%. As a
result, we are 1.5 pp overweight the sector relative to the MSCI China benchmark. To
finance the move, we remove Sichuan Pharmaceutical (1%) from the health care sector.
One more change that we make to the portfolio is that we replace China Southern (1%)—
as we have dropped coverage—with China COSCO (1%).
Overall, we continue to be OVERWEIGHT on the ‘broad consumer sector’ (that we define
as discretionary, staples, healthcare and technology), banks (marginally), insurance and
utilities. On the other hand, we are UNDERWEIGHT on cyclical sectors such as energy,
materials, industrials and real estate. We are MARKET WEIGHT on telecoms.
Figure 26: Credit Suisse’s China model portfolio
Weighting CS P/E Consensus
(%) (x) P/E (x)
vs
MSCI sector CS MSCI MSCI 2011E 2012E 2011E 2012E Recommended stocks
Consumer discretionary 6.0 6.1 -0.1 15.3 14.6 12.2 10.5 Belle (2%), China Lodging (2%), Dongfeng (1%), New Oriental (1%)
Consumer staples 5.0 5.6 -0.6 11.1 11.1 22.8 18.6 China Modern Dairy (3%), Tenfu (1%), Yurun (1%)
Energy 18.0 18.5 -0.5 9.2 9.2 8.9 8.3 Petrochina (12%), Shenhua (6%)
Financials 37.0 34.6 2.4 9.3 9.3 7.2 6.4
Banks 24.0 22.5 1.5 8.4 8.4 6.2 5.6 CCB (9%), ICBC (9%), China Merchants Bank (6%)
Insurance & div. fin. 10.0 7.1 2.9 13.2 13.2 14.3 12.1 Ping An (5%), China Pacific (5%)
Property 3.0 5.0 -2.0 8.4 8.4 7.2 6.2 Vanke A (3%)
Healthcare 2.0 0.9 1.1 12.7 12.7 18.4 15.2 Mindray (1%), Sino Biopharm (1%)
Industrials 4.0 6.8 -2.8 11.4 11.4 10.6 9.0
Transportation 2.0 2.4 -0.4 13.8 13.8 15.2 11.0 China Merchant (1%), China COSCO (1%)
Capital goods 2.0 4.4 -2.4 9.7 9.7 9.1 8.1 Shanghai Electric (2%)
Information technology 8.0 6.7 1.3 13.5 13.5 21.5 17.1 Tencent (2%), Lenovo (2%), ZTE (2%), Aisino (1%), Ufida (1%)
Materials 4.0 5.3 -1.3 5.5 5.5 8.7 7.4 Baosteel (3%), Zijin (1%)
Telecoms 12.0 13.2 -1.2 10.0 10.0 12.1 11.3 China Mobile (12%)
Utilities 4.0 2.3 1.7 11.3 11.3 12.4 10.7 CR Gas (2%), CR Power (2%)
MSCI China 100.0 100.0 0.0 9.9 9.8 9.5 8.4
Consumer sector* 21.0 19.3 1.7 13.4 13.2 18.8 15.4
* We define the broad consumer sector as: discretionary, staples, healthcare and tech
Source: MSCI, IBES aggregates, Credit Suisse estimates
Model portfolio performance
Our model portfolio has been down 8% since its inception in 2008 and up 13% YTD,
outperforming the benchmark MSCI China by 34% and 2%, respectively.
Figure 27: CS China model portfolio performance versus MSCI China
Performance (%) CS MSCI Relative
2008 -45.2 -51.9 14.1
2009 69.6 58.8 6.8
2010 1.8 2.3 -0.6
2011 -13.9 -20.3 8.1
2012 13.1 10.9 1.9
Since inception -7.8 -31.0 33.5
Source: MSCI, Credit Suisse estimates
China Market Strategy 15
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Figure 28: Relative performance—CS China model portfolio versus MSCI China
Our model portfolio has
140 outperformed the
135 benchmark by 34% and 2%
since its inception and YTD,
130
respectively
125
120
115
110
105
100
95
Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11
Relativ e performance (CS China portfolio v ersus MSCI China)
Source: MSCI, Credit Suisse estimates
China Market Strategy 16
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Actual versus CS estimates
Credit Suisse China analysts have reviewed over 140 Chinese companies that have More misses than beats
reported their full-year 2011 results. Compared to our forecasts, around 37% of the
companies in our universe missed our expectations and only 27% were above
expectations.
Figure 29: Net profits—actual versus CS estimates (2011) Figure 30: Net profit—actual versus CS estimates (2010)
17%
43%
40%
Note: Reported sales versus forecast made in January. Source: Company data, Credit Suisse estimates
☺= above, = below, = in line
Company data, Credit Suisse estimates
Figure 31: Beat and miss versus CS estimates and earnings revision post results
Relatively more misses in
# of Actual vs. expectations 2012 EPS
the materials sector, staples
(%) co's ☺ and tech are doing better
Consumer Discretionary 22 36 32 32 18 32 50
Consumer Staples 6 50 50 0 33 50 17
Energy 7 0 100 0 14 57 29
Financials 32 25 38 38 19 53 28
Banks 9 33 33 33 11 89 0
Insurance 6 17 50 33 0 17 83
Real Estate 16 19 38 44 31 44 25
Health Care 8 38 50 13 38 25 38
Industrials 17 24 29 47 0 59 41
Capital Goods 15 27 27 47 0 53 47
Transportation 2 0 50 50 0 100 0
Information Technology 17 53 29 18 29 6 65
Materials 23 13 22 65 4 39 57
Telecoms 3 0 33 67 0 33 67
Utilities 9 11 33 56 22 44 33
Grand Total 144 27 36 37 17 40 43
Source: Credit Suisse estimates
As a result, more analysts have revised down their estimates. Only 17% of the company
estimates were revised up versus 43% which were cut. Most of them came from materials,
capital goods and consumer discretionary sectors. There were some upward revisions in
the consumer staples sector.
China Market Strategy 17
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Since end-January, we have revised our net profit forecasts for Credit Suisse China CS total net profit ex-banks
universe—up 11% and 0.7% for 2012 and 2013, respectively, mainly due to a substantial was revised down by about
~40% upgrade in banks due to a lower credit cost assumption. Excluding banks, our net 4% since the reporting
profit forecasts for 2012 and 2013 are revised down by 4.2% and 4.1%, respectively, season started
driven by the energy (2012: down 8%) and materials (2012: down 16%) sectors. On the
other hand, we have revised the earnings for the utilities sector by the most for 2012.
Overall, we forecast 10% and flat net profit growth for 2012 and 2013, respectively.
Figure 32: Net profit(NP) revision and growth post full year 2011 results—CS universe
Wtg by Net profit revision Net profit growth
(%) 2012 NP 2011 2012 2011 2012
Consumer Discretionary 2.5 -3.6 -4.0 13.3 19.8
Autos 1.4 -1.0 -1.1 17.2 18.1
Retailing 0.6 -7.1 -7.0 13.2 23.5
Consumer Staples 1.9 0.1 0.3 38.5 31.4
Energy 20.4 -8.0 -5.7 9.7 9.3
Financials 53.5 29.9 7.1 8.8 -15.0
Banks 44.1 38.6 10.7 4.9 -20.1
Insurance 4.9 -2.3 -3.7 65.2 16.2
Real Estate 4.1 3.9 -4.0 14.6 -0.6
Health Care 0.5 -7.5 -10.6 20.0 24.4
Industrials 5.2 4.3 -0.3 19.3 13.2
Capital Goods 3.8 -2.0 -1.6 0.8 10.4
Transportation 1.4 25.3 2.9 130.2 20.3
Information Technology 2.2 -4.5 -2.1 36.2 39.7
Materials 3.7 -16.2 -12.1 -0.5 38.4
Telecoms 8.4 -1.4 -0.9 5.6 14.5
Utilities 1.7 10.6 4.2 39.8 12.8
Grand Total 100.0 10.9 0.7 10.3 -0.5
Ex-Banks 55.9 -4.2 -4.1 15.0 15.0
Source: Company data, Credit Suisse estimates
Consensus forecasts regarding EPS growth are 10.9% and 12.2% for 2012 and 2013,
respectively, for MSCI China; our estimates are lower at 9.4% and 8.4%, mainly due to the
discrepancies in the financial sector.
Figure 33: Market index EPS growth assumptions—CS versus consensus
MSCI China HSCEI
We forecast lower–than-
20
consensus’ EPS growth
15
12.2 12.0
10.9 11.4
10.3
9.4
10 8.4
5.1
5
0
2012E 2013E 2012E 2013E
Credit Suisse Consensus
Source: IBES Aggregates, Credit Suisse estimates
China Market Strategy 18
anonymous@anonymous.com FIRST LAST 04/10/12 02:09:00 PM Hong Kong Highpower
10 April 2012
Figure 34: Our EPS growth forecasts are lower than consensus’
Consensus EPS growth (%) CS EPS growth (%)
2012E 2013E 2012E 2013E
MSCI China 10.9 12.2 9.4 8.4
Consumer Discretionary 18.9 16.6 18.0 17.9
Autos 13.9 15.4 15.6 18.0
Retailing 24.8 20.1 19.3 20.6
Consumer Staples 18.8 22.7 22.1 25.3
Energy 10.2 6.8 6.0 9.5
Financials 11.6 12.2 9.6 0.6
Banks 9.8 10.7 -6.0 -16.9
Insurance 48.6 18.5 61.9 14.5
Real Estate 3.6 14.8 5.8 4.5
Industrials 5.3 18.0 20.4 11.9
Capital Goods 1.9 11.2 1.6 9.5
Transportation 17.3 38.8 111.9 17.3
Information Technology 14.9 25.6 22.6 36.3
Materials 6.9 17.1 -8.7 28.6
Telecommunication Services 4.5 7.3 5.4 12.6
Utilities 39.2 15.6 41.5 14.2
H share index 12.0 11.4 10.3 5.1
Source: IBES Aggregates, Credit Suisse estimates
China Market Strategy 19
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10 April 2012
Companies Mentioned (Price as of 09 Apr 12)
Aisino Co., Ltd (600271.SS, Rmb18.85, OUTPERFORM [V], TP Rmb28.00)
Baosteel (600019.SS, Rmb4.78, OUTPERFORM, TP Rmb7.10)
Belle International Holdings Ltd (1880.HK, HK$14.00, OUTPERFORM, TP HK$17.20)
China Construction Bank (0939.HK, HK$6.00, OUTPERFORM, TP HK$7.63)
China COSCO Holdings (1919.HK, HK$5.10, OUTPERFORM [V], TP HK$6.00)
China Lodging Group (HTHT.OQ, $12.49, OUTPERFORM [V], TP $17.00)
China Merchant Holdings (0144.HK, HK$25.15, OUTPERFORM, TP HK$28.00)
China Merchants Bank - H (3968.HK, HK$15.90, NEUTRAL, TP HK$15.99)
China Mobile Limited (0941.HK, HK$83.65, OUTPERFORM, TP HK$101.00)
China Modern Dairy Holdings Ltd (1117.HK, HK$2.26, OUTPERFORM, TP HK$3.25)
China Pacific (H) (2601.HK, HK$24.80, OUTPERFORM, TP HK$35.00)
China Resources Gas (1193.HK, HK$14.82, OUTPERFORM, TP HK$15.10)
China Resources Power Holdings (0836.HK, HK$13.64, OUTPERFORM, TP HK$18.25)
China Shenhua Energy Company Limited (1088.HK, HK$33.20, OUTPERFORM, TP HK$46.00)
China Southern Airlines (1055.HK, HK$3.60, OUTPERFORM [V], TP HK$5.67)
China Vanke Co Ltd-A (000002.SZ, Rmb8.22, OUTPERFORM, TP Rmb10.40)
China Yurun (1068.HK, HK$11.08, OUTPERFORM [V], TP HK$13.90)
Dongfeng Motors Group Co Ltd (0489.HK, HK$14.00, OUTPERFORM [V], TP HK$17.00)
Industrial & Commercial Bank of China (1398.HK, HK$5.03, OUTPERFORM, TP HK$6.46)
Lenovo Group Ltd (0992.HK, HK$7.54, OUTPERFORM, TP HK$7.15)
Mindray Medical International Ltd (MR.N, $33.15, OUTPERFORM, TP $34.00)
New Oriental Education (EDU.N, $27.26, OUTPERFORM, TP $31.90)
PetroChina (0857.HK, HK$11.00, OUTPERFORM, TP HK$13.50)
Ping An (H) (2318.HK, HK$60.20, OUTPERFORM, TP HK$80.00)
Shanghai Electric Group Co., Ltd. (2727.HK, HK$3.94, OUTPERFORM [V], TP HK$4.80)
Sihuan Pharmaceutical Holdings Group Ltd. (0460.HK, HK$3.12, OUTPERFORM, TP HK$4.50)
Sino Biopharmaceutical Limited (1177.HK, HK$1.96, OUTPERFORM, TP HK$3.60)
Tencent Holdings (0700.HK, HK$222.80, OUTPERFORM, TP HK$240.00)
Tenfu (6868.HK, HK$6.00, OUTPERFORM [V], TP HK$7.30)
Ufida Software Co. Ltd (600588.SS, Rmb19.99, OUTPERFORM, TP Rmb25.00)
Zijin Mining Group Co., Ltd (2899.HK, HK$3.05, OUTPERFORM [V], TP HK$4.90)
ZTE Corporation (0763.HK, HK$20.80, OUTPERFORM, TP HK$30.00)
Disclosure Appendix
Important Global Disclosures
Peggy Chan, CFA & Vincent Chan each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in
this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation
was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total
revenues, a portion of which are generated by Credit Suisse's investment banking activities.
Analysts’ stock ratings are defined as follows:
Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived
risk) over the next 12 months.
Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months.
Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months.
*Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total
return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**,
with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities.
Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry
factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of
the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage
universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a
7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds
replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively.
**An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector.
Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.
China Market Strategy 20
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10 April 2012
Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected
performance of an analyst’s coverage universe* versus the relevant broad market benchmark**:
Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.
Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
*An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector.
**The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months.
Credit Suisse’s distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Outperform/Buy* 46% (60% banking clients)
Neutral/Hold* 42% (57% banking clients)
Underperform/Sell* 10% (51% banking clients)
Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy,
Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's
decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the
market that may have a material impact on the research views or opinions stated herein.
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