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Goldman Sachs - In a tough spot_

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Goldman Sachs  - In a tough spot_ Powered By Docstoc
					May 18, 2012

China
In a tough spot, but better quarters
lie ahead
                                                                                                                     Portfolio Strategy Research



Slightly lower growth forecasts; but 2H12 outlook should improve
Our economics teamrevised 2012 GDP forecasts slightly to 8.1% from 8.6%.
The much weaker-than-expected April data suggests a sub-8% print for
2Q12, but we would expect more proactive policies (higher lending, RRR
cuts, more fiscal support including to select infra projects, etc) to support
stabilization/recovery in 2H12.

Lower near-term visibility, but a good entry point for medium term
Our top-down earnings forecasts for 2012/13E are trimmed to 6%/12% from
8%/12%. Our year-end target is cut slightly to 12,900 for HSCEI and 70 for
MXCN (from 13,600/70.4), but after the 10.5% correction in the past two
weeks, we still see meaningful upside of 32% / 30%. Re-rating to 10.5x fPER
target for MXCN by year-end (unchanged) should be driven by both China
cyclical and global factors: domestic and global confidence are at low
levels now and should normalize. Valuation is a bigger risk than earnings
and we think global factors are a bigger risk to valuation than domestic
factors. That said, visibility is lower in the next few months as European
politics are fluid, and China’s policy response may take time to filter
through to fundamentals. We expect 5% upside for the next 3 months.

Stay with domestic cyclicals; upgrading healthcare to OW
We remain comfortable favoring domestic cyclicals (retail, cement, banks)
positioned for more supportive policy, and we UW staples and telecom
despite lower earnings risks - the sectors are not attractively valued. We
upgrade healthcare to OW from Neutral – this is not a de-beta call, but
rather because: 1) valuation is at trough levels of 15.8 times after an
underperformance of 22% in the past 12 months; attractive with 25%/21%
consensus EPS growth for 2012E/13E; 2) we think this is one of the few
sectors facing limited earnings risk as price cuts are largely reflected and
raw material margin pressure is easing; 3) regulatory focus may shift from
pure price control over to balancing product quality in time, liquidity
improvement may benefit working capital; 4) investor positioning is low.
                                                                                   Goldman Sachs does and seeks to do business with
Helen Zhu
+852-2978-0048 helen.zhu@gs.com Goldman Sachs (Asia) L.L.C.                        companies covered in its research reports. As a result,
                                                                                   investors should be aware that the firm may have a conflict of
Timothy Moe, CFA                                                                   interest that could affect the objectivity of this report. Investors
+852-2978-1328 timothy.moe@gs.com Goldman Sachs (Asia) L.L.C.                      should consider this report as only a single factor in making
                                                                                   their investment decision. For Reg AC certification and other
Hanfeng Wang, Ph.D, CFA                                                            important disclosures, see the Disclosure Appendix, or go to
+86(10)6627-3318 hanfeng.wang@ghsl.cn Beijing Gao Hua Securities Company Limited
                                                                                   www.gs.com/research/hedge.html. Analysts employed by non-
                                                                                   US affiliates are not registered/qualified as research analysts
Ben Bei
+852-2978-1220 ben.bei@gs.com Goldman Sachs (Asia) L.L.C.                          with FINRA in the U.S.

Chenjie Liu
+86(10)6627-3324 chenjie.liu@ghsl.cn Beijing Gao Hua Securities Company Limited




The Goldman Sachs Group, Inc.                                                                 Goldman Sachs Global Economics, Commodities and Strategy Research
May 18, 2012                                                                                                                                                             China



Lower growth more than priced in


Lower GDP translates into lower earnings...
We have updated our earnings models to reflect the slightly lower GDP
forecast from our economics team. While the April macro data was
weaker than expected across the board, impact on full year growth was
not drastic. China’s slowdown has been largely self imposed, and China
exhibits both the capacity and the willingness to normalize policy
from extremely tight levels. We expect to see further moves from both
the monetary (lending, RRR, etc.) and fiscal sides (tax reform, fiscal
subsidies, more infra FAI). Property policies will also continue to finetune,
but policymakers may not necessarily use this as the first line of defense
nor move aggressively beyond the mass market products, given the risk
of a price rebound or loss of policy credibility. For more details on
expected policy measures, please see our economics team’s latest report
of May 18, 2012 titled: Lower growth in China but sequential recovery
coming, little impact on rest of AEJ.




Exhibit 1: China GDP growth path and forecast – slower                                                 Exhibit 2: China CPI growth path and forecast
growth expected, but sequential recovery expected in
2H12

 % chg                            China GDP Growth Path                                                 % chg                      China Quarterly CPI Path
                                                                                           GS
                                                                                           Forecasts   12
  20
                                                                                                                                                                         GS Forecasts
                                                                                                                    yoy
  18
                                                                                                        9
                                                                                                                    qoq sa ann
  16

  14                                                                                                    6

  12
                                                                                                        3
  10

   8
                                                                                                        0
   6
                                          yoy     qoq sa ann
   4
                                                                                                        -3
   2

   0                                                                                                    -6
   2001    2002   2003   2004   2005   2006     2007   2008    2009   2010   2011   2012                  2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


Source: CEIC, GS Global ECS Research estimates.                                                        Source: CEIC, GS Global ECS Research estimates.




We lowered our 2012E/13E earnings growth assumptions slightly to
6%/12% respectively. While we could continue to see weak earnings
trends in 2Q12, we expect our full year estimates to be achievable due to:

           Stronger GDP growth in 2H12 due to policy response

           Easier base effects as we move through the year

           The areas with the most meaningful earnings weakness may be
            relatively smaller in index weighting

           1Q12 earnings were >25% of GS 2012E top down EPS estimates
            already (24% of consensus 2012E)




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                                                 2
May 18, 2012                                                                                                                                China


Exhibit 3: We have modestly lowered our 2012E earnings forecasts to 6%
from 8%




                                          EPS growth                   EPS integer
                                          MSCI China                   MSCI China
                                         2012E   2013E                2012E 2013E
 GS Top down forecasts                   6.0%    12.3%                 5.94    6.67
 GS Previous forecasts                   8.4%       -
 Consensus forecasts                     11.5%   12.4%

Source: MSCI, Bloomberg, GS Global ECS Research estimates




Exhibit 4: Our 2012E earnings estimate is below                               Exhibit 5: 1Q12 earnings growth rebounded vs. 4Q11
consensus

  50%
                                                                                                        MSCI China        CSI300
                         MSCI China earnings
  40%                                                                          30%

                                                                               25%                            Quarterly earnings growth (yoy)
  30%
                                                                               20%
  20%
                                                                               15%

  10%                                                                          10%

   0%                                                                           5%

                                                                                0%
 -10%
                                                                                -5%
                                                                                        1Q11A        2Q11A       3Q11A        4Q11A     1Q12A



Source: MSCI, I/B/E/S, Factset, Bloomberg, GS Global ECS Research estimates   Source: MSCI, Wind, Bloomberg, GS Global ECS Research




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                               3
May 18, 2012                                                                                                                                                                                                                                                                                    China



Exhibit 6: Consensus earnings forecasts tend to lag GDP                                                                       Exhibit 7: We continue to forecast earnings cuts, but the
revisions by a few months                                                                                                     trough of the revision sentiment appears to have been in
                                                                                                                              4Q11

 14                                                                                                                15
                                                                                                                               60%               Number of analysts' upgrades minus downgrades / total number of estimates                                                                                 120
               Consensus GDP growth (%)                 Consensus MSCI China EPS integer (RHS)
                                                                                                                                                                                                                             China 1-wk rev                  MSCI China (Right)
                                                                                                                   13          40%
 12                                                  2007
                                                                                                                                                                                                                                                                                                           100
                                          2006                                                  2010
                                                                                                                   11
                                                                                                                               20%
 10                          2005                              2008
                                                                                                       2011                                                                                                                                                                                                80
                                                                                                                                   0%
                                                                                                              2013 9
      2004
                                                                                                2012
  8                                                                           2009
                                                                                                          2013                 -20%                                                                                                                                                                        60
                                                                                                                  7
                                                                                         2012

  6                                                                                                                            -40%
                                                                                                  2011
                                                                                                                                                                                                                                                                                                           40
                                                                                                                  5
                                                                                          2010
                                                                                                                               -60%
  4
                                                        2007                      2009                            3
                  2005                                                2008                                                                                                                                                                                                                                 20
       2004                                  2006                                                                              -80%

  2
                                                                                                                  1
                                                                                                                              -100%                                                                                                                                                                        0




                                                                                                                                                                                                                                                                     Aug-11




                                                                                                                                                                                                                                                                                       Feb-12
                                                                                                                                                     Aug-08




                                                                                                                                                                       Feb-09




                                                                                                                                                                                         Aug-09




                                                                                                                                                                                                                    May-10




                                                                                                                                                                                                                                          Nov-10


                                                                                                                                                                                                                                                   Feb-11
                                                                                                                                        May-08




                                                                                                                                                              Nov-08




                                                                                                                                                                                May-09




                                                                                                                                                                                                  Nov-09


                                                                                                                                                                                                           Feb-10




                                                                                                                                                                                                                                 Aug-10




                                                                                                                                                                                                                                                            May-11




                                                                                                                                                                                                                                                                              Nov-11




                                                                                                                                                                                                                                                                                                  May-12
  0                                                                                                               -1




Source: MSCI, I/B/E/S, NBS, Consensus Economics, GS Global ECS Research.                                                      Source: MSCI, I/B/E/S, NBS, Consensus Economics, GS Global ECS Research.




...but we still see significant room in valuation
normalization
We revise our year-end 2012E MXCN and HSCEI index targets down
slightly to reflect the lower earnings growth. However, we still see
significant upside to our targets given that markets have already more
than priced this in after the 10.5% pullback in the past two weeks.

We maintain our fPER target of 10.5x by year-end, unchanged– this
was premised on a 1 PER point of valuation re-rating (11%) for China
cyclical normalization and a 1 PER point of re-rating (11%) for global
macro improvements (our year-end MXAPJ, Stoxx index targets assume
16%/19% valuation re-rating from beginning to end of 2012). While
China’s total re-rating assumption of 22% is higher than that for the
MXAPJ and the Stoxx, for example, we notice that China’s relative
valuation to other major indices fell by well over 20% since 4Q10. This
was largely due to cyclical tightening concerns while relative growth rates
were not similarly reduced. The reversal of macro policy direction should
be able to warrant some relative re-rating in our view (although we do not
expect a full relative re-rating given still outstanding structural/reform
issues).


Exhibit 8: Our new HSCEI year-end target is 12,900



 MSCI China at 5/16/2012               53.9
     HSCEI at 5/16/2012               9,742
                                                                                                                        Implied forward
                                                 EPS growth                                                               valuations
                                                                   2012E
                                                                   target/
                                                          11E-13E implied Implied
                                    2012E           2013E CAGR      level  +/- (%)                                      P/E (X)         P/B (X)
MSCI China Bull Case                 12%             18%    15%       80.2   49%                                           11.0              1.8
MSCI China                           6%              12%     9%       70.0   30%                                           10.5              1.6
MSCI China Bear Case                 2%               6%     4%       47.7  -11%                                             8.0             1.1
HSCEI                                6%              13%     9%     12,900   32%                                             9.4             1.3

Source: MSCI, Bloomberg, GS Global ECS Research estimates.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                                                                                                                                                                          4
May 18, 2012                                                                                                                                                                                                                                                                              China




Exhibit 9: MXCN valuation relative to key global indices                                                                    Exhibit 10: Meanwhile, relative growth rate has not
weakened by 20%+ since late 2011                                                                                            varied meaningfully since late 2010

 (%)         12m P/E difference- MXCN vs MXAPJ, MXWD, MXWO and MXEF                                                                            12m growth difference: MXCN vs MXAPJ, MXWD, MXWO
              MXCN vs MXAPJ           MXCN vs MXWD                   MXCN vs MXWO                  MXCN vs MXEF                                                       and MXEF
 80
                                                                                                                              (%)                MXCN vs MXAPJ                    MXCN vs MXWD                         MXCN vs MXWO                                MXCN vs MXEF
                                                                                                                              15
 60


                                                                                                                              10

 40

                                                                                                                               5

 20
                                                                                                                               0


   0
                                                                                                                               -5



 (20)
                                                                                                                              -10



 (40)                                                                                                                         -15



                                                                                                                              -20
 (60)
                                                                                                                                 Jan-03               Jan-04      Jan-05         Jan-06               Jan-07       Jan-08        Jan-09                   Jan-10            Jan-11         Jan-12
    Jan-03    Jan-04   Jan-05        Jan-06        Jan-07        Jan-08      Jan-09       Jan-10      Jan-11   Jan-12



Source: MSCI, I/B/E/S, NBS, Factset, Bloomberg, GS Global ECS Research                                                      Source: MSCI, I/B/E/S, NBS, Factset, Bloomberg, GS Global ECS Research




Exhibit 11: China remains on the attractive side of our                                                                     Exhibit 12: Implied ERP is highest in Asia and at peak
regional P/B vs. ROE comparison                                                                                             levels

 2012E
 P/B (X)
                                                                                                                            Equity risk premium (%)                                                                   +/- 1 S.D.                Current                      High / Low
 3.0                                                                                                                        16
                                                                                                                             14                                   More attractively valued
                                                       Philippines                                                           12
 2.5
                                                                                                                             10                          11.6
                                                                                                                                                                                                                                                              10.6
                                                                          Thailand                                            8                                                                                                               9.0                                         9.1
                                                             U.S                                                                                                  8.8                                     8.3                                                                 8.8
                                          Malaysia                                                                                        8.2                                                                       8.0
 2.0                                                                                                                          6                                                           6.9
                                              India                                                                           4                                                                                                 5.6
                                Taiwan                                                                                                                                         4.5
                                                   Australia
                                                                                                                              2
 1.5                       Singapore                         China
                                        Europe                                                                                0
               Hong Kong                                                                                                     (2)
 1.0         Japan                                 Korea                                                                     (4)
                                                                                                                                                                               India




                                                                                                                                                                                                                                Philippines
                                                                                                                                                                                          Indonesia




                                                                                                                                                                                                                                              Singapore
                                                                                                                                          Australia

                                                                                                                                                          China




                                                                                                                                                                                                                     Malaysia




                                                                                                                                                                                                                                                                               Thailand

                                                                                                                                                                                                                                                                                           MXAPJ
                                                                                                                                                                   Hong Kong




                                                                                                                                                                                                           Korea




                                                                                      Attractive
                                                                                                                    2012E
                                                                                                                                                                                                                                                                   Taiwan
 0.5                                                                                                                 ROE
        5      7       9        11            13            15        17        19          21         23      25    (%)




Source: MSCI, I/B/E/S, NBS, Factset, Bloomberg, GS Global ECS Research                                                      Source: MSCI, I/B/E/S, NBS, Factset, Bloomberg, GS Global ECS Research




Confidence will rebuild, but it may take some time
1Q12 market performance was strong as a result of a confluence of
positive factors – strong US macro momentum, relief in Europe on the
aftermath of LTRO, and still resilient data from China. All three of these
factors have started to reverse in the past weeks, and the European
situation appears particularly difficult.

At the current juncture, we feel that investor confidence in both China and
global fundamentals have reverted to a recent trough. We see significant
room for improvement in the coming quarters. That said, near-term
visibility remains low as:




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                                                                                                                                                                  5
May 18, 2012                                                                           China


         The next couple of months are very crowded in terms of the
          European events calendar – for example the Greek election in
          mid June, and the upcoming German elections as well as more
          sovereign maturities

         It may take time for the impact of various China policy
          adjustments to filter through into fundamentals. In the
          meantime, investors might continue to question whether policies
          are ‘too little too late’

As such, we feel that room for meaningful re-rating in the coming 3
months may be more limited and we assume less absolute returns near
term.


Exhibit 13: 2012E returns will be a combination of earnings growth and
valuation expansion




 90%
 80%
 70%
 60%
 50%
 40%
 30%
 20%
 10%
  0%
-10%               Earnings change
-20%               Valuation change
                   Price performance
-30%
-40%
-50%
-60%
            2005



                         2006



                                  2007



                                            2008



                                                       2009




                                                                               2012E
                                                                 2010



                                                                        2011




Source: MSCI, Bloomberg, I/B/E/S, GS Global ECS Research estimates.




Goldman Sachs Global Economics, Commodities and Strategy Research                         6
May 18, 2012                                                                                                                             China


Exhibit 14: Near-term returns may be muted but ample potential later on



    15,000

                  HSCEI                                                                                                         12m:
    14,000                                                                                                                     13,300
                                                                                                                               (+37%)
    13,000

                                                                                                                  Year end:
    12,000                                                                                                         12,900
                                                                                                                   (+32%)
    11,000



    10,000                                                                                                     3m:
                                                                                                             10,200
                                                                                                              (+5%)
     9,000



     8,000


                                HSCEI 3m, 2012 year end and 12m index forecast
     7,000



     6,000
         Jan-10    Apr-10   Jul-10   Oct-10   Jan-11   Apr-11   Jul-11   Oct-11   Jan-12   Apr-12   Jul-12   Oct-12   Jan-13    Apr-13



Source: MSCI, Bloomberg, I/B/E/S, GS Global ECS Research estimates.




Greater uncertainty from external factors vs. domestic,
and on valuation vs. earnings
Overall we feel that downside risks are likely to be:

-            More external than domestic: We believe the willingness and ability
             of Chinese policymakers to overcome the cyclical volatility are high
             (willingness was particularly underscored with the recent RRR cut and
             white goods/auto energy efficient products subsidies, which should
             boost confidence/reduce downside risks). In contrast, global
             uncertainties are much higher, particularly regarding the Eurozone
             political scene.

-            Higher risk on valuation than on earnings: Global risk-off is a more
             likely downside risk and this will impact China equities more directly
             through valuations rather than corporate fundamentals.

The potential exception to the above view would be if further political
volatility emerges in the coming months ahead of the leadership
transition. While changes could well be medium to longer-term positive,
the perception of instability around such changes could pose a risk to
valuation near-term on both a relative and absolute basis for China
equities.




Sector positioning – domestic is the word... Healthcare now to OW
We have reviewed our sector positioning choices and our criteria for
sectoral outperformance in the coming months are:
                  Low earnings risks




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                           7
May 18, 2012                                                                     China


        Relatively weak performance YTD and light investor positioning -
         to avoid profit taking pressure in case of further global risk-off or
         fund outflows

        Policy alignment – sectors that may benefit from adjustments to
         domestic policies

In this context, we remain overweight on several macro-sensitive
domestic-facing sectors:
        Banks: Low earnings risks, light positioning, and likely to benefit
         from l improvements in liquidity and corporate fundamentals.
         The sector is also relatively more defensive in the case of more
         globally-induced volatility.

        Retail: The sector has pulled back to very inexpensive valuation
         levels and while there are more consensus cuts likely, the bulk
         should be behind us. Policies to enhance social safety nets (fiscal
         spend, tax breaks) and support consumption (like the recent
         energy efficient white goods subsidy) could be positive as well.

        Cement: Slower and less than expected easing is likely to result
         in weak price recovery trends vs. the market’s previous
         expectations. That said, the sector’s recent performance has
         already reflected such concerns, and positioning has lightened up
         meaningfully in the past month. Cement remains our preferred
         sector within the commodities space. Compared to other
         commodities like steel and aluminum that are struggling with
         industry-wide losses, cement should still realize above mid- cycle
         margins and returns. Furthermore, as a pure domestic cyclical
         play with low inventory, we believe it is the first and most direct
         beneficiary of a potential pickup in infrastructure investments off
         a very low base in 1Q12 (particularly water, rural, environmental
         projects).

We also move healthcare to OW from Neutral:
-   Good entry point: The healthcare sector has underperformed MXCN
    by 22% over the past twelve months. This was largely driven by
    concerns over mandated price cuts, raw material pressure on
    margins, and a high starting point in terms of sector valuations (23.7
    times fPER 12 months ago) after an impressive performance in 2010.
    Investor positioning has lightened up meaningfully .

-   Earnings outlook now more resilient: Although more government-
    mandated price cuts are certainly likely to be forthcoming in the
    coming months, our sector analysts believe it is now well-expected
    by the market and thus already in consensus. Raw material cost
    pressures are also easing together with inflation. There are no major
    reasons to expect upward revisions near term, but we believe ‘less
    downside’ is already positive in the current environment and
    positions the sector well on a relative basis.

-   Valuation has made new troughs: Sector valuation is now at 15.8
    times fPER, a historical trough, and very reasonable given the sector’s
    20%+ earnings CAGR. Other sectors with low earnings risks (like
    staples and telcos) are all trading at higher valuations versus
    history/growth.

-   Potential catalyst if price cut pressures start to abate: Persistent
    rounds of price cuts have started to result in drug quality problems


Goldman Sachs Global Economics, Commodities and Strategy Research                   8
May 18, 2012                                                                                                                                                                                                    China


                  and discouragement of R&D and higher tier products. While we do
                  not expect any immediate policy changes, in the coming quarters
                  (particularly after the leadership handover), we may see potential
                  policy reviews and changes in approach.

-                 Liquidity improvement may also benefit certain names: Although
                  healthcare is usually viewed as a less macro sensitive sector, we do
                  think that improving liquidity can significantly enhance fundamentals
                  for some of the listcos. In particular, the distributors’ working capital
                  issues could be meaningfully alleviated.

-                 Our sector teams’ preferred names are Sino Biopharm, Sihuan and
                  CMS.




Exhibit 15: Our favored sectors have limited earnings risks, low positioning, and policy alignment

                                                                                                             Consensus 12E       Sector CAGR           Sector       Sector 12E     Relative perf      Perceived
                                       GS            MXCN             P/E      EPS Growth (%) Ytd revision     EPS revision      vs. MXCN (%)        12m fP/E       P/E vs APJ       vs MXCN           investor
Sectors                              Rating       weighting       2012E 2013E 2012E 2013E 2012E EPS              direction            2011-13E        Z-score            sector 6 months ytd 2012 positioning
MSCI China                            OW                            9.1    8.1   11.7    12.3       -2.8%       Downward                                 -1.3             -19%                           UW
Banks                                 OW             22.5%          5.8    5.3   12.2    10.4        2.9%           Flat                      -0.7       -1.5             -36%         1%        -2%     UW
Retail                                OW              3.6%         13.0   11.1   22.0    17.3       -9.1%    Flat/downward                     7.6       -1.6              -6%      -12%         -8%    Neutral
Building materials                    OW              2.1%          7.3    6.1    -4.8   19.0      -19.9%       Downward                      -5.6       -1.3             -38%      -11%         -3%     UW
Health care                           OW              0.8%         17.5   14.5   25.4    20.5       -3.6%           Flat                      10.9       -1.3              -5%        -6%        -3% Slight UW
Property                             Neutral          5.3%          7.2    6.2     2.5   15.8       -8.2%       Downward                      -3.1       -1.0             -39%       18%        13%      UW
Metals/mining                        Neutral          1.3%          7.1    6.8     3.0    5.1      -10.1%       Downward                      -8.0       -1.2             -24%      -21%       -14%      UW
Industrials                          Neutral          4.3%          8.5    7.5     0.2   12.4       -5.2%       Downward                      -5.9       -1.0             -23%        -4%        -3%     UW
Autos and components                 Neutral          2.2%          9.6    8.4   12.7    15.2       -5.9%       Downward                       2.0       -1.2              17%         5%         2%    Neutral
Insurance                            Neutral          7.3%         14.2   11.7   42.2    21.1       -7.3%       Downward                      19.2       -1.3               7%        -7%         0%    Neutral
Tech hardware                        Neutral          1.8%         11.9   10.0   30.3    18.8      -12.2%       Downward                      12.4       -0.7             -15%         6%         4%    Neutral
Software and services                Neutral          5.1%         26.3   21.2   27.8    24.2        0.0%        Upward                       14.0       -0.7              38%       40%        39%      OW
Chemicals                            Neutral          0.8%          7.8    6.6   16.8    17.7      -10.8%    Flat/downward                     5.2       -1.8             -31%      -16%       -12%     Neutral
Steel, aluminium                     Neutral          0.6%         22.3   15.0   21.2    49.1      -39.5%       Downward                      22.4        0.3              93%      -11%         -6%     UW
Oil and gas                          Neutral         17.9%          8.4    7.9   10.0     7.2       -0.7%    Flat/downward                    -3.4       -1.6             -14%        -7%        -4% Slightly OW
Transportation                       Neutral          2.3%         13.9   10.3   53.5    35.5      -10.8%       Downward                      32.2       -0.7             -23%         5%        -1%     UW
Utilities                            Neutral          2.4%         12.5   10.7   39.6    16.7        6.1%        Upward                       15.6       -1.0             -15%         7%         1%    Neutral
Consumer staples                      UW              5.9%         23.1   18.6   15.9    24.4      -13.9%           Flat                       8.1        1.6              35%         4%         0%     OW
Telecom                               UW             13.9%         12.3   11.4     6.7    7.2       -2.8%           Flat                      -5.1       -0.3              -8%         4%         0%     OW


Source: MSCI, Bloomberg, I/B/E/S, Factset, Gao Hua Securities Research estimates, GS Global ECS Research estimates.
Note: Blue highlights are favorable while gray highlights are unfavorable




Exhibit 16: Healthcare sector is trading at mid teens PER                                                    Exhibit 17: ... and historical trough PB as well


                                                                                                               12m forward P/B (X)
    12m forward P/E (X)
                                                                                                               8.0            MXCN Health care              Average              Avg + 1sd         Avg - 1sd
    45                         MXCN Health care             Average                 + 1sd            - 1sd
                                                                                                               7.0
    40

    35                                                                                                         6.0


    30                                                                                                         5.0

    25
                                                                                                               4.0

    20
                                                                                                               3.0
    15
                                                                                                               2.0
    10

    5                                                                                                          1.0


    0                                                                                                          0.0
         Jun-09




                          Dec-09




                                         Jun-10




                                                         Dec-10




                                                                           Jun-11




                                                                                            Dec-11




                                                                                                                                     Aug-10




                                                                                                                                                                                   Aug-11
                                                                                                                     Feb-10




                                                                                                                                                           Feb-11




                                                                                                                                                                                                       Feb-12




Source: MSCI, I/B/E/S, Bloomberg, GS Global ECS Research estimates.                                          Source: MSCI, I/B/E/S, Bloomberg, GS Global ECS Research estimates.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                                                                                  9
May 18, 2012                                                                                                                                                                                                                                                                                                                                                                                            China



Exhibit 18: Most macro sensitive sectors are at historical                                                                                                                                                                                             Exhibit 19: Over the past few weeks, higher beta sectors
trough valuations                                                                                                                                                                                                                                      have meaningfully corrected

                                                                                                                                                                                                                                                        30%
 12M forward P/E (X)                                                                                                              High/low                               +/- 1 Std.dev.                                   Current
  70                                                                                                                                                                                                                                                    25%
                                                                                                                                                                                                                                                                                                                                                              Earnings revision
              5 years historical data used
 60                                                                                                                                                                                                                                                     20%                                                                                                   Valuation change
                                                                                                                                                                                                                                                                                                                                                              Price performance
 50                                                                                                                                                                                                                                                     15%

 40                                                                                                                                                                                                                                                     10%

 30                                                                                                                                                                                23.5                                                                  5%
                                                                          19.4                                                                                                                 17.4
 20                                                                                                                                                                                                                                                      0%
                                                                                                                            12.6                                  11.6                                           11.5 11.5 11.2
       8.4 8.6                                                10.2
                                                                                                              7.8                        7.9
 10                  5.3 6.5 6.8                                                              6.6                                                      6.4                                                                                              -5%

  0                                                                                                                                                                                                                                                    -10%
              Auto




                                                                                                              Industrials
                                                                                              Metals/Mining




                                                                                                                                                                                                                  Telco
                                                                                                                                                                                                Steel/aluminum
                                                                           Stap./Healthcare




                                                                                                                             Insurance




                                                                                                                                                                   Discretionary
                     Banks



                                                  Chemicals




                                                                                                                                                                                                                          Transportation
                                                                                                                                                       Property
                             Building materials




                                                                                                                                         Oil and gas




                                                                                                                                                                                                                                           Utilities
                                                               Hardware




                                                                                                                                                                                    Software
       MXCN




                                                                                                                                                                                                                                                       -15%

                                                                                                                                                                                                                                                       -20%




                                                                                                                                                                                                                                                                                                       Insurance
                                                                                                                                                                                                                                                                                             Telcos.




                                                                                                                                                                                                                                                                                                                                               Banks




                                                                                                                                                                                                                                                                                                                                                                     Energy
                                                                                                                                                                                                                                                               I.T.




                                                                                                                                                                                                                                                                                                                                                                              Cons. Disc.
                                                                                                                                                                                                                                                                                 Utilities




                                                                                                                                                                                                                                                                                                                                                       Industrials




                                                                                                                                                                                                                                                                                                                                                                                                         MXCN
                                                                                                                                                                                                                                                                      Property




                                                                                                                                                                                                                                                                                                                   Health care




                                                                                                                                                                                                                                                                                                                                                                                            Materials
                                                                                                                                                                                                                                                                                                                                 Cons. Stap.
Source: MSCI, I/B/E/S, Bloomberg, GS Global ECS Research estimates.                                                                                                                                                                                    Source: MSCI, I/B/E/S, Bloomberg, GS Global ECS Research estimates.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                                                                                                                                                                                                                                                                          10
May 18, 2012                                                                                                                                      China



Disclosure Appendix


Reg AC
We, Helen Zhu, Timothy Moe, CFA, Hanfeng Wang, Ph.D, CFA, Ben Bei and Chenjie Liu, hereby certify that all of the views expressed in this report
accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our
compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.




Disclosures

Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
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                   Buy             Hold            Sell                 Buy             Hold            Sell
   Global            31%           54%             15%                  48%           41%            36%
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Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                    11
May 18, 2012                                                                                                                                          China


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Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                        12
May 18, 2012                                                                                                                                         China


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Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                          13

				
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