A fast growing market with great potential by MikeJenny

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									China Securities Sector                            A fast growing market with great potential
Industry In-depth Report
                                      Summary:
                                         Fast growing market with tremendous development potential. China’s
July 13 2011                             securities market was established in early 90s and the Non-tradable Share
                                         Reform initiated in Apr 2005 marked the turning point of the equity market.
Special Views:                           The market showed a leapfrog development starting from 2005 with its total
China’s securities market is a           market cap and transaction value expanding enormously. Shanghai SE and
                                         Shenzhen SE ranked top positions in the world’s lists, improving sharply from
fast growing market with great           2005. The securities market is expected to see tremendous development given
potential. The Non-tradable              increases in direct financing and securitization rate, in our view.
Share Reform initiated in Apr
2005 marked the turning point of          Brokerage remains major business, while capital and earnings abilities
the equity market.  The capital          strengthening. CSRC has started comprehensive regulation activities since
                                          Aug 2004. The regulation, together with the Non-tradable Share Reform
and     earnings    abilities    of       brought excellent development opportunities for the securities companies,
securities    companies       have        vastly boosting their capital base and profitability. Brokerage business
greatly strengthened since 2005.          remains the major business, accounting for over 50% of the total income.
Brokerage      remains       major        Nonetheless, incomes from underwriting and innovative business are
business, but the revenue                 expanding. Compared with their international peers, the income structure of
                                          securities companies still has great improvement potential, in our view. Also,
structure grows to be diversified.        Chinese securities companies have been tapping the overseas market recently
Both Traditional and innovative           by setting up overseas subsidiaries.
businesses        see         great
development potential. Core               Both Traditional and innovative businesses see great development
                                          potential. Mainland equity market shows a significantly higher turnover
competitive     advantages       of       velocity than other stock exchanges in the world. The Non-tradable Share
leading securities companies              Reform and the rapid economic development boomed up the market
will     become      increasingly         capitalization and free-float market cap of Chinese securities market, bringing
significant. Chinese securities           strong development opportunities for brokerage business. The regulators
sector should enjoy growth                allowed securities companies to expand the investment scope of their
                                          proprietary trading business in June 2011. The expansion in OTC market and
premium against developed                 the introduction of market-maker services will bring new income source.
markets.                                  Margin financing, asset management, private equity investment and index
                                          futures trading, the above innovative businesses have great growing potential.
                                          Core competitive advantages of leading securities companies will become
                                          increasingly significant. Brokerage services face intensified competitions and
                                          will shift from price competition to service competition, in our view. The
                                          advantages of large securities in research and integrated services could help
                                          strengthen their pricing capability and market share. Diversification and
                                          upgrade of investment demand highlight the advantages of integrated
                                          securities companies. Market concentration rate of investment banking
                                          business will remain high in future. Leading securities companies show
                                          significant advantage on innovative businesses. Net capital is the regulation
                                          focus of CSRC. We believe large securities companies with stronger capital
                                          strength possess more advantages in acquiring business qualifications.
                                          International board will favor large investment banks, in our view.
                                          Chinese securities sector should enjoy growth premium against developed
                                          markets. We believe P/E should be the key valuation reference of Chinese
                                          securities stocks, and the growth of Chinese securities sector is higher than its
Shanshan Li                               international peers. Upside potential in leverage ratio will increase ROE
lishanshan@bocomgroup.com                 further. Since there is huge growth potential in Chinese capital market and
Tel: (8610) 85182131x77                   direct financing, the innovative businesses are at infant stage and strong
                                          growth phase, valuations of Chinese securities companies should enjoy
Li Wan                                    growth premium against developed markets, in our view.
wanli@bocomgroup.com
Tel: (8610) 85182130x74                   Major risks: Falling economic growth; falling market turnover and intense
                                          competitions of brokerage services; uncertainties in the regulations.
                                         Valuation of major listed securities in A-share market
                                                                 Ticker           10PE         11PE    10PB      11PB
Download our reports from
                                         CITICS                 600030           16.4           15.4    1.8        1.7
Bloomberg: BOCM〈enter〉
                                         HAITONG                600837           16.9           14.8    1.5        1.2
                                         HUATAI                 601688           18.1           15.5    1.9        1.8
                                         GUANGFA                000776           23.9           20.6    4.4       3.9
                                         CMS                    600999           19.7           17.3    2.5        2.3
                                         EVERBRIGHT             601788           19.5           16.4    1.9        1.7
                                         CHANGJIANG             000783           17.1           14.8    1.9       1.4
                                        Source:Bloomberg (based on closing prices on 11 July 2011)
      China Securities Sector                                  13 July 2011                                    A fast growing market with great potential


I.   A fast growing market with tremendous development potential............................................................................6
     1.    China’s securities market has showed leapfrog development since 2005...................................................................6
     2.    Market size ranks on the world’s top lists ................................................................................................................8
     3.    Non-tradable Share Reform in Apr 2005 marked the development turning point.......................................................9
     4.    Proportion of direct financing and securitization ratio has large potential to increase .............................................. 11
II.  Brokerage remains major business, while capital and earnings abilities strengthening.................................... 12
     1.    Improving profitability and risk control ................................................................................................................. 12
     2.    Brokerage remains major business; revenue structure grows to be diversified......................................................... 14
     3.    Great improvement potentials on revenue structure................................................................................................ 16
     4.    Competitive advantages keep strengthening; heading to the international platform ................................................. 20
III. Traditional businesses still see development potential.......................................................................................... 22
     1.    Higher float market cap boosts development of brokerage business........................................................................ 22
     2.    Expansion of Proprietary Trading’ s investment scope ........................................................................................... 23
     3.    The growing and deepening of capital market brings new growing point ................................................................ 24
IV. Innovative businesses show higher potential.......................................................................................................... 26
     1.    Multi-level capital market brings more development opportunities......................................................................... 26
           i. ChiNext brings new earnings drivers for securities companies......................................................................... 26
           ii. OTC to see expansion; the introduction of market-maker services could bring new revenues ........................... 27
     2.    Huge potential for innovative businesses ............................................................................................................... 29
           i. The introduction of financing mechanism could boost the development of credit transaction ........................... 29
           ii. Ample growth potential and strong anti-cyclical feature of asset management business ................................... 31
           iii. Development of PE business accelerates......................................................................................................... 33
           iv. Index futures trading enjoy huge growth potential........................................................................................... 35
V.   Core competitive strength of leading securities companies to be more significant ............................................ 37
     1.    Brokerage businesses shift from price competition to service competition .............................................................. 37
     2.    Diversification and upgrade of investment demand highlight the advantages of leading securities companies ......... 39
     3.    Market concentration rate of investment banking business will remain high in future ............................................. 39
     4.    Leading securities companies show significant advantage on innovative businesses ............................................... 41
     5.    Earnings of leading securities companies are more stable....................................................................................... 43
     6.    International board favors large investment banks.................................................................................................. 44
VI. Chinese securities sector should enjoy growth premium against developed markets.................................................. 45
     1.    PE valuation should be regarded as the key reference of Chinese securities stocks.................................................. 45
     2.    Higher growth momentum of Chinese securities sector than the overall market ...................................................... 45
     3.    Upside potential for leverage ratio and ROE of Chinese securities companies ........................................................ 46
     4.    Chinese securities sector should enjoy growth premium against developed markets................................................ 48
VII. Major Risks ................................................................................................................................................................... 50




     Download our reports from Bloomberg: BOCM <enter>                                                                                                                 Page 2
      China Securities Sector                               13 July 2011                                A fast growing market with great potential


Figure 1: Total stock market value and growth rate (1990-2010)............................................................................................7
Figure 2: Total floating market value and growth rate (1990-2010).......................................................................................7
Figure 3: Trading value of A share(1992-2010) ........................................................................................................................7
Figure 4: Number of listed companies(1990-2010) ..................................................................................................................7
Figure 5: Market data of Shenzhen Stock Exchange(2010)......................................................................................................7
Figure 6:International comparison of market capitalization (2010)........................................................................................8
Figure 7:New capital raised by shares (2010)...........................................................................................................................8
Figure 8:International comparison of share trading value (2010)...........................................................................................8
Figure 9: International comparison of stock market (2010 vs. 2005) ......................................................................................9
Figure 10:SSE composite index(1990.12-2011.6)..................................................................................................................... 10
Figure 11: SSE composite index(1990.12-2005.4).................................................................................................................... 10
Figure 12: SSE composite index(2005.4-2011.6)...................................................................................................................... 10
Figure 13: Lending is still the main channel of social financing ........................................................................................... 11
Figure 14: China has a low market cap./GDP ratio .............................................................................................................. 11
Figure 15: China has high residential savings ratio............................................................................................................... 11
Figure 16: Operating revenue of China securities sector (2003-2010)................................................................................... 13
Figure 17: Total asset of China securities sector (2003-2010) ................................................................................................ 13
Figure 18: Net profit of China securities sector (2006-2010).................................................................................................. 13
Figure 19: Net capital of China securities sector (2002-2010)................................................................................................ 13
Figure 20: Operating income of CITICS(1999-2010) .............................................................................................................. 14
Figure 21: Net capital of CITICS(1999-2010) .......................................................................................................................... 14
Figure 22: Risk control standard of securities companies ..................................................................................................... 14
Figure 23: Revenue structure of China securities industry (2007-2010) ............................................................................... 15
Figure 24: Structure of fee and commission income(2007-2010)........................................................................................... 15
Figure 25: 2010 Revenue structure of listed securities........................................................................................................... 16
Figure 26: Breakup of 2010 net fee income of listed securities( of total net revenue).......................................................... 16
Figure 27: US securities industry’s net income & growth..................................................................................................... 17
Figure 28:Revenue structure of US securities industry ......................................................................................................... 17
Figure 29: Revenue structure of Goldman Sachs (2002-2010)............................................................................................... 17
Figure 30: Revenue structure of Morgan Stanley (2002-2010)............................................................................................... 17
Figure 31: Revenue structure of Nomura Group (FY2007-FY2011)..................................................................................... 18
Figure 32: Revenue structure of DB (2003-2007)................................................................................................................... 19
Figure 33: Revenue structure of corporate banking for DB (2004-2007)............................................................................... 19
Figure 34: Revenue structure of CS (2005-2007 Average) .................................................................................................... 19
Figure 35: Investment banking revenue/total net revenue for CS (2005-2007) ................................................................... 19
Figure 36: Market share of global IPO underwriting top 15 (2010)...................................................................................... 20
Figure 37: China securities companies’ subsidiaries in Hong Kong .................................................................................... 21
Figure 38: Floating market value/total stock market value (1994-2010)............................................................................. 22
Figure 39: A-share daily turnover (1992-2010)....................................................................................................................... 22
Figure 40: International comparison of turnover velocity (2010) ......................................................................................... 22
Figure 41 Proprietary trading gains/Total revenue of listed securities (2010).................................................................... 23
Figure 42: Equity’s proportions are relatively high for small securities .............................................................................. 24
Figure 43: Equity fund raising (1992-2010) ............................................................................................................................ 25
Figure 44: Number of IPO (1990-2010) ................................................................................................................................... 25
Figure 45:Fee income from IPO underwriting and sponsor (2006-2010) ............................................................................. 25
Figure 46: Debt issuance in China (1996-2010)....................................................................................................................... 25
Figure 47: Rank for GEM market’s capitalization.................................................................................................................. 26
Figure 48: Market value of GEM(2009.10-2011.5) ................................................................................................................. 27
Figure 49:Market cap. :GEM/Main board ............................................................................................................................. 27
Figure 50: Trading value :GEM/Main board......................................................................................................................... 27

      Download our reports from Bloomberg: BOCM <enter>                                                                                                     Page 3
      China Securities Sector                              13 July 2011                                A fast growing market with great potential
Figure 51: US securities’ gains from OTC market Making.................................................................................................... 28
Figure 52: Growth rate of NASDAQ trading value and gains from OTC market making ................................................. 28
Figure 53: Balance of margin finance & securities lending .................................................................................................. 30
Figure 54: Proportion of margin trading is very low in China ............................................................................................. 30
Figure 55: Margin trading contributed little to total revenue for listed securities(2010) ............................................... 30
Figure 56: TSE’s margin trading value accounted for 15% ................................................................................................... 30
Figure 57: TWSE’s margin trading value accounted for more than 40% ............................................................................. 30
Figure 58: Sensitivity analysis of interest income from credit transactions ......................................................................... 31
Figure 59: Asset management products increased fast (2005-2010) ................................................................................ 32
Figure 60: Proportion of asset management income ............................................................................................................. 32
Figure 61: US securities’ asset management revenues kept stable growth(2002-2008).................................................. 32
Figure 62: Proportion of US securities’ asset management revenues raised stably(2001-2008)..................................... 32
Figure 63: Goldman Sach’s asset management revenues were stable(2005-2010).......................................................... 33
Figure 64: Goldman Sach’s asset management fees/total revenue(2004-2010).............................................................. 33
Figure 65: Nomura’s asset management revenues kept relatively stable growth(FY2008-2011) .................................. 33
Figure 66: Nomura’s Asset management fees/total revenue(FY2007-2011)................................................................... 33
Figure 67: PE investment in China(1Q08-1Q11) ............................................................................................................... 34
Figure 68: Gain on PE/revenue for Nomura Group ............................................................................................................. 35
Figure 69: Gain on PE/revenue for Daiwa Securities(FY01-11) ........................................................................................... 35
Figure 70: Trading value of stock index futures/share trading value ................................................................................. 36
Figure 71: Trading value of stock index futures/share trading value (China).................................................................... 36
Figure 72: Investor structure by trading volume of TOPIX futures ..................................................................................... 36
Figure 73: Commission rate has dropped since 2007 ............................................................................................................ 38
Figure 74: Concentration of broker business decreased in 2009&2010 ................................................................................ 38
Figure 75: Concentration of stock brokerage (HK) ................................................................................................................ 38
Figure 76: Concentration of securities lending (HK)............................................................................................................. 38
Figure 77:Commission rate of some listed securities(1Q09-1Q11) ....................................................................................... 38
Figure 78:Business outlet number increase of China securities since 2008.......................................................................... 38
Figure 79: Top 5 and top 10 concentration of IPO fund raising(2006-2010)......................................................................... 40
Figure 80: Top 10 market share of IPO underwriting amount(2010) ................................................................................... 40
Figure 81: Underwriting amount (Stock& Bond) Top 10 (2007-2010) .................................................................................. 40
Figure 82: Global market share of IPO underwriting top 10 (2010) .................................................................................... 40
Figure 83: Market share of top 10 securities’ stock underwriting in the US (2010) ............................................................. 40
Figure 84: Registered capital for direct investment companies of securities ....................................................................... 42
Figure 85: Net asset value of asset management products ................................................................................................... 42
Figure 86: Direct investment companies of listed Securities (2010)...................................................................................... 42
Figure 87: Leading securities had more stable earnings growth .......................................................................................... 43
Figure 88:Brokerage commission/Revenue........................................................................................................................... 43
Figure 89: Equity investment/Proprietary............................................................................................................................. 43
Figure 90: China securities index performance relative to the market (2004.1-2011.6) ....................................................... 45
Figure 91: China securities index performance is highly correlated with market turnover value ..................................... 45
Figure 92: PE of securities is more volatile than the whole A-share market(2004.1-2011.6).......................................... 46
Figure 93: PB of securities is more consistent with the whole A-share market(2004.1-2011.6)...................................... 46
Figure 94:Leverage of leading EU securities.......................................................................................................................... 46
Figure 95:Leverage of leading US securities .......................................................................................................................... 46
Figure 96:ROE of leading EU securities (1997-2010).............................................................................................................. 47
Figure 97:ROE of leading US securities (1996-2010).............................................................................................................. 47
Figure 98:Leverage of China listed securities (2010) ............................................................................................................. 47
Figure 99:ROE of China listed securities (2010)..................................................................................................................... 47
Figure 100: ROA of China listed securities (2010) ................................................................................................................. 48

      Download our reports from Bloomberg: BOCM <enter>                                                                                                   Page 4
      China Securities Sector                         13 July 2011                            A fast growing market with great potential
Figure 101: PE performance of China listed securities (2008.1-2011.6) ................................................................................ 48
Figure 102: PB performance of China listed securities (2008.1-2011.6) ................................................................................ 48
Figure 103: PE performance of US listed securities (1990.2-2011.6)...................................................................................... 49
Figure 104: PB performance of US listed securities (1990.2-2011.6)...................................................................................... 49
Figure 105: PE performance of Japan listed securities (2008.1-2011.6)................................................................................. 49
Figure 106: PB performance of Japan listed securities (1999.9-2011.6)................................................................................. 49
Figure 107: International comparison of valuation and financial ratios .............................................................................. 51




     Download our reports from Bloomberg: BOCM <enter>                                                                                       Page 5
China Securities Sector             13 July 2011                   A fast growing market with great potential


                                    I.      A fast growing market with tremendous
                                            development potential

                                    1. China’s securities market has showed leapfrog
                                       development since 2005

                                    China’s securities industry began to form its shape in the early 90s, with
                                    Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE)
                                    established in late 1990 and July 1991, respectively. Only 53 companies were
                                    listed on the two exchanges in 1992 and total market cap was RMB106bn. The
                                    cap first exceeded RMB1tn in 1996. The development of Chinese equity
                                    market saw a turning point in 2005 and the total market cap grew beyond
                                    RMB10tn in 2006 which then surged to over RMB40tn in 2007. Free-float
                                    market cap continued to expand since the Non-tradable Share Reform in 2005.
                                    Free float ratio increased to 2/3 in late 2010 from 1/3 before the reform.

                                    As of the end of 2010, 894 companies were listed on SSE with total market
                                    cap and free-float market cap reaching RMB17.9tn and RMB14.23tn,
                                    respectively. Number of companies listed on SZSE totaled 1169 while total
                                    market cap and free-float market cap amounted to RMB8.46tn and
                                    RMB5.08tn. SSE houses more large caps and SZSE is catered for small and
                                    mid caps.

                                    Turnover volume increased fast. Annual turnover has never exceeded
                                    RMB7tn before 2006. The number grew to near RMB9tn in 2006 and
                                    expanded to over RMB20tn for the following years from 2007. Turnover
                                    reached RMB54.25tn in 2010.

                                    SME Board, Third Board Market and ChiNext were launched since 2004,
                                    creating a more systematic capital market.

                                         Main Board of SSE and SZSE were launched in 1990-1992;
                                         B-share market were introduced in SSE and SZSE in 1992 (B-shares are
                                         RMB-denominated shares and could be traded in foreign currencies by
                                         foreign investors). Local investors were allowed to trade B-shares
                                         starting from 2001. The B Shares trades are of smaller scales due to
                                         capital flow regulation;
                                         SZSE launched SME Board in May 2004;
                                         SZSE began a pilot scheme in the Zhongguancun Science Park,
                                         providing share transfer services for non-listed firms within the region
                                         (the New Third Board Market, or the OTC market);
                                         ChiNext was officially launched in SZSE in Oct 2009. Listed companies
                                         on ChiNext increased by 117 in 2010.




Download our reports from Bloomberg: BOCM <enter>                                                     Page 6
China Securities Sector                                                     13 July 2011                         A fast growing market with great potential


 Figure 1: Total stock market value and growth rate                                                Figure 2: Total floating market value and growth
 (1990-2010)                                                                                       rate (1990-2010)

                 Total market value                                          yoy% 400%                           Total floating market value                                                  yoy%
   50,000                                                                                           20,000                                                                                      300%
             Bn yuan                                                                                              Bn yuan
   40,000                                                                                  300%
                                                                                                    15,000                                                                                         200%
   30,000                                                                                  200%
                                                                                                    10,000                                                                                         100%
   20,000                                                                                  100%
                                                                                                     5,000                                                                                         0%
   10,000                                                                                  0%
      -                                                                                    -100%          -                                                                                        -100%




                                                                                                                 1990
                                                                                                                         1992
                                                                                                                                 1994
                                                                                                                                        1996
                                                                                                                                               1998
                                                                                                                                                      2000
                                                                                                                                                             2002
                                                                                                                                                                    2004
                                                                                                                                                                            2006
                                                                                                                                                                                    2008
                                                                                                                                                                                            2010
            1990
                   1992
                          1994
                                 1996
                                         1998
                                                2000
                                                       2002
                                                              2004
                                                                     2006
                                                                             2008
                                                                                    2010



 Source:WIND                                                                                       Source:WIND

 Figure 3: Trading value of A share(1992-2010)                                                     Figure 4: Number of listed companies(1990-2010)
                                        Trading value of A-share                                                                         Number of listed companies
       Bn yuan
  60,000                                yoy%(R)                  500%                               2,500                                                                                            400
                                                                                                                                         yoy change
  50,000                                                         400%                               2,000                                                                                            300
  40,000                                                         300%
                                                                                                    1,500
  30,000                                                                              200%                                                                                                           200
  20,000                                                                              100%          1,000
                                                                                                     500                                                                                             100
  10,000                                                                              0%
      -                                                                               -100%           -                                                                                              -
            1992
                   1994
                          1996
                                 1998
                                         2000
                                                2002
                                                       2004
                                                              2006
                                                                     2008
                                                                             2010




                                                                                                                1990
                                                                                                                        1992
                                                                                                                                1994
                                                                                                                                        1996
                                                                                                                                               1998
                                                                                                                                                      2000
                                                                                                                                                             2002
                                                                                                                                                                     2004
                                                                                                                                                                             2006
                                                                                                                                                                                     2008
                                                                                                                                                                                              2010
 Source:WIND                                                                                       Source:WIND

                                        Figure 5: Market data of Shenzhen Stock Exchange(2010)
                                                         Bn yuan                                               2010                                   Structure                                2010 vs.2009
                                           Number of listed companies                                          1169                                     100%                                      40.8%
                                           Main Board                                                           485                                      41%                                       3.9%
                                           SME Board                                                            531                                      45%                                      62.4%
                                           ChiNext                                                              153                                      13%                                     325.0%
                                           Total market value                                                  8,642                                    100%                                      45.8%
                                           Main Board                                                          4,369                                     51%                                       7.1%
                                           SME Board                                                           3,536                                     41%                                     109.6%
                                           ChiNext                                                              737                                       9%                                     357.4%
                                           Total floating market value                                         5,077                                    100%                                      39.3%
                                           Main Board                                                          3,262                                     64%                                      13.8%
                                           SME Board                                                           1,615                                     32%                                     115.2%
                                           ChiNext                                                              201                                       4%                                     570.8%
                                           Fund raised by share                                                 410                                     100%                                     145.9%
                                           Main Board                                                           79                                       19%                                      -11.2%
                                           SME Board                                                            235                                      57%                                     307.2%
                                           ChiNext                                                              96                                       23%                                     372.0%
                                           Share trading value                                                24,132                                    100%                                      27.4%
                                           Main Board                                                         13,977                                     58%                                       0.3%
                                           SME Board                                                           8,583                                     36%                                      77.8%
                                           ChiNext                                                             1,572                                     7%                                      759.8%
                                        Source: Shenzhen Stock Exchange

Download our reports from Bloomberg: BOCM <enter>                                                                                                                                                    Page 7
China Securities Sector                                                                        13 July 2011                                                 A fast growing market with great potential


                                                                                              2. Market size ranks on the world’s top lists
                                                                                              SSE ranked the 6th among the world’s exchanges in terms of market
                                                                                              capitalization in 2010. As for equity turnover, SSE and SZSE ranked 3rd and
                                                                                              5th, respectively. SSE and SZSE ranked 4th and 6th in equity financing amount
                                                                                              (including IPO financing and refinancing activities). Combined equity
                                                                                              financing amount of the two exchanges was only behind NYEX which
                                                                                              topped the list. Compared to 2005, the two exchanges made significant
                                                                                              progresses in world’s rankings in 2010.

                                                                                                      Figure 6:International comparison of market capitalization (2010)

                                                                                                                                             Bn$         Domestic market capitalization
                                                                                                                      16,000
                                                                                                                      12,000
                                                                                                                           8,000
                                                                                                                           4,000
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                                                                                                      Source:WFE

 Figure 7:New capital raised by shares (2010)                                                                                                      Figure 8:International comparison of share trading
                                                                                                                                                   value (2010)
           $Bn                                      IPO                           Refinancing                                                              $Bn           Value of share trading
  250                                                                                                                                                         17,796
  200
                                                                                                                                                     20,000
                                                                                                                                                                 12,659
                                                                                                                                                     15,000
  150                                                                                                                                                                 4,486
                                                                                                                                                     10,000               3,793
  100                                                                                                                                                                         3,5642,750
                                                                                                                                                      5,000
    50                                                                                                                                                  -
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 Source: Shanghai & Shenzhen stock exchange                                                                                                        Source:WFE




Download our reports from Bloomberg: BOCM <enter>                                                                                                                                                 Page 8
China Securities Sector             13 July 2011                   A fast growing market with great potential
                                    Figure 9: International comparison of stock market (2010 vs. 2005)
                                                  $Bn                  2010       Rank       2005      Rank
                                     Domestic market cap.
                                     Shanghai SE                       2,716.5       6        286.2       21
                                     Shenzhen SE                       1,311.4       14       115.7       32
                                     Value of share trading
                                     Shanghai SE                       4,486.5        3       238.5       18
                                     Shenzhen SE                       3,563.8        5       154.3       25
                                     New capital raised
                                     Shanghai SE                        83.5          4        3.7        24
                                     Shenzhen SE                        60.3          6        0.4        43
                                     Source: WFE


                                    3. Non-tradable Share Reform in Apr 2005 marked
                                       the development turning point
                                    Free float ratio was only 1/3 before 2005 due to the non-tradable share issue.
                                    During the early establishment of the securities market, the regulators
                                    divided the equities into two types, namely the non-tradable shares like the
                                    State-owned shares and Legal person shares, and tradable shares like public
                                    shares, so as to avoid the change in the controlling stake of state-owned
                                    enterprises. Non-tradable share issue refers to the facts that the equity of a
                                    listed company was divided into the above mentioned two types of shares
                                    with different costs and float rights.

                                    China began its reform of state-owned enterprises in 1998. To meet the
                                    capital demand for reform and enhance its social security system, the
                                    government started to reduce its shareholding in state-owned enterprises in
                                    2H1998, leading to severe market plunge. The government soon stopped the
                                    stake cut activities in the beginning of 1999, and the equity market regained
                                    upswing momentum. In June 2001, the State Council proposed to reduce the
                                    shareholding in state-owned enterprises to raise funds for social security,
                                    dragging down market performances again. While the market gained short-
                                    term strength in Oct when the government announced to withdraw the stake
                                    cut policy, the equity market remained weak as investors were concerned
                                    over the possible stake cut.

                                    In early 2004, the State Council addressed the non-tradable share issue and
                                    the CSRC issued the "Notice on related issues about experimental Non-
                                    tradable Share Reform” in Apr 2005, the reform was initiated officially.
                                    Shareholders of non-tradable share will pay the consideration to
                                    shareholders of tradable shares, so that the non-tradable shares could
                                    gradually be traded on the market.

                                    The state-owned shares became float after the reform, and it was different
                                    from a stake cut in that the pressure in secondary markets could be absorbed
                                    gradually. The problem that had dragged the development of equity market
                                    for a long time was ultimately resolved, accompanied with robust economic
                                    fundamentals, giving rise to an unprecedented bull market in 2006 and 2007.

Download our reports from Bloomberg: BOCM <enter>                                                      Page 9
China Securities Sector             13 July 2011                                       A fast growing market with great potential
                                    SHCOMP reached its peak of 6092pts on 16 Oct 2007, up 415.9% from the
                                    start of 2006.

                                       Figure 10:SSE composite index(1990.12-2011.6)

                                        7,000                               Shanghai Stock Exchange Composite Index
                                        6,000
                                                                                                              Apr.2005 Non-tradable
                                        5,000
                                                                                                              Share Reform
                                        4,000
                                        3,000
                                        2,000
                                        1,000
                                          -    0

                                                          2

                                                                     4

                                                                                6


                                                                                           8

                                                                                                      0

                                                                                                                 2


                                                                                                                            4

                                                                                                                                       6


                                                                                                                                                  8

                                                                                                                                                             0
                                            -9

                                                       -9

                                                                  -9

                                                                             -9

                                                                                        -9

                                                                                                   -0

                                                                                                              -0

                                                                                                                         -0

                                                                                                                                    -0


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                                                                                    D

                                                                                               D

                                                                                                          D

                                                                                                                     D

                                                                                                                                D


                                                                                                                                           D

                                                                                                                                                      D
                                       Source:Bloomberg

                                       Figure 11: SSE composite index(1990.12-2005.4)
                                                                              Shanghai Stock Exchange Composite Index
                                        2,500
                                                      # of Newly listed                  Dec.96
                                        2,000         companies                          price limit 10%
                                        1,500         doubled

                                        1,000
                                                                                                                                           reduction of
                                         500                                             loose monetary                                    state-owned
                                                                                         policy                                            shares
                                          -
                                               0

                                               1

                                               2

                                               3

                                               4

                                               5

                                               6

                                               7

                                               8

                                               9

                                               0

                                               1

                                               2

                                               3

                                               4
                                            -9

                                            -9

                                            -9

                                            -9

                                            -9

                                            -9

                                            -9

                                            -9

                                            -9

                                            -9

                                            -0

                                            -0

                                            -0

                                            -0

                                            -0
                                         ec

                                         ec

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                                        D

                                        D

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                                        D

                                        D

                                        D

                                        D

                                        D

                                        D

                                        D

                                        D

                                        D

                                        D

                                        D

                                        D
                                       Source:Bloomberg

                                       Figure 12: SSE composite index(2005.4-2011.6)
                                                                             Shanghai Stock Exchange Composite Index
                                        7,000                                                     tightening monetary policy,
                                                   Split share structure reform,
                                        6,000                                                     financial crisis, slowing
                                                   strong economic growth,
                                        5,000                                                     economic growth,ect.
                                                   loose monetary policy,
                                                                                                                        large financing of
                                        4,000      etc.
                                                                                                                        banking industry;
                                        3,000
                                                                                                 4 trillion investment Government financing
                                        2,000                                                                           platform loans,etc.
                                                                                                plan, loose money
                                        1,000                                                   supply,ect.
                                          -
                                              Apr-05 Jan-06 Oct-06                  Jul-07 Apr-08 Jan-09 Oct-09                     Jul-10 Apr-11

                                       Source:Bloomberg




Download our reports from Bloomberg: BOCM <enter>                                                                                                        Page 10
China Securities Sector                        13 July 2011                    A fast growing market with great potential

                                               4. Proportion of direct financing and securitization
                                                  ratio has large potential to increase
                                               The proportion of indirect financing in total social financing kept shrinking,
                                               and the proportion of direct financing has large potential to increase when
                                               compared to other developed markets. With a relatively high savings ratio
                                               and low securitization ratio, Chinese securities market sees a tremendous
                                               development potential.

                                                  Figure 13: Lending is still the main channel of social financing
                                                                       Proportion of loans in social financing
                                                   100%                Corporate bonds
                                                    90%                Stock financing of nonfinancial enterprises
                                                    80%
                                                    70%
                                                    60%
                                                    50%
                                                    40%
                                                    30%
                                                    20%
                                                    10%
                                                     0%
                                                         2



                                                        03




                                                         4



                                                        05



                                                        06



                                                        07



                                                        08



                                                        09




                                                         0
                                                        03



                                                        04



                                                        05



                                                        06



                                                        07



                                                        08



                                                        09



                                                        10
                                                      -0




                                                      -0




                                                      -1
                                                     J-



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                                                     D-




                                                     D-



                                                     D-



                                                     D-



                                                     D-



                                                     D-
                                                     D




                                                     D




                                                     D
                                                  Source:CEIC


 Figure 14: China has a low market cap./GDP ratio                     Figure 15: China has high residential savings ratio
  Market value/GDP                                                                   China              Japan            US
  1.6            China    South Korea     UK      Australia     US    30%            UK                 Germany
  1.4                                                                 25%
  1.2
  1.0                                                                 20%
  0.8                                                                 15%
  0.6                                                                 10%
  0.4
                                                                       5%
  0.2
  -                                                                    0%
        S-03   J-04 M-05 D-05 S-06   J-07 M-08 D-08 S-09 J-10               1995   1997   1999   2001    2003     2005   2007    2009


 Source: Bloomberg                                                    Source: Bloomberg




Download our reports from Bloomberg: BOCM <enter>                                                                               Page 11
China Securities Sector             13 July 2011                   A fast growing market with great potential

                                    II.     Brokerage remains major business, while
                                            capital    and    earnings     abilities
                                            strengthening
                                    1.    Improving profitability and risk control
                                    Prior to 2004, operations of securities companies in China were not well
                                    regulated and the regulations consisted of numerous loopholes. Some
                                    securities companies embezzled money on clients’ account and provided
                                    inaccurate and misleading financial statements. The stock index and turnover
                                    volume saw a downturn in late 2003 to early 2004, which caused the risks of
                                    the companies to be exposed amid continuing losses. CSRC began its
                                    regulations on securities companies in Aug 2004 and has disposed of 31
                                    securities companies by Aug 2007.

                                    While disposing high-risk securities companies, the regulatory authorities
                                    also encouraged innovative businesses of quality securities companies. In
                                    Aug 2004, the Securities Association of China (SAC) began to make
                                    assessments of the securities companies. Under the assessment scheme, only
                                    securities companies granted with “innovative” rating could conduct
                                    innovative businesses such as asset management. The assessment was
                                    completed in Aug 2007, and 29 brokerages were granted “innovative” rating
                                    and 31 received “regulated” rating.

                                    The CSRC issued the “Guidelines on the regulation of the classifications of
                                    securities companies (trial)” in July 2007, classifying securities companies
                                    into five categories (ABCDE) including 11 levels. The new classification and
                                    evaluation system replaced the “innovative” and “regulative” assessment. In
                                    2010, 10 companies including CITIC, Haitong, CICC, China Galaxy Securities
                                    and GTJA, were evaluated with the highest level of AAA.

                                    The regulations on securities companies and the Non-tradable Share Reform
                                    helped the securities industry gain a leapfrog development. The capital
                                    strength and profitability of securities companies were largely improved.
                                    According to the statistics released by the SAC, the industry reported losses
                                    in 2004. Annual revenue of the industry never exceeded RMB30bn in 2002-
                                    2005. The profitability, however improved sharply starting from 2006. Net
                                    profit of the industry surpassed RMB25bn in 2006 and grew beyond
                                    RMB130bn in 2007. The figure managed to stand at around RMB50bn amid
                                    the financial turmoil in 2008. If we look at the revenue of CITIC Securities in
                                    1999-2010, we could see that the annual revenue never reached RMB2.5bn
                                    before 2006 but the figure jumped to RMB6bn in 2006 and grew beyond
                                    RMb10bn for each of the following years after 2007.

                                    Net capital of the securities industry as a whole expanded sharply from less
                                    than RMB100bn in 2006 to nearly RMB300bn in 2007. Net capital of CITIC
                                    Securities was less than RMB5bn prior to 2006. The figure grew above
                                    RMB10bn in 2006 and exceeded RMB40bn as of the end of 2010.


Download our reports from Bloomberg: BOCM <enter>                                                       Page 12
China Securities Sector                        13 July 2011                              A fast growing market with great potential


                                                    Figure 12:Number of securities companies(1990-2010)

                                                                              Number of securities companies
                                                      600                    553      467
                                                      500              481550
                                                                                   523        330
                                                      400                                          305
                                                                                                      255
                                                      300            171                        310      199
                                                                                                               161
                                                      200                                                           153 109 106
                                                                                                            177 152
                                                      100    25 29                                                     142 107
                                                      -
                                                            1990           1994          1998               2002           2006             2010

                                                    Source:CEIC

 Figure 16: Operating revenue of China securities                           Figure 17: Total asset of China securities sector
 sector (2003-2010)                                                         (2003-2010)

      Operating revenue:top 20 Operating revenue                                                     Total Asset:top 20           Total Asset
            Bn yuan             283.6                                         2,500           Bn yuan
   300.00                               205.3                                                                                          1,259 1,212
                                              192.7                           2,000                                       1,118
   200.00                            123.1                                    1,500                                               750
                           62.7                                               1,000
   100.00   23.4 16.9 -                                                                   277 147 166 385
                                                                                500
      -                                                                         -
           03

                  04

                         05

                                06

                                       07

                                               08

                                                      09

                                                             10




                                                                                      03

                                                                                                04

                                                                                                        05

                                                                                                                  06

                                                                                                                         07

                                                                                                                                08

                                                                                                                                       09

                                                                                                                                                10
         20

                20

                       20

                              20

                                     20

                                             20

                                                    20

                                                           20




                                                                                    20

                                                                                              20

                                                                                                      20

                                                                                                                20

                                                                                                                       20

                                                                                                                              20

                                                                                                                                     20

                                                                                                                                              20
 Source: Securities Association of China                                    Source: Securities Association of China


 Figure 18: Net profit of China securities sector                           Figure 19: Net capital of China securities sector
 (2006-2010)                                                                (2002-2010)
         Bn yuan    Net profit:top 20         Net profit                                            Net capital:top 20           Net capital
   150                 130.7                                                  500                                                             432
                                                                                      Bn yuan                                             382
                                                                              400                                               296 292
                                                    93.4
   100                                                        78.4            300
                                      49.4                                    200
                                                                                                    79                   76
    50                                                                        100                          45
             25.5                                                                         -                       -
                                                                              -
   -
                                                                                    02

                                                                                           03

                                                                                                      04

                                                                                                             05

                                                                                                                    06

                                                                                                                           07

                                                                                                                                  08

                                                                                                                                         09

                                                                                                                                                10




           2006        2007          2008      2009         2010
                                                                                  20

                                                                                         20

                                                                                                    20

                                                                                                           20

                                                                                                                  20

                                                                                                                         20

                                                                                                                                20

                                                                                                                                       20

                                                                                                                                              20




 Source: Securities Association of China                                    Source: Securities Association of China




Download our reports from Bloomberg: BOCM <enter>                                                                                             Page 13
China Securities Sector                 13 July 2011                        A fast growing market with great potential


 Figure 20: Operating income of CITICS(1999-2010)                 Figure 21: Net capital of CITICS(1999-2010)

  35,000        Operating income           yoy%(R)   600%          50,000             Net capital     yoy%(R)          300%
  30,000   Mn yuan                                   500%                   Mn yuan                                    250%
                                                                   40,000
  25,000                                             400%                                                              200%
  20,000                                             300%          30,000                                              150%
  15,000                                             200%          20,000                                              100%
  10,000                                             100%                                                              50%
                                                                   10,000
   5,000                                             0%                                                                0%
       0                                             -100%              0                                              -50%
      20 9
        00

      20 1
      20 2
        03

      20 4
      20 5
        06

      20 7
      20 8
        09
        10




                                                                       20 9
                                                                         00

                                                                       20 1
                                                                         02

                                                                       20 3
                                                                       20 4
                                                                         05

                                                                       20 6
                                                                       20 7
                                                                         08

                                                                       20 9
                                                                         10
        9


        0
        0


        0
        0


        0
        0




                                                                         9


                                                                         0


                                                                         0
                                                                         0


                                                                         0
                                                                         0


                                                                         0
      19


      20



      20



      20



      20




                                                                       19


                                                                       20


                                                                       20



                                                                       20



                                                                       20
 Source: Securities Association of China                          Source: Securities Association of China

               Figure 22: Risk control standard of securities companies
                                                                            Pre-warning standard            Standard
                Net capital/Provisions for risk capital                            ≥120%                     ≥100%
                Net capital/ Net asset                                             ≥48%                       ≥40%
                Net capital/Liabilities                                            ≥9.6%                      ≥8%
                Net asset/ Liabilities                                             ≥24%                       ≥20%
                Proprietary
                Total value of proprietary equities and derivatives/Net
                capital                                                            ≤80%                      ≤100%
                Total value of fixed income securities/Net capital                 ≤400%                     ≤500%
                Holding cost for one single equity/Net capital                     ≤24%                      ≤30%
                Market value of one single equity/ Total market value
                of the equity                                                         ≤4%                       ≤5%
                Margin trading and securities lending
                Margin trading value of one single client/Net capital                 ≤4%                       ≤5%
                Securities lending value of one single client/Net capital             ≤4%                       ≤5%
                Market value of one single stock as collateral/total
                market value of the stock                                           ≤16%                     ≤20%
               Source: Risk control measures of securities industry



                                        2.      Brokerage remains major business; revenue
                                                structure grows to be diversified
                                        Brokerage business remains the principal business in terms of revenue
                                        structure. Net income from agency broking accounted for over 50% of the
                                        total. However, the growing number of listing companies and the
                                        introduction of innovative businesses boosted the contribution of
                                        underwriting and innovative businesses, and the contribution from
                                        brokerage business kept decreasing. These changes led to a more diversified
                                        revenue structure. Revenue from agency brokerage accounted for 53.5% of
                                        the total in 2010, down 2ppts from that in 2007. As for the net fees and
                                        commissions incomes, revenue from agency broking accounted for 70.9% of
                                        the total, down 13.7ppts from that in 2007.




Download our reports from Bloomberg: BOCM <enter>                                                                 Page 14
China Securities Sector               13 July 2011                                  A fast growing market with great potential
                                     If we look at the revenue structure of listed securities companies in 2010, net
                                     fees income accounted for over 70% of the total revenue while investment
                                     returns and net interest income took up near 30%. Brokerage commission
                                     was the major contributor of the net fees income, contributing over 50% of
                                     the total. Securities underwriting and asset management contributed around
                                     13% and 3%, respectively.

                                     The regulatory authorities started to introduce innovative business in 2005.
                                     Given the relatively short development period, we expect the revenue of the
                                     innovative businesses would expand rapidly in the next few years.

                                            Apr 2005 – CSRC allowed securities companies with “innovative rating”
                                            to conduct asset management business;
                                            Sept 2007 – CSRC allowed CITIC Securities and CICC to conduct trial
                                            direct investment business;
                                            Mar 2010 – 25 securities companies obtained approval to conduct
                                            margin financing and securities lending businesses
                                            Apr 2010 – Stock index futures was introduced.

 Figure 23: Revenue structure of China securities                     Figure 24: Structure of fee and commission
 industry (2007-2010)                                                 income(2007-2010)
                   Brokerage commission net income                                       Other fee and commission net income
                   Other commission net income                                           Asset management
                   Net interest income                                                   Securities underwriting
                                                                                         Brokerage commission net income
                   Net investment income                                     100%
   80%             Other revenue                                              80%
                            66.7%                      53.5%                  60%
              55.5%                    66.3%
                                                                              40%       84.5%                  80.1%            82.1%         70.9%
   30%                                                                        20%
                                                                               0%
  -20%                                                                                   2007                  2008             2009          2010
            2007          2008       2009          2010

 Source:WIND, Bocom Int’l                                             Source: WIND, Bocom Int’l

                                         Figure 12:Revenue structure of China securities industry
                                         (2007 vs. 2010)

                                                   55.6%                             2007                       2010
                                             60%        53.5%
                                             50%
                                             40%
                                             30%                                                                 23.5%
                                                                                                                    15.5%
                                             20%                     11.3%    1.6%    8.3%                                                1.2%
                                                                  3.2%             3.4%                                          6.2%
                                             10%                           1.4%                                                     -0.1%    0.8%
                                              0%
                                                                                  management
                                                     commission




                                                                                                                   Investment


                                                                                                                                 Net income




                                                                                                                                                 Other income
                                                                   Underwriting




                                            -10%
                                                                                                Net interest
                                                      Brokerage




                                                                                                                                  from FV
                                                                                                                                  changes
                                                                                                 income
                                                                                    income




                                                                                                                      gains
                                                                     income

                                                                                     Asset




                                         Source:WIND




Download our reports from Bloomberg: BOCM <enter>                                                                                               Page 15
China Securities Sector                         13 July 2011                      A fast growing market with great potential


 Figure 25: 2010 Revenue structure of listed                             Figure 26: Breakup of 2010 net fee income of listed
 securities                                                              securities( of total net revenue)
                Net commission fee income   Net interest income                 Brokerage commission               Underwriting income
  110%          Investment gains            Others                       100%   Asset management income
   90%                                                                    80%
   70%                                                                    60%
   50%
                 74% 80% 67% 79% 77% 64% 79% 74% 68% 63%   82% 81% 90%    40%
                                                                                                                                    65% 58%
                                                                                            62% 53% 55% 54% 55%
   30%     53%
                                                                          20%         50%                         45% 52% 55% 41%             49%
                                                                                28%
   10%
                                                                           0%
  -10%
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                                                                           C
 Source: Wind                                                            Source: Wind


                                                3.      Great improvement potentials on revenue
                                                        structure
                                                Contributions from brokerage business revenue in China’s securities
                                                companies were significantly higher than that of its peers in mature markets
                                                and the proportions of interest incomes and dividend returns were much
                                                lower. Incomes from asset management business and other innovative
                                                business were also relatively low. With the enhancement in China’s bond
                                                market, rapid growth of innovative businesses and the development of
                                                investment channels and products, we expect the industry’s revenue
                                                structure will improve further.

                                                U.S. market:

                                                The securities industry in the US reported profits for over 20 years from 1995
                                                to 2007. Looking at its revenue structure in 2001-2006, brokerage
                                                commissions accounted for less than 20% on average; trading income took up
                                                around 10%; incomes from asset management, fund sales and underwriting
                                                businesses each contributed around 6-8%; incomes from margin interests
                                                accounted for 3.8%. Other incomes related to securities business such as
                                                interests and dividend income shared some 30%.

                                                If we look at the revenue structure of Goldman Sachs and Morgan Stanley
                                                from 2002-2010, interest and dividend incomes accounted for 30-40% of the
                                                total; income from equities trading was around 20%; investment banking
                                                businesses took up around 10% and brokerage business no more than 10%;
                                                income from asset management stayed within 5%. Contributions from asset
                                                management business income jumped to around 20% in 2009-2010.




Download our reports from Bloomberg: BOCM <enter>                                                                                    Page 16
China Securities Sector                            13 July 2011                            A fast growing market with great potential


                                                         Figure 27: US securities industry’s net income & growth

                                                                                 Net Income(bn USD)               Growth
                                                          30                                                      27.3                        200%
                                                                                 19.3
                                                          20                                    15.0                                          100%
                                                                  13.2                   12.5
                                                                           8.8                                                                0%
                                                          10                                                             6.0
                                                                                                                                              -100%
                                                            0                                                                                 -200%
                                                          -10     2001    2002      2003   2004     2005        2006    2007       2008       -300%
                                                                                                                                              -400%
                                                          -20                                                                                 -500%
                                                          -30                                                                     -24.7       -600%

                                                         Source:SIA

                                                         Figure 28:Revenue structure of US securities industry
                                                         (2001-2006average)
                                                                                                   Commissions,
                                                          01-06Avg.          Other Revenue,
                                                                                                      17.2%                   Trading Gain
                                                                                 11.9%
                                                                                                                              (Loss), 10.4%

                                                                  Other Revenue                                                         Investment
                                                                   Related to the                                                      Account Gain
                                                                     Securities                                                         (Loss), 1.0%
                                                                  Business, 33.5%                                                     Underwriting
                                                                                                                                      Revenue, 6.8%
                                                                                             Fees, Asset                             Margin
                                                                                                         Mutual Fund
                                                                                            Management,                           Interest, 3.8%
                                                                                                         Sale Revenue,
                                                                                                7.7%
                                                                                                              6.8%
                                                         Source:SIA

 Figure 29: Revenue structure of Goldman Sachs                                   Figure 30: Revenue structure of Morgan Stanley
 (2002-2010)                                                                     (2002-2010)
                Others                                                                            Investments ,servicing and others
                Interest income                                                                   Interest and dividends
                Asset management and securities services                                          Asset management, distribution and administration
                                                                                                  Commissions
                Trading and principal investments                                                 Trading
    100%        Investment banking                                                  100%          Investment banking
     80%                                                                             80%
     60%
                                                                                     60%
     40%
     20%                                                                             40%
      0%                                                                             20%
                                                                                      0%
          02


                 03


                        04


                               05


                                      06


                                             07


                                                    08


                                                           09


                                                                  10
        20


               20


                      20


                             20


                                    20


                                           20


                                                  20


                                                         20


                                                                20




                                                                                           2002   2003   2004   2005   2006    2007   2008   2009   2010

 Source:Company data                                                             Source: Company data




Download our reports from Bloomberg: BOCM <enter>                                                                                             Page 17
China Securities Sector                13 July 2011                   A fast growing market with great potential

                                      Japan:

                                      Prior to the global financial crisis, interest and dividend incomes accounted
                                      for 47.9% of the total revenue of Nomura Group in 2007. Brokerage incomes
                                      shared 16.5% while gains from securities trading took up 14.2%. Incomes
                                      from investment banking and asset management business accounted for less
                                      than 8% of the total revenue while gains from private equities investments
                                      contributed 2.3%.

                                      Nomura reported losses in both FY08 and FY09 after the outbreak of financial
                                      crisis. Incomes from interests and dividend remained the key source of
                                      revenue, accounting for around of 50% of the total in FY08-FY09.
                                      Contributions from brokerage commissions were within 30% except FY09;
                                      Contributions from asset management business increased largely amid
                                      financial crisis given its steady feature; securities trading and private equities
                                      investments reported losses in 2009; Gains from private equities investments
                                      remained low at less than 5%.

    Figure 31: Revenue structure of Nomura Group (FY2007-FY2011)
                                                       FY2007.3     FY2008.3     FY2009.3      FY2010.3      FY2011.3
      Commissions                                         16.5%        25.4%         46.2%        29.1%          29.3%
      Fees for investment banking                          4.8%          5.3%         8.3%         8.9%           7.7%
      Asset management and portfolio service fees           7.1%       11.9%         21.1%         9.7%          10.4%
      Net gain on trading                                 14.2%          3.9%       -19.3%        30.8%          24.3%
      Gain on private equity investments                   2.3%          4.8%        -8.2%         0.9%           1.4%
      Interest and dividends                              47.9%        50.0%         49.9%        17.3%          25.0%
      Gain on investments in equity securities            -1.0%         -3.1%        -3.8%         0.4%          -1.2%
      Private equity entities product sales                   5%
      Other                                                   3%          2%            6%           3%             3%
      Total revenue                                        100%         100%          100%         100%           100%
     Source:Company data

                                      Germany:

                                      Looking at the revenue structure of Deutsche Bank, incomes from private
                                      banking and asset management businesses accounted for around 30-40% of
                                      the total revenue. Among its corporate banking and securities business, bond
                                      sales and trading accounting for some 30% of the total revenue.




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China Securities Sector                 13 July 2011                   A fast growing market with great potential


 Figure 32: Revenue structure of DB (2003-2007)                Figure 33: Revenue structure of corporate banking
                                                               for DB (2004-2007)
              Private Client and Asset Management                Sales & Trading - Debt & Other      Sales & Trading - Equity
              Corporate Banking & Securities                     Origination - Equity                Loan Products
  100%                                                           Origination - Debt                  Advisory
                                                                 Other Products                      Global Transaction Banking
   80%                                  32.7%                   80%
            38.0%      36.4%    33.4%               32.9%
   60%                                                          60%
   40%                                                          40%
   20%                                                          20%      28.6%       28.5%           31.6%      27.3%
    0%                                                           0%
                                                               -20%      2004        2005            2006        2007
            2003       2004     2005     2006        2007

 Source:Company data                                           Source: Company data

                                        Switzerland:

                                        Looking at the revenue structure of Credit Suisse before financial crisis,
                                        investment banking revenue accounted for half of the total while private
                                        banking business took up one third of it. Incomes from asset management
                                        accounted for around 7%. Bonds and equities trading accounted for over 70%
                                        of the revenue of investment banking business. In particular, incomes from
                                        bond trading were greater than that of equities trading.

 Figure 34: Revenue structure of CS               (2005-2007   Figure 35: Investment banking revenue/total net
 Average)                                                      revenue for CS (2005-2007)
                          Others,
  2005-2007 Avg.                                                   Fixed Income Trading             Equity Trading
                           9.2%                                    Debt Underwriting                Advisory and Other Fees
            Asset                                                  Equity Underwriting              Other
                                                                60%
         Manageme
                                                                50%
          nt, 6.7%                                              40%
                                                Investment      30%
                                                 Banking,
                                                                20%
             Private                              50.9%                    23.0%             25.0%
                                                                10%                                           15.6%
           Banking,                                              0%
             33.1%                                             -10%        2005              2006              2007

 Source:Company data                                           Source: Company data




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China Securities Sector             13 July 2011                                                   A fast growing market with great potential

                                    4.    Competitive advantages keep strengthening;
                                          heading to the international platform
                                    Chinese investment banks ranked higher in the world’s equity underwriting
                                    amount. Among the top 15 investment banks in IPO underwriting in the
                                    world in 2010, 5 players came from China. In particular, CICC ranked the 7th
                                    while CITIC took the 11th position.

                                    Chinese securities companies tapped the HK capital market in the mid 90s.
                                    CICC and GTJA established their HK offices in 1995. As more Chinese
                                    companies listed in overseas market since 2000, Chinese securities companies
                                    underwent rapid expansion in HK. Most of the medium- and large-sized
                                    securities companies in China have established subsidiaries or branches in
                                    HK. CITIC Securities injected US$400m in CITIC Securities International in
                                    Aug 2010, strengthening the capital base of its investment banking arm.
                                    Huatai Securities, Guangfa Securities and CMS all infused more capital into
                                    their HK subsidiaries in 2011, indicating their ambitions in overseas market.

                                    Chinese securities companies’ establishment of subsidiaries in HK or capital
                                    injection was made based on the following two considerations: (i) HK is an
                                    ideal starting point for a strategic expansion in the overseas market; (ii) HK
                                    offers a wide range of investment products which could meet the rising
                                    demands of mainland investors. The outbreak of financial crisis in 2008
                                    offered an excellent opportunity for Chinese investment banks. Chinese
                                    securities companies showed dramatic development in its internal operations,
                                    human resources, business operations and customer services over the past
                                    several years. For instance, the number of Chinese securities companies
                                    acting as underwriters of the top 30 IPO and refinancing deals rose from 5 in
                                    2006 to 8 in 2010.

                                    Grasping the opportunities brought by the financial crisis, the Chinese
                                    securities companies extended the exposure to the overseas market. CITIC
                                    Securities International, the wholly-owned subsidiary of CITIC Securities,
                                    targets to buy a stake of 19.9% in both CLSA and CA Cheuvreux. The
                                    transactions are expected to complete by 31 December 2011.

                                   Figure 36: Market share of global IPO underwriting top 15 (2010)
                                             Market share of global IPO underwriting top 15 (2010)
                                          8.4%
                                    9%       6.8%
                                                 6.7%5.3%
                                    7%                   5.0% 4.9%
                                    5%                           3.9% 3.8%3.5%
                                                                             2.9% 2.6%2.2% 1.9%
                                                                                              1.9% 1.7%
                                    3%
                                    1%
                                                         Goldman




                                                                                                                     Nomura
                                                                              Credit
                                                   JPM


                                                                   Deutsche




                                                                                                 CICC


                                                                                                              CITI
                                                                                       Merrill


                                                                                                        UBS




                                                                                                                              CITICS


                                                                                                                                                  BOC Int'l
                                          Morgan




                                                                                                                                                              Pingan
                                                                                                                                                                       Guosen
                                                                                                                                       Barclays




                                   Source: Bloomberg


Download our reports from Bloomberg: BOCM <enter>                                                                                                                               Page 20
China Securities Sector               13 July 2011                       A fast growing market with great potential


              Figure 37: China securities companies’ subsidiaries in Hong Kong
                   Company                 Subsidiary                                       Event
                                                                A wholly-owned subsidiary of CITIC Securities engaged in
                                     CITIC         Securities   investment banking, securities brokerage, futures
               CITIC Securities
                                     International              brokerage, asset management, proprietary trading and
                                                                private equity and other businesses;
                                                                Acquired Tai Fook Securities, the largest local brokerage in
               Haitong Securities    Haitong International
                                                                HK through its subsidiary in Dec 2009;
                                     CICC HK       Securities   CICC HK Securities is a wholly-owned subsidiary of CICC
               CICC
                                     Limited                    in HK;
                                                                Established in May 2009, Essence Securities Investment is a
                                     Essence      Securities
               Essence Securities                               wholly-owned subsidiary of Essence Securities in HK after
                                     Investment (HK)
                                                                its acquisition of CSSC;
                                                                GTJA Int’l, a subsidiary of GTJA in HK, listed on the main
               GTJA                  GTJA Int’l
                                                                board of HKEx in July 2010;
                                                                Huatai Securities announced in Jan 2011 to inject HK$1bn
                                     Huatai      Financial
               Huatai Securities                                into its wholly-owned subsidiary Huatai Financial
                                     Holdings (HK)
                                                                Holdings (HK) in phases;
                                                                Guangfa Securities completed its capital injection of
                                                                HK$450m into GF Holdings (HK) in May 2011 as decided
               Guangfa Securities    GF Holdings (HK)
                                                                on 22 Oct 2010, bringing the total capital of the HK
                                                                subsidiary to HK$680m;
                                                                The Board of Directors agreed on Apr 2010 to inject
               China Merchants       China        Merchants
                                                                HK$1bn into China Merchants Securities in HK. The
               Securities            Securities (HK)
                                                                capital injection was completed in Apr 2011;
                                                                Everbright Securities announced to establish the HK
               Everbright            Everbright    Financial    subsidiary, Everbright Financial Holdings, with HK$200m
               Securities            Securities Holdings        in Oct 2010. It also planned to acquire a 51% stake in
                                                                Everbright Securities (International);
                                                                Obtained CSRC approval to set up Changjiang Securities
               Changjiang            Changjiang Securities
                                                                Holdings (HK) in Nov 2010 with registered capital of
               Securities            Holdings (HK)
                                                                HK$300m;
                                                                Obtained CSRC approval to set up wholly-owned
               Industrial           Industrial     Securities
                                                                subsidiary in HK, Industrial Securities (HK) Financial
               Securities           (HK) Financial Holdings
                                                                Holdings in May 2011 with registered capital of HK$100m;
                                                                The Board of Directors decided to initiate a HK listing for
               Guoyuan Securities    Guoyuan (HK)
                                                                Guoyuan (HK) (established in July 2006) in July 2010.
              Source: BOCOM Int’l




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China Securities Sector                           13 July 2011                        A fast growing market with great potential

                                                  III. Traditional businesses                                 still     possesss
                                                       development potential
                                                  1.          Higher free float market cap                                boosts
                                                              development of brokerage business
                                                  Mainland equity market shows robust trading recently, with its turnover
                                                  ratio significantly higher than other stock exchanges in the world. Average
                                                  turnover velocity of SZSE reached 344.3% in 2010, topping the world’s list.
                                                  SSE ranked 3rd, behind NASDAQ.

                                                  The Non-tradable Share Reform and the rapid economic development
                                                  boomed up the market capitalization and free float market cap of Chinese
                                                  securities market. Together with the relatively high turnover velocity, the
                                                  average transaction value of A-shares has stayed above RMB200bn since 2009,
                                                  five times more than that reported in 2006. The huge transaction value brings
                                                  strong development opportunities for brokerage business.

 Figure 38: Floating market value/total stock market                         Figure 39: A-share daily turnover (1992-2010)
 value (1994-2010)

           Floating market value/Total market value                           2,500   100mn          A-share daily turnover
  70%
                                                                              2,000    yuan
  60%
  50%                                  2005.4 Split                           1,500
                                       share structure
  40%                                                                         1,000
  30%                                                                           500
  20%                                                                           -
        1994

               1996

                      1998

                             2000

                                    2002

                                           2004

                                                       2006

                                                               2008

                                                                      2010




                                                                                       1992 1995 1998 2001 2004 2007 2010

 Source: Shanghai & Shenzhen stock exchange                                  Source: Shanghai & Shenzhen stock exchange

                                                       Figure 40: International comparison of turnover velocity (2010)
                                                         400%                    Turnover velocity of domestic shares
                                                         300%
                                                         200%
                                                         100%
                                                              0%
                                                                                      SE




                                                                                      ge
                                                                                      SE




                                                                                        e




                                                                                     up
                                                                                        .
                                                                                     SE




                                                                                      S)
                                                                                       X




                                                                                     rp




                                                                                     rs
                                                                                   M




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                                                                                  (U




                                                                                   ...


                                                                                 ro
                                                                                 en




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                                                                                 Bö
                                                                                  ai




                                                                                 ul
                                                                                 O




                                                                                ch
                                                                               ch
                                                                              gh




                                                                               G
                                                                              nb
                                                                              zh




                                                                              xt
                                                                              Q




                                                                              e


                                                                             Ex
                                                                             SE
                                                                            Ex




                                                                            SE
                                                                            ch
                                                                           ne
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                                                                          h
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                                                                         Is




                                                                        ro
                                                                       Sh
                                                                       SD




                                                                       ea
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                                                                        o
                                                                       is
                                                                      eu




                                                                      ky
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                                                                   To
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                                                                  Sp
                                                                   E
                                                                YS




                                                                E
                                                               N




                                                              BM




                                                       Source:WFE




Download our reports from Bloomberg: BOCM <enter>                                                                         Page 22
China Securities Sector             13 July 2011                    A fast growing market with great potential

                                    2.     Expansion of Proprietary Trading’s investment
                                           scope
                                    According to “Checklist of Securities Allowed for the Proprietary Trading
                                    Business of Securities companies”, proprietary trading business of securities
                                    companies could only conduct investments in domestic stock exchanges,
                                    interbank market and OTC products of other financial institutions. While
                                    proprietary Trading of international investment banks such as Goldman
                                    Sachs and Morgan Stanley would involve structural products, foreign
                                    exchange and block trades. The Regulatory Authority released the
                                    “Regulation on the Investment Scope of the Proprietary Trading Business of
                                    Securities companies and Related Issue”. Securities companies may invest in
                                    financial products other than those listed in the Checklist through subsidiary
                                    companies. While the regulation did not state clearly if the securities
                                    companies could make investments in new Third Board Market or other
                                    financial products, the new rules offer rooms for the expansion of investment
                                    scope. We expect the proprietary trading business of securities could expand
                                    gradually.

                                    Proprietary trading businesses of small to medium-sized securities
                                    companies are more aggressive and would allocate a larger proportion in
                                    equity investments. Larger securities companies adopt a more diversified
                                    portfolio to ensure more stable earnings.


                                         Figure 41 Proprietary trading gains/Total revenue of listed securities
                                         (2010)

                                          30%                Proprietary trading gains/Total revenue

                                          20%
                                                                         29%
                                          10% 20%                                   21%         23%
                                                    11%                                   11%
                                                          6% 9% 8% 6%          9%                     6% 10% 3%
                                           0%                                                                   0%
                                                           fi c
                                               H CS




                                                  no i
                                                            fa

                                                             S




                                                   th t
                                                ut an
                                               o n al
                                              In ang
                                               G tai




                                                 ng t




                                                  Sh t
                                                 uo n
                                                          ng




                                                            k
                                                            x
                                             N wes

                                                            s
                                              ha ig h
                                            Ev CM




                                          -10%
                                                        ua




                                                       l in
                                                       ng




                                                       ea

                                                       an
                                            H stri




                                                        ci
                                                     yu
                                                     ua
                                                         I
                                                      to
                                                    IT




                                                     ji




                                                  Pa
                                                  gy
                                                   br
                                                  ua




                                                   h
                                                  ai

                                                  H




                                                du
                                           C




                                                or
                                                er




                                               Si
                                               G
                                             So
                                            C




                                         Source:Company data




Download our reports from Bloomberg: BOCM <enter>                                                             Page 23
China Securities Sector             13 July 2011                   A fast growing market with great potential


                                         Figure 42: Equity’s proportions are relatively high for small
                                         securities
                                            Equity/
                                          Proprietary
                                          investment
                                                  80%
                                                             Southwest
                                                 60%       Shanxi
                                                   Northeast                               CITICS
                                                                             Haitong
                                                 40%                              Huatai
                                                         Hongyuan             CMS
                                                                              Guangfa
                                                              GuoyuanEverbright
                                                 20%            Changjiang
                                                               Industrial
                                                      Sinolink                             Total asset(Mn)
                                                  0%
                                                        -      50,000     100,000     150,000       200,000

                                         Source:Company data



                                    3.     The growing and deepening of capital market
                                           brings new growing point
                                    Proceeds raised in equity market never exceeded RMB200bn before 2006. IPO
                                    activities were suspended in 2005 due to Non-tradable Share Reform and the
                                    proceeds raised that year were only some RMB30bn. The figure climbed to
                                    above RMb100bn after 2006 and the equity financing scale grew beyond
                                    RMB1tn in 2010 due to financing activities of state-owned banks and the
                                    listings in of ChiNext (over 300 IPOs during the year). Net income from
                                    underwriting business reached RMB25bn in 2010, up 103.8% from 2009.

                                    While IPO financing of large companies would gradually decrease in the
                                    future, the listing demand of SMEs remains strong. Together with demands
                                    for re-financing, financial advisory, M&A, issuance of corporate bonds, we
                                    expect the investment banking business will maintain a strong growing
                                    momentum.




Download our reports from Bloomberg: BOCM <enter>                                                      Page 24
China Securities Sector                                           13 July 2011                            A fast growing market with great potential


 Figure 43: Equity fund raising (1992-2010)                                                   Figure 44: Number of IPO (1990-2010)

                            Equity fund raising                          yoy%(R)                                            Number of IPO
   1,200                                                                       800%            300
              Bn yuan                                                                          250                                              IPO pause
                                                                                      600%
    900                                                                                                                                         (2005.5-2006.6)
                                                                                               200
                                                                                      400%                                                       due to Split share
    600                                                                                        150
                                                                                      200%                                                      structure reform
                                                                                               100
    300                                                                               0%        50
     -                                                                                -200%    -
             1992
                     1994
                             1996
                                     1998
                                            2000
                                                   2002
                                                          2004
                                                                 2006
                                                                        2008
                                                                               2010




                                                                                                      1990

                                                                                                             1992
                                                                                                                    1994

                                                                                                                           1996
                                                                                                                                  1998

                                                                                                                                         2000
                                                                                                                                                 2002
                                                                                                                                                         2004

                                                                                                                                                                2006
                                                                                                                                                                       2008

                                                                                                                                                                              2010
 Source:WIND                                                                                  Source: WIND

 Figure 45:Fee income from IPO underwriting and                                               Figure 46: Debt issuance in China (1996-2010)
 sponsor (2006-2010)
                     Fee income from IPO underwriting and                                                            Issuance of Corporate Bond
                     sponsor
   20,000                                          17,032                                                            Corporate Bond/Issuance of
                    Mn yuan
                                                                                               600                   Debt(excl.CBN&Fin.Bond)                                  20%
   15,000
                                                                                               400        Bn yuan                                                             15%
   10,000                           7,616                                                                                                                                     10%
                                                                 5,315                         200
                    3,547                                                                                                                                                     5%
    5,000                                          2,355
                                                                                                -                                                                             0%
         -
                                                                                                     96

                                                                                                            98

                                                                                                                   00

                                                                                                                             02

                                                                                                                                    04

                                                                                                                                             06

                                                                                                                                                          08

                                                                                                                                                                  10
                    2006            2007           2008          2009          2010
                                                                                                   19

                                                                                                          19

                                                                                                                 20

                                                                                                                           20

                                                                                                                                  20

                                                                                                                                           20

                                                                                                                                                        20

                                                                                                                                                                20
 Source:WIND                                                                                  Source: WIND




Download our reports from Bloomberg: BOCM <enter>                                                                                                                        Page 25
China Securities Sector             13 July 2011                 A fast growing market with great potential

                                    IV. Innovative               businesses            show         higher
                                        potential
                                    1.     Multi-level capital market                  brings       more
                                           development opportunities

                                         i. ChiNext brings new earnings drivers for securities
                                            companies

                                    SZSE launched ChiNext in Oct 2009. As of the end of 2010, market cap of
                                    ChiNext reached RMB736.5bn, up 357% from that in 2009YE. Equity
                                    transaction amount soared 760% YoY to RMB1.57tn. As of the end of 2010,
                                    SZSE’s ChiNext ranked 4th among all GEMs in the world in terms of market
                                    capitalization.

                                    While ChiNext showed rapid development, the business scale remains low
                                    when compared to the main board. Market cap of ChiNext accounted for
                                    2.77% of the total market cap in 2010YE while equity transaction amount
                                    represented 2.88% of the total. The GEM in Korea and US took up 8.6% and
                                    29.0% of the market share during the same period, indicating that China’s
                                    ChiNext still enjoy a large development potential.

                                    The development of ChiNext would also benefit the brokerage, underwriting
                                    and private equity businesses of securities companies.

                            Figure 47: Rank for GEM market’s capitalization
                                                                                 Domestic market cap.
                                     Exchange                GEM market                                 Rank
                                                                                    $Mn (2010)
                            SIX Swiss Exchange          SPI EXTRA (s/m-cap)          272,565.4           1
                            London SE Group             AIM                          123,498.5           2
                            Osaka Securities Exchange   JASDAQ                       117,124.4           3
                            Shenzhen SE                 ChiNext                      111,768.7           4
                            Korea Exchange              Kosdaq                        84,441.3           5
                            TSX Group                   TSX Venture                   72,509.9           6
                            BM&FBOVESPA                 Organized OTC market          24,201.7           7
                            Deutsche Börse              Entry Standard                17,419.5           8
                            Hong Kong Exchanges         GEM                           17,324.3           9
                            Tokyo SE Group              Mothers                       16,167.6           10
                            Source: WFE




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China Securities Sector                 13 July 2011                    A fast growing market with great potential


                                          Figure 48: Market value of GEM(2009.10-2011.5)

                                                      Bn yuan            Market value of GEM
                                           1,000                         Floating market value of GEM
                                             800
                                             600
                                             400
                                             200
                                                 0




                                             M 0




                                                10




                                             M 1
                                             D 9


                                             F- 0




                                                 10

                                             A 0




                                             D 0

                                                 11
                                             A 0

                                                  0




                                             A 1
                                                  9


                                                  9




                                             M 0




                                                  0


                                             N 0

                                                  0




                                                  1
                                              J- 1
                                                 1




                                              J- 1




                                                 1
                                               -1


                                               -1




                                               -1
                                               -0
                                               -0




                                               -1
                                               -1
                                               -0




                                               -1




                                               -1




                                               -1




                                               -1
                                              J-



                                             S-




                                              J-
                                             F-
                                             N
                                            O




                                             O
                                          Source:CEIC


 Figure 49:Market cap. :GEM/Main board                          Figure 50: Trading value :GEM/Main board

                 Korea:KOSDA/KOSPI                                              Korea:KOSDA/KOSPI
                 US:NASDAQ/NYSE                                                 US:NASDAQ/NYSE
                 Japan:Mothers/(1st+2nd section )                150%           Japan:Mothers/(1st+2nd section )
  40%
                 HK:GEM/Main board                                              HK:GEM/Main board
  30%                                                            100%
  20%
                                                                  50%
  10%
   0%                                                              0%
         2005    2006     2007   2008     2009       2010               2005   2006    2007   2008      2009     2010

 Source:WFE, Korea exchange, TSE                                Source: WFE, Korea exchange, TS


                                         ii. OTC to see expansion; the introduction of market-maker
                                             services could bring new revenues

                                    Established in 2001, the Agency Share Transfer System, also known as the
                                    Third Board, was first introduced to provide a platform for the transfer and
                                    transaction of shares of delisted companies. In 2006, SZSE began a pilot
                                    scheme in the Zhongguancun Science Park, providing share transfer services
                                    for non-listed firms within the region (the New Third Board Market, OTC
                                    market). To develop a multi-level capital market system, it is inevitable to
                                    build a nationwide OTC trading market and the OTC expansion is essential.

                                    Given regional restrictions, the absence of market-maker services and
                                    reasonable pricing mechanism, the pilot scheme of the New Third Board
                                    developed slowly in the past 5 years with thin trading volumes. The
                                    regulatory authorities may add a market-make rule to boost liquidity in the
                                    non-listed trading market. With the expansion in number of companies, all
                                    new technology science parks in the country might be gradually involved in
                                    the market. According to data announced on the Ministry of Science and


Download our reports from Bloomberg: BOCM <enter>                                                              Page 27
China Securities Sector                 13 July 2011                   A fast growing market with great potential
                                        Technology, national high-technology science parks totaled 83 as of 18 Mar
                                        2011. The current OTC market only include Zhongguangcun Science Park, it
                                        is expected that the remaining 82 science parks will be included in phases.

                                        Total market cap of OTC market reaches around RMB20bn with 85 listed
                                        firms. In particular, Zhongguancun Science and Technology Park owned
                                        15,700 firms in 2010YE and achieved total profit of RMB129.9bn. Excluding
                                        the 175 listed firms (Source: Official website of Zhongguancun Science and
                                        Technology Park), the listing ratio is less than 1%, implying ample potential
                                        projects. Assuming the expansion of 5 new zones each year in the next 5
                                        years, 5 firms to go listing each year in each new zone and a market cap of
                                        RMB300m for each firm on average, potential market cap shall exceed
                                        RMB100bn after 5 years. Given the increased market cap upon capacity
                                        expansion and active trading, share transfer, additional issuance and M&A of
                                        listed companies will provide ample profit growth potential for securities
                                        companies’ high value-added services such as underwriting and
                                        management, private equity, restructuring and financial advisory.

                                        It is expected that OTC market should have similar framework with the
                                        counter market in Taiwan. The OTC transactions in the counter market of
                                        Taiwan account for around 20% of the main board trading value. After the
                                        establishment of securities counter trading center in Nov 1994, trading value
                                        surged markedly in 2 years and maintained high afterwards. The revenue of
                                        OTC market makers in the US securities industry reached around US$800m
                                        to US$1bn in 2002-08, and the revenue of OTC market marking accounted for
                                        around 15.5% of total fee income.


 Figure 51: US securities’ gains from OTC market              Figure 52: Growth rate of NASDAQ trading value
 Making                                                       and gains from OTC market making
           Gain from OTC Market Making                                Growth rate of gains from OTC market making
                                                                      Growth rate of NASDAQ trading value(RHS)
            Growth rate of gains from OTC market making
          $Mn                                                   20%                                            300%
  5,000   3,968                                       20%
  4,000                                               0%         0%                                            250%
  3,000                                               -20%            2001 2002 2003 2004 2005 2006 2007       200%
                                                               -20%
  2,000         1,3911,054                            -40%                                                     150%
                            980 755         853 985
                                        753                    -40%
  1,000                                               -60%                                                     100%
      0                                              -80%      -60%                                            50%
          2001 2002 2003 2004 2005 2006 2007 2008              -80%                                            0%

 Source:SIA                                                   Source:SIA




Download our reports from Bloomberg: BOCM <enter>                                                           Page 28
China Securities Sector             13 July 2011                    A fast growing market with great potential

                                    2.     Huge potential for innovative businesses
                                    While China has accelerated the launch of innovative businesses in recent
                                    years, development of innovative businesses such as margin trading,
                                    securities lending and index futures is still subjected to strict control and
                                    regulations. Given the easing of regulatory policy, the innovative businesses
                                    could enjoy ample growth potential.

                                         i. The introduction of financing mechanism could boost the
                                            development of credit transaction

                                    In Oct 2008, CSRC introduced a pilot scheme for margin trading and
                                    securities lending businesses. It approved 3 groups of 25 pilot securities
                                    companies with potential facilities of around RMB90bn. By May 2011, margin
                                    financing balance still reached RMB25.76bn (RMB179m of which was for
                                    securities lending business).

                                    Margin financing business currently contributes limited profit to securities
                                    companies. According to FY10 annual results data, interest income of margin
                                    trading business of CITIC, Haitong, GF and Huatai contributed less than
                                    0.5% of their operating revenue, while that of CMS and Everbright were
                                    slightly higher at 1.4% and 0.6% respectively. Even if the facilities were fully
                                    utilized, the contribution rate would still be less than 2%.

                                    Constraints hindering margin trading and securities lending businesses
                                    include:

                                          Only 50 constituents of SHCOMP Index and 40 constituents of SZSE are
                                          available for margin trading and securities lending;
                                          Securities companies are unable to use leverage given the absence of
                                          financing mechanism (such as Securities Finance Companies which
                                          provide the securities for securities lending or margin financing);
                                          The financing rates of securities companies are basically unified, failing
                                          to reflect the difference in financing costs and required rate of return.

                                    Credit transactions contribute around 15% of total transaction value in Japan
                                    in recent years against over 40% contribution in Taiwan. Turnover velocity is
                                    also higher than general investors. There is financing mechanism in Japan
                                    and Taiwan. In order to facilitate the rapid development of margin financing
                                    business in China, regulators are likely to introduce financing mechanism as
                                    soon as possible.

                                    Assuming that the margin financing transactions account for 2-20% of spot
                                    market turnover, average margin trading and securities lending balances
                                    account for 80% and 20% of total balance respectively, interest spread of
                                    margin trading and securities lending businesses reaches 3% and self-owned
                                    capital accounts for 70% of margin trading business, net interest income of
                                    margin trading and securities lending businesses would contribute 5-50%
                                    increase in operating revenue in 2010.


Download our reports from Bloomberg: BOCM <enter>                                                        Page 29
China Securities Sector                        13 July 2011                           A fast growing market with great potential
                                                 Figure 53: Balance of margin finance & securities lending
                                                                            Balance of marging finance & Short selling
                                                  Mn yuan                   Growth MoM(R)
                                                  30000                                                                                    200%
                                                  25000
                                                                                                                                           150%
                                                  20000
                                                  15000                                                                                    100%
                                                  10000
                                                                                                                                           50%
                                                   5000
                                                       0                                                                                   0%
                                                           M-10      M-10     J-10        S-10        N-10       J-11    M-11       M-11

                                                 Source:CEIC

 Figure 54: Proportion of margin trading is very low                    Figure 55: Margin trading contributed little to total
 in China                                                                                            (    )
                                                                        revenue for listed securities(2010)
            Monthly turnover on margin                                                Interest income from margin financing & short
            Monthly turnover on margin/ Stock Turnover                                selling/Total revenue
   400                                             0.5%                     1.5%                                      1.39%
          100 mn
   300     yuan                                    0.4%                     1.0%                                                            0.58%
   200
                                                   0.3%
                                                                            0.5%      0.28% 0.38%                       0.24%
                                                                                                             0.09%
                                                           0.2%
   100                                                                      0.0%
                                                           0.1%




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 Source: Wind                                                           Source:Wind


 Figure 56: TSE’s margin trading value accounted                        Figure 57: TWSE’s margin trading value accounted
 for 15%                                                                for more than 40%
                         TSE: Proportion of stock margin                             TWSE: Proportion of short sales turnover value
  20%                    turnover value
                                                                                     TWSE: Proportion of stock margin turnover value
  18%                                                                       100%
                           16.9%                                            80%
  16%                                  14.9% 15.6%
           15.0%                                      15.5%
                               14.4% 14.1%                                  60%
  14%          14.1%
                          14.0% 14.2%           13.5% 13.1%
                                                                            40%
  12%                   12.3%                 12.0% 11.8%
                11.9%                                                       20%
  10%
                                                                              0%
         1995      1998       2001      2004       2007       2010
                                                                                   1995          1998        2001       2004    2007         2010

 Source: CEIC                                                           Source:CEIC




Download our reports from Bloomberg: BOCM <enter>                                                                                          Page 30
      China Securities Sector                13 July 2011                        A fast growing market with great potential
Figure 58: Sensitivity analysis of interest income from credit transactions
Margin financing turnover/spot market
                                              2%         4%      6%      8%       10%    12%     14%     16%       18%     20%
turnover
Net interest income of margin trading         151        302     453     604      755     907    1,058   1,209     1,360   1,511
Net interest income of securities lending     45          90     136     181      226     271     317     362       407     452
Net interest income of margin financing       196        393     589     785      982    1,178   1,374   1,571     1,767   1,963
Contribution to FY10 operating revenue       5.0%       10.0%   15.0%   20.1%    25.1%   30.1%   35.1%   40.1%     45.1%   50.1%

                            Key assumptions
                              Daily average turnover in spot markets (‘00m)                                2,200
                              Margin financing turnover velocity                                           400%
                              Percentage of average margin trading balance                                 80%
                              Percentage of average securities lending balance                             20%
                              Percentage of self-owned fund for margin trading                             70%
                              Percentage of borrowed funds for margin trading                              30%
                              Margin trading rate                                                          8.85%
                              Lending rate of Securities Finance companies                                 5.85%
                              Securities lending rate                                                     10.85%
                              Securities lending rate of Securities Finance companies                      7.85%
                            Source:BOCOM Int’l


                                              ii. Ample growth potential and strong anti-cyclical feature
                                                  of asset management business

                                            Owing to regulatory control, development of securities companies’ asset
                                            management business lags far behind mutual funds and private funds. Major
                                            constraints include: High entry barrier for the supply of and demand for
                                            securities companies’ wealth management products; securities companies
                                            could only use their own sales channels; poorer liquidity; public promotion is
                                            prohibited. Revenue of asset management business of listed securities
                                            companies just contributed less than 5% of operating revenue in 2010 except
                                            Everbright Securities and Haitong, which contributed 13.1% (over 10%) and
                                            7.3% of operating revenue.

                                            Based on the development of asset management business in international
                                            investment banks, China still possesses huge growth potential. Revenue of
                                            asset management business in the US securities industry attained an annual
                                            average growth rate of 8.14% in 2001-08. Even when the US faced the serious
                                            financial crisis in 2008, revenue of asset management business did not show
                                            any decline. Goldman Sachs Asset Management has become one of the top 10
                                            asset management companies in the world. Based on the revenue structure of
                                            Deutsche Bank and Credit Suisse in Europe, private banking and asset
                                            management businesses contributed over 1/3 of total revenue before the
                                            crisis. The asset management revenue of Nomura Group in Japan maintains
                                            at around 140bn yen.

                                            The asset management business of securities companies in China possesses
                                            ample growth potential. The approval process of asset management business
                                            has accelerated since 2009. As of mid June 2011, there were a total of 226

     Download our reports from Bloomberg: BOCM <enter>                                                               Page 31
China Securities Sector                  13 July 2011                  A fast growing market with great potential
                                         integrated wealth management products. 97 new products were launched in
                                         2010, far exceeding 47 products in 2009. Based on the product offering of
                                         securities companies, CITIC Securities has the highest net asset management
                                         value of RMB16.934bn, and that GTJA and China Merchants Securities have
                                         net asset management value of over RMB10bn.

                                         Upon the regulated development in recent years, securities companies have
                                         established solid foundation. Leveraging on the general strength, securities
                                         companies’ asset management business has natural advantage on research
                                         and sales. Once the integrated wealth management business of securities
                                         companies is changed from approval system to filing system, their wealth
                                         management business could achieve rapid growth.


 Figure 59: Asset management products increased                Figure 60: Proportion of asset management income
                )
 fast (2005-2010)
   100 mn       Number of newly issued products(R)                       Asset management income/Total revenue
                Newly issued shares(L)                          20%
  1000                                                   120             Asset management income/Net commission fee
   800                                                   100    16%                     13%
                                                         80     12%
   600
                                                         60      8%          7%
   400
                                                         40      4%
                                                                                                   3% 2% 2%       4%
   200                                                                  1%        1% 1% 1%                  1% 0%   0%
                                                         20      0%
     0                                                   0

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 Figure 61: US securities’ asset management                    Figure 62: Proportion of US securities’ asset
                            (         )
 revenues kept stable growth(2002-2008)                                                         (         )
                                                               management revenues raised stably(2001-2008)
             Fees, Asset Management      TOTAL REVENUE                        Fees, Asset Management/Total Revenue
   40%                                                          13%
                                                                12%
                                                                11%                                                      11.3%
   20%                                                          10%                         8.8%
                                                                 9%           8.4%   8.4%
    0%                                                           8%                                 7.2%
                                                                 7%      7.0%                              6.4%
         2002    2003   2004   2005     2006     2007   2008                                                      7.0%
                                                                 6%
  -20%                                                           5%
                                                                 4%
  -40%                                                                2001   2002 2003 2004        2005 2006 2007        2008

 Source: SIA                                                   Source:SIA




Download our reports from Bloomberg: BOCM <enter>                                                                  Page 32
China Securities Sector                  13 July 2011               A fast growing market with great potential


 Figure 63: Goldman Sach’s asset management                 Figure 64: Goldman Sach’s asset management
                     (         )
 revenues were stable(2005-2010)                                              (         )
                                                            fees/total revenue(2004-2010)
                 Growth of asset management fee                              Asset management fee/net revenue
   150%                                                      25%
                 Growth of net revenue
   100%                                                      20%                                      20.9%

                                                             15%                                                    11.4%
    50%                                                            12.2% 11.7%      11.1%
                                                             10%
     0%                                                                                     9.7%             8.9%
          2005    2006    2007    2008      2009   2010       5%
   -50%
                                                              0%
  -100%                                                            2004   2005    2006   2007      2008   2009      2010

 Source: Company data                                       Source:Company data

 Figure 65: Nomura’s asset management revenues              Figure 66: Nomura’s Asset management fees/total
                              (           )
 kept relatively stable growth(FY2008-2011)                         (
                                                            revenue(FY2007-2011))
          Asset management and portfolio service fees                        Asset management and portfolio service
          Total revenue                                      25%             fees/total revenue
   150%
                                                                                           21.1%
                                                             20%
   100%
                                                             15%          11.9%
                                                                                                      9.7%
    50%
                                                             10%
     0%                                                                                                             10.4%
                                                              5%      7.1%
          FY2008.3   FY2009.3    FY2010.3      FY2011.3
   -50%
                                                              0%
  -100%                                                            FY2007.3 FY2008.3 FY2009.3 FY2010.3 FY2011.3

 Source: Company data                                       Source:Company data



                                         iii. Development of Private Equity (PE) business accelerates

                                      In Aug 2007, CITIC Securities announced to establish a wholly-owned
                                      subsidiary – Gold Stone Investment by its own fund and obtained PE
                                      business license in Sep 2007. As at the end of 2010, 31 securities companies
                                      set up their PE companies with a total registered capital of RMB22.51bn and
                                      an average registered capital of RMB726m.

                                      The launch of GEM Board in 2009 provides a more convenient exit channel
                                      for PE business of securities companies and the development of their PE
                                      business accelerated. Among the 31 existing PE companies, 13 were
                                      established in 2010 with a total registered capital of RMB3.65bn. Apart from
                                      the newly-established PE companies, many securities companies increased
                                      capital of PE companies in 2010. PE companies of Chinese securities
                                      companies reported aggregate new capital of RMB8.15bn in 2010.




Download our reports from Bloomberg: BOCM <enter>                                                             Page 33
China Securities Sector             13 July 2011                    A fast growing market with great potential
                                    In 2011, the PE business of some securities companies such as CITIC, Haitong
                                    and GF will enter into a harvest period. CITIC Securities is involved in PE
                                    pilot business earlier and 6 projects of its PE investment company are listed
                                    in GEM Board, while Haitong Securities and GF Securities have 7 and 3
                                    projects being listed respectively.

                                    PE investment started earlier in the US. In 1986, Goldman Sachs established
                                    Goldman Sachs Capital Partners (GSCP), and Lehman Brothers and Morgan
                                    Stanley set up their PE department during the corresponding period. The PE
                                    department of Goldman Sachs conducts PE investment through the GSCP
                                    and conducts mezzanine financing through Goldman Sachs Mezzanine
                                    Partners (GSMP). As of the end of 2008, GSCP raised a total of 7 funds with
                                    gross proceeds of nearly US$40bn, only 40% of which were raised through
                                    third-party channels.

                                    Percentage of PE investment return of large securities companies in Japan,
                                    such as Nomura Group and Daiwa Securities, is rising in general. While they
                                    suffered loss in FY09 due to the financial crisis, contribution of PE investment
                                    return to operating revenue could reach 3-5% in normal years.

                                   Regulators in China require that the investment capital of securities
                                   companies on a PE company use its own fund and shall not exceed 15% of its
                                   net capital. The registered capital of Gold Stone Investment is RMB5.2bn,
                                   which is close to the upper limit. Given the rapid growth of PE business, the
                                   existing rules would hinder the development of PE business and looser
                                   regulation is likely in future.



                                                                        (         )
                                       Figure 67: PE investment in China(1Q08-1Q11)
                                                    $Mn               PE investment in China
                                        10,000
                                         8,000
                                         6,000
                                         4,000
                                         2,000
                                             0
                                                 1Q08 2Q08 3Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

                                       Source:CEIC




Download our reports from Bloomberg: BOCM <enter>                                                        Page 34
China Securities Sector                13 July 2011                    A fast growing market with great potential


 Figure 68: Gain on PE/revenue for Nomura Group               Figure 69: Gain on          PE/revenue      for     Daiwa
 (FY07-11)                                                    Securities(FY01-11)
     Nomura               Gain on private equity               Daiwa          Net gain (loss) on private equity and
                          investments/total revenue                           other securities/revenue
   10%
                                                                20%
                4.8%
    5%                                   0.9%                   10%
                                                      1.4%
                                                                 0%
    0%      2.3%
                                                               -10%




                                                                     01


                                                                             03


                                                                                     05


                                                                                             07


                                                                                                     09


                                                                                                              11
         FY2007.3 FY2008.3 FY2009.3 FY2010.3 FY2011.3




                                                                  FY


                                                                          FY


                                                                                  FY


                                                                                          FY


                                                                                                  FY


                                                                                                           FY
   -5%                                                         -20%

  -10%                         -8.2%                           -30%


 Source:CEIC                                                  Source:CEIC



                                        iv. Index futures trading enjoy huge growth potential

                                       Index futures develop rapidly in China since it was introduced on 16 Apr
                                       2010. According to the statistics of China Financial Futures Exchange,
                                       turnover of CSI300 Index futures reached RMB41.07tn in 2010, representing
                                       95.7% of stock turnover for the corresponding period.

                                       Given high entry barrier and the absence of a complete arbitrage trading
                                       mechanism, index futures pose limited contribution to securities companies’
                                       profit. Currently, index futures market is mainly comprised of retail investors,
                                       while most of the other index futures markets regard institutional investors
                                       as the major investors. For example, percentage of trading amount of
                                       institutional investors reaches 60% (56% in Jan 2010) in Taiwan index futures
                                       market. Hong Kong has a percentage of 81% and individual investors in
                                       Japan share less than 1%. In 2011, the number of major investors in index
                                       futures market is likely to increase gradually. Index futures policies such as
                                       sunlight private fund and QFII are pending approval.

                                       Based on the percentage of index futures turnover in Asian stock market to
                                       spot market turnover, Korea is at a higher level with the percentage of index
                                       futures turnover to spot market turnover exceeding 300%. HK has a
                                       percentage of over 200% and Japan and Taiwan surpass 150%. Index futures
                                       market in China could enjoy explosive growth in the next 2 years. Assuming
                                       10% growth in daily average trading volume and increase in futures/spot
                                       ratio from less than 100% on average to 120%, revenue growth of index
                                       futures business could exceed 40%.




Download our reports from Bloomberg: BOCM <enter>                                                               Page 35
China Securities Sector                    13 July 2011                   A fast growing market with great potential


                                             Figure 70: Trading value of stock index futures/share trading value
                                                  Hong Kong Exchanges                   Korea Exchange
                                                  National Stock Exchange of India      TAIFEX
                                                  Japan:TSE&OSE
                                              600%
                                              500%
                                              400%
                                              300%
                                              200%
                                              100%
                                                 0%
                                                          2004   2005    2006        2007    2008      2009     2010

                                             Source:WFE


 Figure 71: Trading value of                  stock     index    Figure 72: Investor structure by trading volume of
 futures/share trading value (China)                             TOPIX futures
            Trading value of SH&SZ300 index futures                                    Securities Companies
  Bn yuan                                                                             Individual investor
          Trading value of SH&SZ300 index futures/stock
  15,000                                             200%                              Trust Banks
                                                        150%      100%
   10,000                                                          80%
                                                        100%       60%
    5,000
                                                        50%        40%
      -                                                 0%         20%
                                                                    0%
            A-10   J-10   A-10 O-10 D-10    F-11 A-11
                                                                           2006       2007     2008      2009   2010

 Source:WFE,OSE&TSE as a whole                                   Source:China Futures Association




Download our reports from Bloomberg: BOCM <enter>                                                               Page 36
China Securities Sector             13 July 2011                   A fast growing market with great potential

                                    V.      Core competitive strength of leading
                                            securities  companies  to  be   more
                                            significant
                                    1.    Brokerage businesses shift from                               price
                                          competition to service competition
                                    Competitions of brokerage businesses become intensified among securities
                                    companies in recent years. Average commission rate fell from 0.16% in 2007
                                    to 0.099% in 2010. The average commission rate even decreased by 24% in
                                    2010. The average commission rate for some regions with dense distribution
                                    of business outlets has been approaching the breakeven point.

                                    Securities companies accelerated the speed of establishing business outlets
                                    after the CSRC loosened the regulation in Oct 2009, leading to increased
                                    competitions in brokerage services. As of late May 2011, the number of
                                    securities business outlets in China increased from 4,824 in 1Q08 to 6,606.
                                    However, the speed of setting up new business outlets has slowed since 2010.
                                    In Mar 2011, the CSRC introduced new rules to enhance customer service
                                    capability of new securities business outlets and strengthen regulations in
                                    commission rate. This helped avoid vicious competitions.

                                    Market concentration rate drops given intensified competitions in brokerage
                                    services. Market share of top 10 securities companies shrank from 57.28% in
                                    2008 to 53.79% in 2010. Market concentration rate of brokerage services and
                                    short-selling trading of securities companies in Hong Kong showed a rising
                                    trend from 1998 to 2010. Market share of top 20 companies remained steady
                                    after reaching 65-70%.

                                    The Chinese brokerage services will shift its focus of competition from
                                    commission rate to service quality in the future. It will become an inevitable
                                    trend for commission rate to fall to approaching cost level. Only those
                                    brokerage firms which have innovative revenue model in brokerage
                                    businesses and provide value-added services could become the leading
                                    players of new brokerage competition. The advantages of large securities
                                    companies in research and integrated services could help raise their pricing
                                    capability and market share, and strengthen their leading position in
                                    brokerage businesses for mid to high-end personal and institutional
                                    customers.




Download our reports from Bloomberg: BOCM <enter>                                                      Page 37
China Securities Sector                         13 July 2011                        A fast growing market with great potential


 Figure 73: Commission rate has dropped since 2007                    Figure 74: Concentration of broker business
                                                                      decreased in 2009&2010
             Average commission rate of China securities                            Market share of to top 10 securities in terms of turnover
  0.18%                                                                 (%)         Market share of to top 15 securities in terms of turnover
           0.160%                                                      60
  0.16%                                                                                                      57.28
                                                                       55                                                54.91        53.79
  0.14%               0.132%       0.130%                                             51.72       52.45
                                                                       50
  0.12%
                                               0.099%                  45                                    44.89
                                                         0.093%                       43.01       42.05                  42.26        41.75
  0.10%
                                                                       40
  0.08%                                                                35
             2007         2008      2009        2010     2011:1-2                  2006        2007       2008       2009          2010

 Source: BOCOM Int’l                                                  Source:WIND

 Figure 75: Concentration of stock brokerage (HK)                     Figure 76: Concentration of securities lending (HK)

    Market Share of Top20 Brokers in the Total Turnover of                                Market share of Top20 active participants by
    HIS Constituents                                                   70%                turnover of short selling
  80%                                                                  65%
  75%                                                                  60%
                                                                       55%
  70%
                                                                       50%
  65%                                                                  45%
  60%                                                                  40%
      98


               00


                       02


                                   04


                                          06


                                                    08


                                                            10




                                                                              98


                                                                                       00


                                                                                                  02


                                                                                                            04


                                                                                                                   06


                                                                                                                              08


                                                                                                                                       10
    19


             20


                     20


                                 20


                                        20


                                                  20


                                                          20




                                                                            19


                                                                                     20


                                                                                                20


                                                                                                          20


                                                                                                                 20


                                                                                                                            20


                                                                                                                                     20
 Source: SFC                                                          Source:SFC

 Figure 77:Commission               rate    of     some      listed   Figure 78:Business outlet number increase of China
 securities(1Q09-1Q11)                                                securities since 2008
               Sinolink            Southwest            Haitong                           Business Outlet Number increase QoQ
                                                                       300
               CITICS              CMS                  Pacific
  0.23%                                                                250
               Huatai              Everbright           Hongyuan
                                                                       200
  0.18%                                                                150
  0.13%                                                                100
                                                                        50
  0.08%                                                                -
                                                                       -50
  0.03%
                                                                        20 Q1

                                                                        20 2
                                                                        20 3
                                                                        20 4

                                                                        20 1
                                                                        20 2
                                                                        20 3
                                                                        20 4

                                                                        20 1
                                                                        20 2
                                                                        20 Q3

                                                                        20 4
                                                                        M Q1
                                                                               1
                                                                             Q
                                                                             Q
                                                                             Q
                                                                             Q
                                                                             Q
                                                                             Q

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                                                                          08
                                                                          08

                                                                          08
                                                                          08
                                                                          09
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                                                                          09
                                                                          09
                                                                          10

                                                                          10
                                                                          10
                                                                          10

                                                                          11
                                                                          ay




           1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
                                                                        20




 Source: Company data, WIND                                           Source: Shanghai stock exchange




Download our reports from Bloomberg: BOCM <enter>                                                                                   Page 38
China Securities Sector             13 July 2011                  A fast growing market with great potential

                                    2.    Diversification and upgrade of investment
                                          demand highlight the advantages of leading
                                          securities companies
                                    The diversification and upgrade of resident and corporate investment
                                    demand, as well as growing complicated financial products, will highlight
                                    the advantages of integrated securities companies. For example, more
                                    business cooperation is required between investment banking and PE, as
                                    well as between research and investment banking, brokerage and asset
                                    management. Integrated securities companies with rich strength will show
                                    more significant advantages in the field of cross-selling, product innovation
                                    and services.

                                    CITIC Securities has established a leading position in brokerage businesses,
                                    investment banking, direct investment and research in the industry. The
                                    diversified financial platform of CITIC Group shows substantial advantages
                                    when compared to peer groups.



                                    3.    Market concentration rate of investment
                                          banking business will remain high in future
                                    Despite investment banking business has shown fluctuations in recent years
                                    due to imbalanced distribution of large IPO projects for each year, market
                                    concentration rate remains high in general. Top 10 companies have
                                    accounted for over 60% of market share in terms of the underwriting amount
                                    of equities and bonds. Also, market concentration rate of equity
                                    underwriting is even higher, with the top 10 companies accounting for 70%
                                    of market share in 2008-09.

                                    The leading 2 securities companies, CITIC and CICC accounted for nearly
                                    30% of market share in the underwriting amount of equity and bond.
                                    Although the market share dropped to 20% in 2010, they still outperformed
                                    other investment banks, with CITIC owning the largest market share from
                                    2008 to 2010.

                                    Based on the US and global data, market concentration rate of investment
                                    banking business maintains at a high level. In 2010, market share of top 10
                                    investment banks in terms of underwriting amount in the US and global
                                    stock markets totaled 86.5% and 51.2% respectively.




Download our reports from Bloomberg: BOCM <enter>                                                     Page 39
         China Securities Sector                    13 July 2011                                A fast growing market with great potential


          Figure 79: Top 5 and top 10 concentration of IPO                     Figure 80: Top 10 market                                                    share         of      IPO
          fund raising(2006-2010)                                              underwriting amount(2010)
                         Top 5 concentration of IPO fund raising                                                   Market share of IPO underwriting in
                                                                                                                   terms of fund raising(2010)
           100%          Top 10 concentration of IPO fund                      12% 9.7%
                      85.4%             71.9%                                  10%      7.9%
            80%               70.1%                                                          6.9% 6.7%
                                                             60.2%              8%                     5.4% 5.2% 5.2% 4.8%
                                                                                6%                                         4.3% 4.0%
            60%                                    41.3%                        4%
            40%                                                                 2%
            20%                                                                 0%




                                                                                                                                                         BOC
                                                                                                                                      Galaxy

                                                                                                                                               Haitong



                                                                                                                                                                 GTJA
                                                                                                          CICC
                                                                                               CITICS




                                                                                                                                                                         CJIS

                                                                                                                                                                                CMS
                                                                                                                    PingAn

                                                                                                                             Guosen




                                                                                                                                                         Int'l
             0%
                      2006      2007     2008      2009     2010

          Source: Wind                                                         Source:Wind

 Figure 81: Underwriting amount (Stock& Bond) Top 10 (2007-2010)
                        2007                               2008                                              2009                                                  2010
                                   market                             market                                                   Market                                           Market
                       Bn yuan                             Bn yuan                                        Bn yuan
                                   share                              share                                                     share                                            share
    1       CICC         145        14.5%     CITICS         112      17.6%      CITICS                          161           16.0%               CITICS               178     11.2%
    2      CITICS        135        13.5%      CICC          66       10.3%       CICC                           104           10.4%                CICC                138      8.7%
    3      Galaxy        99          9.9%      GTJA           52       8.1%     BOC Int'l                        56             5.6%              BOC Int'l             122      7.7%
    4     BOC Int'l      55          5.5%     Galaxy         45        7.1%       CSC                            47             4.7%                GTJA                 94      5.9%
    5       GTJA          46         4.7%    BOC Int'l       44        7.0%       UBS                            46             4.5%                UBS                  79      5.0%
    6     Haitong        43          4.3%      CSC            27       4.3%       CMS                            45             4.5%               PingAn                76      4.8%
    7       UBS           40         4.0%      Anxin         21        3.3%       GTJA                           42             4.2%               Galaxy                73      4.6%
    8      Huatai        37          3.7%      CMS            21       3.3%      Galaxy                          41             4.1%                CSC                  63      4.0%
    9     Guangfa        32          3.2%     Guosen         21        3.3%      Guosen                          35             3.4%              Haitong                60      3.8%
   10       CSC           28         2.8%     PingAn         18        2.8%      PingAn                          32             3.2%                CMS                  55      3.5%
  top2                              28%                                28%                                                      26%                                              20%
  top5                              48%                                50%                                                      41%                                              38%
 top10                              66%                                67%                                                      61%                                              59%
Source: Securities Association of China, unconsolidated basis

          Figure 82: Global market                share     of       IPO       Figure 83: Market share of top 10 securities’ stock
          underwriting top 10 (2010)                                           underwriting in the US (2010)
                                                                                                              Market share of top 10 securities' stock
                             Global market share of IPO                            25%                        underwriting in the US (2010)
                8.4%         underwriting top 10 (2010)                                         19.6%
           9%                                                                      20%
                  6.8%
           7%        6.7%                                                          15%                  12.3%
                        5.3%                                                                                       9.7% 8.8%
                           5.0%4.9%                                                                                          7.7% 7.2% 6.4%
           5%                        3.8%
                                 3.9% 3.5%                                         10%
                                                                                                                                            5.4% 4.7% 4.7%
                                          2.9%2.6%                                  5%
           3%                                       1.9% 1.7%
                                                 2.2% 1.9%
                                                                                    0%
           1%
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          Source:Bloomberg                                                     Source: Bloomberg



         Download our reports from Bloomberg: BOCM <enter>                                                                                                               Page 40
China Securities Sector             13 July 2011                   A fast growing market with great potential

                                    4.    Leading securities companies show significant
                                          advantage on innovative businesses
                                    Net capital is the focus in the regulation of securities companies by CSRC.
                                    Large securities companies with stronger capital strength possess more
                                    advantages in acquiring business qualifications, in our view. Leading
                                    securities companies with stronger capital strength possess more advantages
                                    as they are more likely to be selected for launching pilot emerging businesses.
                                    Based on the development history of various businesses, large securities
                                    companies such as CITIC, Haitong and GTJA have outperformed other
                                    securities companies in the field of asset management and direct investment.

                                    CITIC Securities

                                         CITIC Securities established a PE company called Gold Stone Investment
                                         in 2007 and injected more capital afterwards. It has a registered capital
                                         of RMB5.2bn, the largest amount among all securities companies’ PE
                                         companies. It achieved a profit of RMB414m in 2010. Gold Stone has
                                         entered a harvest period and rapid growth phase. CITIC securities’
                                         leading position in investment banking business enables its PE company
                                         to get involved in more pre-IPO projects;

                                         AUM reached RMB45.956bn at end 2010, the largest amount among its
                                         peers;

                                         Margin trading balance reached RMB1.56bn by the end of 2010,
                                         representing 12.3% of market share and ranking second among its peers.

                                    Haitong Securities

                                         According to the margin trading balance released by SZSE (May of 2011),
                                         Haitong ranks second in terms of market share;

                                         According to the top 20 transaction volume of stock index futures
                                         released by China financial futures exchange, the transaction volume of
                                         Haitong Futures, a subsidiary of Haitong Securities, ranks top in 2011.

                                    Asset management business of GTJA , margin trading and asset management
                                    businesses of China Merchants Securities also show excellent performance.




Download our reports from Bloomberg: BOCM <enter>                                                      Page 41
    China Securities Sector                                                                               13 July 2011                                               A fast growing market with great potential


     Figure 84: Registered capital for direct investment                                                                                                  Figure 85: Net asset value of asset management
     companies of securities                                                                                                                              products

      60                    100mn                                      Registered capital                                                                        Net asset value of Asset management products
                                                                                                                                                             Bn yuan
      50                     yuan
                                                                                                                                                              20 16.9
      40                                                                                                                                                              14.1
      30                                                                                                                                                      15           10.4 10.1 9.6
                                                                                                                                                                                         8.4 8.2
      20                                                                                                                                                      10                                 6.6 6.4 5.7 5.0
                                                                                                                                                                                                                 4.5
      10                                                                                                                                                       5
       0
                                                                                                                                                             -
                            Haitong-




                                                                        Galaxy-


                                                                                           Qilu-
                                       Everbright




                                                                                                          GTJA
              Citics-Gold




                                                                                                                                   Changjiang
                                                                                                   SYWG
                                                              Guosen


                                                                                  PingAn




                                                                                                                 Guoyuan
                                                    Guangfa




                                                                                                                           China




                                                                                                                                                                                                                Dongfang


                                                                                                                                                                                                                                     Changjiang
                                                                                                                                                                                   Everbright




                                                                                                                                                                                                                                                                                CICC
                                                                                                                                                                   CITICS




                                                                                                                                                                                                CMS
                                                                                                                                                                            GTJA




                                                                                                                                                                                                                           Donghai


                                                                                                                                                                                                                                                  Huatai
                                                                                                                                                                                                      Guangfa




                                                                                                                                                                                                                                                           Guoxin
                                                                                                                                                                                                                                                                     Hongyuan
     Source: WIND                                                                                                                                         Source: WIND



Figure 86: Direct investment companies of listed Securities (2010)
 Securities
                              Direct investment                                                    Establishment                           Number of            Investment value                        registered capital                                 Net profit
                                  companies                                                             year                                projects              (100mn yuan)                            (100mn yuan)                                     (100mn yuan)
 CITICS                     Goldstone                                                                   2007                                  35                      21.00                                 46/latest52                                        4.14
 Haitong                    Haitong Kaiyuan                                                             2008                                                                                                    30                                             0.61
 Huatai                     Huatai Zijin                                                                2008                                     4                    1.06                                       5                                             n.a.
 Guangfa                    Guangfa Xinde                                                               2008                                27(to 2010)           8.23(to 2010)                                 13                                             0.01
 CMS                        China merchants capital                                                     2009                                                          1.79                                       5                                              n.a.
 Everbright                 Everbright capital                                                             2008                                     5           4.05/(to 2010)5.11                                         20                                          0.39
 Changjiang                 Changjiang capital                                                             2009                                    n.a.                                                                     5
 Industrial                 Industrial Innovation                                                          2010                                     2                                                                       2
 Hongyuan                   Hongyuan Innovation                                                            2010                                                                                                             2
 Guoyuan                    Guoyuan Equity                                                                 2009                                 9(to 2010)        3.65(to 2010)                                             5
 Southwest                  Southwest Equity                                                               2010                                                                                                             4
 Northeast                  Northeast rongtong                                                             2010                                                                                                             1
 Shanxi                     Shanxi Qifu                                                                    2011                                                                                                             1
Source: Company data




    Download our reports from Bloomberg: BOCM <enter>                                                                                                                                                                                                               Page 42
China Securities Sector             13 July 2011                     A fast growing market with great potential

                                    5.     Earnings of leading securities companies are
                                           more stable
                                    Since most of the revenue is generated from brokerage services, profit
                                    growth of securities companies has been decelerating in 2008 and 2010 when
                                    stock market reported poorer turnover. Profit of mid and small securities
                                    companies is subjected to higher volatility as they are heavily dependent on
                                    traditional brokerage services and proprietary trading businesses, especially
                                    the proprietary trading of Equity. On the other hand, leading securities
                                    companies have relatively stable profit growth.

                                         Figure 87: Leading securities had more stable earnings growth

                                          300%                         2008                   2009               2010
                                          200%

                                          100%
                                             0%
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                                         Source: Wind


 Figure 88:Brokerage commission/Revenue                    Figure 89: Equity investment/Proprietary
 (2008-2010)                                               investment(2010)
              Brokerage commission/Revenue                                    Equity investment/Proprietary investment
                                                            70%
  100%             2008 2009 2010                           60%
                                                            50%
   80%                                                      40%
   60%                                                      30%
                                                            20%
   40%                                                      10%
   20%                                                       0%
                                                                                                              Everbright




                                                                                                                                                                          Southwest
                                                                                                                                                                                      Northeast
                                                                           Haitong




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                                                                  CITICS


                                                                                     Huatai


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                                                                                                                                                                                                  Shanxi
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 Source: Wind                                              Source: Wind




Download our reports from Bloomberg: BOCM <enter>                                                                                                                                         Page 43
China Securities Sector             13 July 2011                   A fast growing market with great potential

                                    6.    International board favors large investment
                                          banks
                                    International board is becoming an innovation of Chinese capital market
                                    following the GEM Board. SSE aims to establish a world-class securities
                                    trading platform and international board is an integral part. Given the
                                    increasing influence of A-share market, foreign enterprises, especially foreign
                                    enterprises with rising proportion of Chinese businesses, would go listing in
                                    A-share market. Many well-known international firms, such as HSBC, BEA
                                    and Coca-Cola, have strong intention to go listing in China.

                                    Upon the introduction of international board, listed enterprises will mainly
                                    comprise of mid and large well-known international firms. Share offering on
                                    international board sets out higher requirements on the expertise, capital
                                    strength and international experiences of underwriters. Given the brand,
                                    personnel advantage and experiences of underwriting large projects, large
                                    investment banks could grasp more underwriting opportunities, e.g. CITIC
                                    and CICC. International board will favor large investment banks, enhance
                                    the competitiveness of the investment banking businesses of Chinese
                                    securities companies and accelerate internationalization process.




Download our reports from Bloomberg: BOCM <enter>                                                       Page 44
China Securities Sector                 13 July 2011                     A fast growing market with great potential

                                        VI. Chinese securities sector should enjoy
                                            growth premium against developed markets
                                        1.     P/E valuation should be the key valuation
                                               reference of Chinese securities stocks
                                        Since the Chinese securities sector is mainly engaged in light-asset brokerage
                                        businesses, P/E should be the key valuation reference, in our view. P/E was
                                        more volatile based on the historical valuation trend of Chinese listed
                                        securities companies. P/E valuation of securities companies reached the
                                        highest level of 50x during the bull market in 2006-07, exceeding the peak
                                        level of A-shares at around 40x. P/B moves in an even more similar way
                                        with A-shares. PE retreats to 20x or below and P/B drops to slightly higher
                                        than 2x at present.

                                        2.     Higher growth momentum of Chinese
                                               securities sector than the overall market
                                        Movement of Chinese securities stocks is highly correlated with broad
                                        market trend, but they are subjected to higher volatility. Given their strong
                                        reliance on brokerage services, their movement is highly correlated with
                                        market turnover. Based on its performance since 2004, however, cumulative
                                        growth of Chinese securities stocks has far exceeded the broad market. This
                                        shows that Chinese securities sector possesses strong cyclical feature and
                                        strong growth potential.

 Figure 90: China securities index performance                 Figure 91: China securities index performance is
 relative to the market (2004.1-2011.6)                        highly correlated with market turnover value
                          China securities index                                China securities index
   1200%                  SH composite index
                                                                 1200%          Monthly turnover value(Bn yuan)          10000
   1000%                                                         1000%
                                                                                                                         8000
     800%                                                         800%
     600%                                                         600%                                                   6000
     400%                                                         400%                                                   4000
     200%                                                         200%
       0%                                                          0%                                                    2000
    -200%                                                        -200%                                                   0
                                                                      04




                                                                               05




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Download our reports from Bloomberg: BOCM <enter>                                                                     Page 45
China Securities Sector                 13 July 2011                        A fast growing market with great potential


 Figure 92: P/E of securities is more volatile than the        Figure 93: P/B of securities is more consistent with
                        (
 whole A-share market(2004.1-2011.6)    )                                                 (
                                                               the whole A-share market(2004.1-2011.6)  )
                     PE of China listed securities                                         PB of China listed securities
     60              PE of all A-share stocks                   10                         PB of all A-share stocks
     40                                                          8
     20                                                          6
      0                                                          4
    -20                                                          2
       5


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                                                                                                           O-07
                                                                                                                  J-08

                                                                                                                          A-09
                                                                                                                                 J-10
                                                                                                                                        O-10
    -80

 Source: Wind                                                  Source: Wind



                                        3.     Upside potential for leverage ratio and ROE of
                                               Chinese securities companies
                                        Owing to strict regulations on net capital, Chinese securities sector has lower
                                        business leverage ratio than that of developed countries. While international
                                        securities companies had lower leverage ratio after the financial crisis, major
                                        securities companies in Europe and the US maintain their leverage ratio
                                        (assets/equity) at 10x or above. Leverage ratio of Chinese securities
                                        companies is at around 2-5x, enjoying greater upside potential. This may in
                                        turn raise their ROE level.

                                        The ROA of Chinese listed securities companies was at 2.5% or above in 2010,
                                        while that of securities companies in Europe and the US is below 2% for
                                        many years. Even if the leverage ratio of Chinese securities sector is just
                                        raised by 1x, overall ROE could be lifted to 20% or above. CITIC Securities
                                        has a lower leverage ratio and the highest FY10 ROA among its listed peers.
                                        It could enjoy a stronger increase in ROE when leverage ratio is lifted.

 Figure 94:Leverage of leading EU securities                   Figure 95:Leverage of leading US securities
 (1997-2010)                                                   (2001-2010)
                  Deutsche Bank        Credit Suisse                               Goldman Sachs                         Morgan Stanley
    A/E           UBS                  Barclays                  A/E               Citi Group                            Jefferies Group
  70              RBS                  BNP Paris                                   Piper Jaffray Cos                     JMP Group Inc
  60
                                                                32
  50                                                            28
  40                                                            24
                                                                20
  30                                                            16
  20                                                            12
                                                                 8
  10                                                             4
                                                                 0
      7
      8
      9
      0
      1

  2, 2
      3
      4
      5
      6
      7
      8
      9
      0
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    99
    99
    00
    00
    00
    00
    00
    00
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    00
    00
    00
    01




                                                                     2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
  1,
  1,
  1,
  2,
  2,
  2,


  2,
  2,
  2,
  2,
  2,
  2,
  2,




 Source: Bloomberg                                             Source:Bloomberg



Download our reports from Bloomberg: BOCM <enter>                                                                                       Page 46
China Securities Sector                                     13 July 2011                                A fast growing market with great potential


 Figure 96:ROE of leading EU securities (1997-2010)                                            Figure 97:ROE of leading US securities (1996-2010)
  ROAE                    Deutsche Bank                          Credit Suisse                   ROAE             Goldman Sachs     Morgan Stanley
                          UBS                                    Barclays                                         Citi Group        Merrill Lynch
   40%                    RBS                                    BNP Paris                      50%
   30%
   20%                                                                                          40%
   10%                                                                                          30%
    0%
                                                                                                20%
  -10%
  -20%                                                                                          10%
        96


                 98


                             00


                                        02


                                                  04


                                                            06


                                                                        08


                                                                                    10
      19


               19


                           20


                                      20


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                                                                                  20
  -30%                                                                                            0%
  -40%
  -50%                                                                                          -10%




                                                                                                    96
                                                                                                    97
                                                                                                    98
                                                                                                    99
                                                                                                    00
                                                                                                    01
                                                                                                    02
                                                                                                    03
                                                                                                    04
                                                                                                    05
                                                                                                    06
                                                                                                    07
                                                                                                    08
                                                                                                    09
                                                                                                    10
                                                                                                  19
                                                                                                  19
                                                                                                  19
                                                                                                  19
                                                                                                  20
                                                                                                  20
                                                                                                  20
                                                                                                  20
                                                                                                  20
                                                                                                  20
                                                                                                  20
                                                                                                  20
                                                                                                  20
                                                                                                  20
                                                                                                  20
  -60%                                                                                          -20%

 Source: Bloomberg                                                                             Source:Bloomberg


 Figure 19: ROA of leading EU securities (1997-2010)                                           Figure 20: ROA of leading US securities (1996-2010)
      ROAA                Deutsche Bank                   Credit Suisse                          ROAA          Goldman Sachs       Morgan Stanley
                          UBS                             Barclays
   2%                     RBS                             BNP Paris                             2%             Citi Group          Merrill Lynch

                                                                                                1%
   1%
                                                                                                0%

                                                                                               -1%
                                                                                                   95
                                                                                                   96
                                                                                                   97
                                                                                                   98
                                                                                                   99
                                                                                                   00
                                                                                                   01
                                                                                                   02
                                                                                                   03
                                                                                                   04
                                                                                                   05
                                                                                                   06
                                                                                                   07
                                                                                                   08
                                                                                                   09
                                                                                                   10
   0%
                                                                                                 19
                                                                                                 19
                                                                                                 19
                                                                                                 19
                                                                                                 19
                                                                                                 20
                                                                                                 20
                                                                                                 20
                                                                                                 20
                                                                                                 20
                                                                                                 20
                                                                                                 20
                                                                                                 20
                                                                                                 20
                                                                                                 20
                                                                                                 20
                                                                                               -2%
     96


                98


                            00


                                        02


                                                  04


                                                            06


                                                                        08


                                                                                    10
   19


              19


                          20


                                      20


                                                20


                                                          20


                                                                      20


                                                                                  20




  -1%                                                                                          -3%

 Source: Bloomberg                                                                             Source:Bloomberg


 Figure 98:Leverage of China listed securities (2010)                                          Figure 99:ROE of China listed securities (2010)
  6                                             A/E                   5.6                                                    ROE
                          4.9                                                                  25%            20.8%
  5                                                                                                                             17.9%
                                4.0         3.8 3.5 3.7                                        20% 16.1%
  4                 3.4                                                           3.6                                                      15.2% 14.5%
                                                                                         3.0                       13.5% 13.5%
              2.5                     2.6                                   2.7                15%        10.4%
  3     2.2                                                                                            8.3%            9.7%  9.4%
                                                                2.0                                                                     7.2%   7.1%
                                                          1.7                                  10%                                  6.2%
  2
  1                                                                                             5%
  0                                                                                             0%
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 Source: Company data                                                                          Source:Company data




Download our reports from Bloomberg: BOCM <enter>                                                                                             Page 47
China Securities Sector                          13 July 2011                           A fast growing market with great potential


                                                      Figure 100: ROA of China listed securities (2010)

                                                                                                       ROA
                                                        8%         7.4%
                                                        7%
                                                        6%                                      4.9%
                                                        5%          3.2%    4.2%                                    4.0%
                                                                                3.4%3.7%3.6%        3.7%
                                                        4%              3.0%                            3.5%           3.5%
                                                                                            2.6%            2.7% 2.5%
                                                        3%
                                                        2%
                                                        1%




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                                                      Source:Company data



                                                4.       Chinese securities sector should enjoy growth
                                                         premium against developed markets
                                                Since there is huge growth potential in Chinese capital market and direct
                                                financing, and the innovative businesses of securities sector are at infant
                                                stage and strong growth phase, valuations of listed securities companies
                                                should enjoy growth premium against developed markets, in our view.

                                                A-share listed securities companies now trade at 10-20x P/E and slightly
                                                higher than 2x P/B on average. Valuations of medium and small securities
                                                companies are higher than leading securities companies and the average P/E
                                                and P/B of securities sector are slightly higher than the overall A-share
                                                market. Major US investment banks now trade at 14.5x PE and 1.0x P/B on
                                                average. These investment banks hit over 20x P/E and 3x P/B during the
                                                strong growth phase in late 1990s. We think the valuations of A-share
                                                Chinese securities companies are at safety range.


 Figure 101: P/E performance of China listed                                 Figure 102: P/B performance of China listed
 securities (2008.1-2011.6)                                                  securities (2008.1-2011.6)
                  CITIC                              Haitong                                         CITIC                          Haitong
                  Huatai                             Guangfa                                         Huatai                         Guangfa
                  SHCOMP Index                                                 9                     SHCOMP Index
   35
                                                                               7
   25
                                                                               5
   15                                                                          3
    5                                                                          1
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 Source: Bloomberg                                                           Source: Bloomberg

Download our reports from Bloomberg: BOCM <enter>                                                                                                Page 48
China Securities Sector                                  13 July 2011                         A fast growing market with great potential


 Figure 103: P/E performance of US listed securities                              Figure 104: P/B performance of US listed securities
 (1990.2-2011.6)                                                                  (1990.2-2011.6)
                           Goldman Sachs                 Morgan Stanley                    Goldman Sachs                    Morgan Stanley                     Citi Group
    40                     Citi Group                    Merrill Lynch                     Merrill Lynch                    SP500
                                                                                       5
    35                     SP500
    30                                                                                 4
    25                                                                                 3
    20
    15                                                                                 2
    10                                                                                 1
     5
   -                                                                               -




                                                                                      90

                                                                                              92

                                                                                                       94

                                                                                                               96

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                                                                                   F-

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   F-

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 Source: Bloomberg                                                                Source: Bloomberg

 Figure 105: P/E performance of Japan listed                                      Figure 106: P/B performance of Japan listed
 securities (2008.1-2011.6)                                                       securities (1999.9-2011.6)
               NOMURA                   DAIWA                        MIZUHO                       NOMURA                       DAIWA                           MIZUHO
   120         MATSUI                   NKY Index
                                                                                   10             MATSUI                       NKY Index
   100
                                                                                       8
       80
                                                                                       6
       60
       40                                                                              4
       20                                                                              2
   -                                                                               -
                                                                                     99

                                                                                             00

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                                                                                                            02

                                                                                                                   03

                                                                                                                          04

                                                                                                                                 05

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     99

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                                                                                   S-

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   S-

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 Source: Bloomberg                                                                Source: Bloomberg




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China Securities Sector             13 July 2011                 A fast growing market with great potential

                                    VII. Major Risks
                                        Brokerage businesses are highly correlated with economic trend. The
                                        unexpected fall in economic growth of China will pose shock on various
                                        businesses of securities companies, and the impacts will exaggerate for
                                        several times;

                                        Securities companies’ revenue still highly depends on brokerage
                                        businesses. Falling market turnover and intense competitions of
                                        brokerage businesses will affect securities companies’ profit;

                                        Uncertainties in easing of regulatory policies. The development pace of
                                        innovative brokerage businesses will directly depend on the easing of
                                        regulatory policies.




Download our reports from Bloomberg: BOCM <enter>                                                   Page 50
       China Securities Sector                      13 July 2011              A fast growing market with great potential


Figure 107: International comparison of valuation and financial ratios
                                                                                               Net
                            Market                                                  Asset               ROA         ROE
 US$mn                                   10P/E
                                         10         1
                                                   11P/E    10P/B    1
                                                                    11P/B   A/E               profit
                            Cap.*                                                   (2010)              (2010)     (2010)
                                                                                              (2010)
 China
 CITIC                       20,392       16.4       15.4    1.8     1.7    2.2     23,245    1,671      4.7        11.1
 HAITONG                     11,527       16.9       14.8    1.5     1.2    2.5     17,514     545       4.1        10.3
 HUATAI                      10,633       18.1       15.5    1.9     1.8    3.4     17,218     506       3.3        10.7
 GF                          14,615       23.9       20.6    4.4     3.9    4.9     14,560     595       3.7        19.8
 CMS                         10,301       19.7       17.3    2.5     2.3    4.0     14,471     477       3.4        12.7
 EVERBRIG                     7,251       19.5       16.4    1.9     1.7    2.6      9,041     325       4.2        10.9
 CHANGJIANG                   3,879       17.1       14.8    1.9     1.4    3.8      5,429     190       4.3        12.7
 SEC-A
 Avg.                        11,228       18.8       16.4    2.3     2.0    3.3                          4.0        12.6
 US
 GOLDMAN SACHS               71,856       10.3        7.6    1.0    0.9     11.6   911,332    8,354      0.9        11.0
 GP
 MORGAN                      34,446       15.7        8.0    0.7    0.7     12.3   807,698    4,703      0.4        5.1
 STANLEY
 CITIGROUP INC              122,139       10.4        8.1    0.7    0.6     11.5   1,913,90   10,602     0.6        7.0
 MERRILL LYNCH                 n.a.       n.a.       n.a.    n.a.   n.a.    12.4       2
                                                                                   621,626    3,776      n.a.       n.a.
 JEFFERIES GROUP              4,241       14.1       12.0    1.2    1.1     13.1    36,727     n.a.      n.a.       11.6
 Avg.                       58,170.5      12.6        8.9    0.9    n.a.    12.2                         0.6        8.7
 EU
 DEUTSCHE BANK-              50,799        6.6        5.8    0.7     0.6    37.8   2,547,06   3,064      0.3        11.2
 RG
 CREDIT SUISS-REG            44,331        7.1        5.9    1.0     0.9    22.9      5
                                                                                   1,105,04   4,905      0.5        15.0
 UBS AG-REG                  65,857        7.9        6.9    1.0     0.9    25.4      9
                                                                                   1,410,48   7,248      0.5        13.9
 BARCLAYS PLC                45,503        8.2        6.0    0.6     0.5    23.9      0
                                                                                   2,322,50   5,509      0.3        6.9
 BNP PARIBAS                 79,873        6.6        5.8    0.8     0.7    23.3      6
                                                                                   2,670,73   10,405     0.5        12.8
 Avg.                       57,272.8       7.3        6.1    0.8     0.7    26.7      8                  0.4        12.0
 Hongkong
 SUN HUNG KAI                 1,273        9.0        8.2    0.8    0.8     1.5     2,593      140       5.3         9.5
 CO SHANGHAI
 FIRST                         162        n.a.       n.a.    n.a.   n.a.    1.6      609        15       n.a.        n.a.
 GET NICE HLDGS                287        n.a.       n.a.    n.a.   n.a.    1.1      481        33       n.a.        n.a.
 VALUE                         79         n.a.       n.a.    n.a.   n.a.    1.2      91        -11       n.a.        n.a.
 CONVERGENC
 Avg.                          450         9.0        8.2    0.8    n.a.    1.4                          5.3         9.5
 Japan
 NOMURA                      18,913       n.a.       n.a.    0.7     0.7    17.5   344,932     335       1.7         3.5
 HOLDINGS GRP
 DAIWA SECS                   7,699       n.a.       n.a.    0.7     0.7    18.3   183,597     -437      0.1         1.0
 MIZUHO SEC                   3,964       n.a.       n.a.    0.6     0.6    39.3   224,219     -343      n.a.        -0.5
 MATSUI                       1,356       n.a.       n.a.    1.4     1.3     5.7    4,988       63       1.2         7.3
 SECURITIE
 Avg.                         7,983       n.a.       n.a.    0.8     0.8    20.2                         1.0         2.8
 South Korea
 DAEWOO SECS CO               3,357       11.4        9.9    1.2    1.0     6.3     15,481     223       1.8        11.0
 DAISHIN SECS CO               641         7.6        6.5    0.6    n.a.    5.2      7,078      73       n.a.       n.a.
 HYUNDAI         SECS         2,033        8.1        7.5    0.6    n.a.    4.6     10,476     254       n.a.       n.a.
 CO
 SAMSUNG         SECS         4,903       15.3       13.2    1.7    1.5     4.7     11,652     207       2.4        11.1
 CO
 Avg.                         2,733       10.6        9.3    1.0    n.a.    5.2                          2.1        11.1
*Market cap based on the closing prices on 11 July 2011
Source:Bloomberg




      Download our reports from Bloomberg: BOCM <enter>                                                          Page 51
China Securities Sector                   13 July 2011                        A fast growing market with great potential


 BOCOM International                                                  Contacts:
 9/F, Man Yee Building, 68 Des Voeux Road                             (852) 2977 9155           (852) 2977 9181
 Central, Hong Kong.                                                  (852) 3710 3369           (852) 2297 9480
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                                                                      (8610) 8518 4068-99
 Main: (852) 3710 3328; Fax: (852) 3798 0133
 www.bocomgroup.com

 Rating System
 Company Rating
 Buy: Expect more than 20% upside in 12 months
 LT Buy: Expect more than 20% upside but longer than 12
 months
 Neutral: Expect low volatility
 Sell: Expect more than 20% downside in 12 months

 Sector Rating
 Outperform: Expect more than 10% upside in 12 months
 Market perform: Expect low volatility
 Underperform: Expect more than 10% downside in 12
 months

Analyst Certification
The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal
views about any and all of the subject securities or issuers; and (ii) no part of any of their compensation was, is, or will be
directly or indirectly related to the specific recommendations or views expressed in this report; (iii) no insider information/
non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations
were being received by the authors.

The authors of this report further confirm that (i) neither they nor their respective associates (as defined in the Code of
Conduct issued by the Hong Kong Securities and Futures Commission) have dealt in or traded in the stock(s) covered in this
research report within 30 calendar days prior to the date of issue of the report; (ii)) neither they nor their respective associates
serve as an officer of any of the Hong Kong listed companies covered in this report; and (iii) neither they nor their respective
associates have any financial interests in the stock(s) covered in this report.




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China Securities Sector                    13 July 2011                        A fast growing market with great potential
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