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henry.wu@nomura.com
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A N C H O R
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Analyst
Henry Wu, CFA +852 2252 2122 henry.wu@nomura.com
Economists
Chi Sun +852 2252 7705 chi.sun@nomura.com Tomo Kinoshita +852 2252 2162 kinoshita.tomo@nomura.com And the China Equity Research Team
Energy saving for long-term sustainable growth 10 stocks most geared to the 12th FYP
Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.
Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 225 to 228.
Nomura 29 September 2010
Strategy | C H I N A
NOMURA INTERNATIONAL (HK) LIMITED
henry.wu@nomura.com
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We believe the upcoming 12 Five Year Plan (2011-15, to be rolled out in March 2011) will give a strong push to Chinas transition from an investment-driven economy to a consumption-driven one, with the key focuses being consumption, industry consolidation and upgrades, development of western and central China, and greater energy efficiency. Strong companies in industries targeted in previous plans have historically seen significant outperformance. We expect a similar effect this time and identify some potential winners. Anchor themes We are positive on Chinas long-term consumption outlook. Chinas GDP per capita (about US$3,700 in 2009) is close to seeing consumption pick up, based on the experience of developed markets (GDP per capita of US$3,300-3,800). We think support for emerging industries considered to have strategic importance under the 12th FYP will offer investment opportunities in the next few years.
th
Analysts
Henry Wu, CFA +852 2252 2122 henry.wu@nomura.com Yang Luo +852 2252 2141 yang.luo@nomura.com Michael Shen +852 2252 2140 michael.shen@nomura.com
Economists
Chi Sun +852 2252 7705 chi.sun@nomura.com Tomo Kinoshita +852 2252 2162 kinoshita.tomo@nomura.com And the China Equity Research Team
Nomura
29 September 2010
Strategy | China
Contents
Executive summary 12th Five-Year Plan preview sustained GDP growth a positive for equities
Our key conclusions
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29 September 2010
Strategy | China
Nomura
29 September 2010
Strategy | China
Executive summary
Henry Wu, CFA / Yang Luo / Michael Shen
Executive summary
The key focus of Chinas 12th Five-Year Plan (FYP) (2011-15), to be officially released in March 2011, will be to transform its economic growth model to achieve sustainable medium-term economic growth, in our view. We believe the 12th FYP will have significant implications for Chinas economic growth, industry returns and profitability, and equity market performance in the next five years. Declining capital returns, slowing demand growth and overcapacity will remain the major issues in the secondary industry, in our opinion. As such, we believe investmentled economic development will become increasingly unsustainable and hard to maintain. The transformation of Chinas economic growth pattern appears to be under way with consumption to become increasingly important. Adjusting the income distribution system and further accelerating the development in western China and central China will be key to boost consumption, in our view. While several measures implemented in the past to promote consumption, such as vehicles for the countryside, home appliances for the countryside and the old for new programme are more short-term measures, in our view, rising individual income and narrowing the income gap are drivers that should boost domestic demand in a more sustainable manner and have a more significant positive effect on the countrys overall economic development. Meanwhile, based on developed countries experience, we believe China is approaching a watershed point (GDP per capita of US$3,300-3,800) for consumption to gain momentum. Chinas GDP per capital reached US$3,687 in 2009, according to the World Bank. Ongoing industry consolidation and upgrades will serve to improve investment returns in the long term, in our view; the government is continuing to introduce measures to support M&A, the relocation of plants from coastal areas to inland areas, and developing key emerging industries of strategic importance energy efficiency and environmental protection, next generation information technology, bio-technology, high-end manufacturing, new energy, new material and clean-energy vehicles. Aggressive targets to reduce energy consumption per unit of GDP should help to phase out low energy-efficiency enterprises and improve industry returns, and in turn support sustainable long-term economic growth. In past Five-Year Plans, energy consumption per unit of GDP declined 22% in 1991-95, 65% in 1996-2000, 9% in 2001-05 and 15% in 2006-09. The importance of western/central China development has several implications. First, it helps urbanisation growth, boosts personal income levels and narrows the income gap in these regions vs Chinas coastal regions. Second, it helps these regions to leverage their rich natural resources to develop industries such as agriculture and food processing. Third, by relocating plants to these regions from coastal areas, sectors such as textile, toys, electrical appliance, etc are able to leverage inexpensive inputs (labour and land) and achieve better export competitiveness. We highlight stocks from each of these sectors that we believe will benefit the most from the forthcoming 12th FYP: Agricultural Bank of China (central and western China development), Angang Steel (industry consolidation), BYD (energy saving), China Everbright International (environmental protection), China Yurun (consumption), Dongfeng Motors (consumption), Gome (consumption), Jiangsu Expressway (central and western China development), O-Net (industry upgrade), and Zhuzhou CSR Times Electric (industry upgrade).
Income distribution, consumption, industry consolidation, support to emerging industries of strategic importance, and energy savings will likely be focuses under the 12th FYP To transform the countrys economic growth model
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29 September 2010
Strategy | China
Key conclusions
12th Five-Year Plan preview sustained GDP growth a positive for equities
In our opinion, the key objective for Chinas 12th FYP (2011-15) is to achieve balanced and sustainable medium-term growth mainly through transforming its economic model and adjusting the income distribution system. As the most essential and instructive measure to depict Chinas development blueprint, we believe the 12th FYP will have significant implications for Chinas economic growth, industry efficiency and profitability, as well as equity market performance in the next five years.
We believe the 12th FYP will have significant implications for Chinas economic growth, industry efficiency and profitability, as well as equity market performance
Note: H share return starts 1993; * refer to 2006 to 2009 Source: CEIC, WIND, Nomura research
In our view, the upcoming 12th FYP is likely to focus more on the quality of GDP growth than on growth rates, which means a likely lower GDP target (7-7.5%) for the next five years vs the 7.5% target seen under the 11th FYP. This may disappoint the market initially, but we believe the market will eventually appreciate the higher quality and more sustainable GDP growth. A quality-oriented GDP growth rate could shed new light on equity market hot spots, resulting in significant potential investment opportunities.
A quality-oriented GDP growth rate could shed light on equity market hot spots, resulting in significant potential investment opportunities
100
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40 ` 0
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29.4 netcash netcash netcash 28.7 netcash netcash netcash 16.2 netcash netcash netcash 16.9 17.7 47.0 17.4 28.3 21.2 16.6 27.2 26.0 netcash netcash netcash 27.4 net cash net cash net cash 49.5 net cash net cash net cash 24.0 net cash net cash net cash
Note: Prices as of 21 September, 2010; numbers rounded up Source: Bloomberg, Company data, Nomura estimates
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Strategy | China
700 HK 159.8
BUY 200.0
Note: Prices as of 21 September, 2010; numbers rounded up Source: Bloomberg, Nomura research
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Note: 1) A total 255 China stocks were explored in the stock pool including 120 H shares in Main board, 93 Red chip shares in Main board, 37 H shares in GEM and 5 Red chip shares in GEM. 2) * represents share performance since IPO Source: Nomura research
Chinas past FYPs can be generalised in two phases: 1) pre-reform and economic openness in 1978 and 2) post-1978 economic reform. In phase 1, we saw no obvious relationship between economic development and the FYPs, while in phase 2, we have seen a high correlation. Since Chinas reform and economic openness in 1978 and the founding of Peoples Republic of China (PRC), the country has seen its economic growth model changed from command planned to mixed economy in about three decades. We believe China is now looking to embark on another major economic transition, extending its economic reform and openness first started in 1978. Since the major economic transition in the early 80s, China has adopted marketoriented reform measures, such as economic system restructuring and economic openness, enabling it to experience over three decades of economic growth with low unemployment rates and controllable inflation. We believe FYPs are leading indicators for a countrys development outlook, and play a crucial role in achieving an overall
We believe China is now looking to embark on another major economic transition, extending its economic reform and openness first started in 1978
Chinas GDP growth cycle (every five years) has a high correlation with FYPs since the country first opened its economy
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Strategy | China
economic success. Under Chinas 11th FYP, when the target of building a resourceconserving and environmentally friendly society was first mentioned, it triggered a string of opportunities for the alternative energy sector and M&A for the heavy chemical sector. Under the 10th FYP, it proposed developing central and western China, which entailed shifting the economic growth engine from eastern China to the central and western regions. We observe that Chinas GDP growth cycle (every five years) has had a high correlation with FYPs since the country first opened its economy and when it started to give more realistic and feasible targets under its FYPs. We believe this has led to a more closely correlated relationship between FYPs and the countrys economic development.
15
0 Economic cycle for every five years Opening up Economic cycle for every five years We expect another major economic transition to take place triggered by 12th FYP 1997 1999 2001 2003 2005 2007 2009
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(30) 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995
Since the major economic transition in 1980, Chinas FYPs have had significant implications in driving economic growth, especially in the first several years of each of the five-year period between the 6th FYP and the 11th FYP. We think this is also a clear indication that the FYPs are highly correlated to economic development, as positive effects from the FYPs are likely to emerge only in the middle of each FYF rather than at the very beginning. In most of the above-mentioned periods, economic growth continued to gain momentum in the first several years, before overheating occurred and a slowdown started at the end of each five-year cycle.
Positive effects from the FYPs are likely to emerge only in the middle of each FYP rather than at the very beginning
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15
10
0 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jul-10
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Structure, efficiency, peoples well being and the environment are key areas of focus
We believe the structural change for economic growth will continue under the 12th FYP
The government recently introduced measures to promote M&A, targeting to improve efficiencies and investment returns via economies of scale
Enhancing the well-being of people will be a major issue under the 12th FYP, in our view
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Reform Commission (NDRC), the high Gini coefficient could lead to social instability. Consequently, we think the widening wealth gap could be a potential threat to Chinas economic development. Nevertheless, the Chinese government recently unveiled plans to adjust the income distribution system to stimulate consumption and improve living standards by raising the minimum wage level and aims to increase the proportion of the middle class in society. In the last nationwide salary adjustment in 2009, central and western China saw salary increase 26% and 27%, respectively, due to a low comparison base, while it was only 19% for eastern areas. The central government also encourages sectors such as textile and garments, toys, electrical appliance, agricultural product processing and equipment manufacturing companies to relocate their plants inland, from Guangdong, Zhejiang and other coastal provinces that are facing rising land and labour costs. We think this will help facilitate the development of central and western China. Moreover, increasing health and medical insurance coverage is another key focus, especially for Chinas aging population in rural areas. We believe this will eventually bring increased security for the Chinese and ultimately help to boost consumption in the long run. Environment protection: We believe lowering energy consumption per unit of GDP and reducing pollutant emissions will remain as one of the top priorities under the 12th FYP. Energy consumption per unit of GDP has experienced a significant drop over the past two decades, but the current energy consumption structure, which relies on highly pollutant coal as a major resource, will likely cause the decline to slow in future. To prevent such a potential adverse outcome, we believe the Chinese government is likely to implement two key measures in the upcoming 12th FYP: 1) reduce energy consumption per unit of GDP by enhancing efficiencies especially for high-energy consumption and high-pollution sectors, such as the heavy chemical industry, and phasing out of outdated capacity; and 2) encourage the development of alternative energy resources including nuclear, wind, solar and hydro-power, among others. We think the recent cut in power supply by provincial governments is a clear indication of helping the government achieve its energyintensity target (a 20% reduction by 2010 from 2005) before the 11th FYP ends. We believe that even if energy consumption per unit of GDP were to rebound starting from next year, the overall declining trend would continue in the long term. This should help to phase out low energy-efficiency enterprises and improve industry profitability.
The structure of energy consumption in China currently relies on coal as the major resource. If this continues, it will likely drive a decline in energy consumption per unit of GDP
Efficiency improvement
People's well-being
Environment protection Lower unit GDP energy consumption Decrease pollutant emission
Consumption driven growth Strategic emerging industry development Upgrade on traditional industry
Industry consolidation
Adjusting income distribution system Development of Central & Western China Increase medical coverage for aging population
Resources conservation
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Drilling down
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Exhibit 14. Contribution to GDP growth breakdown by expenditure (9th 11th FYP)
(%) 8 Contribution to GDP by consumption Contribution to GDP by capital formation Contribution to GDP by net export 6
Exhibit 15. Fixed asset investment growth vs GDP growth (1981 2009)
(%) 20 GDP growth (LHS) Fixed asset investment (RHS) (%) 75
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11th FYP
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Strategy | China
0.35
0.41
0.36
Exhibit 17. Income distribution reform (to be released before 2010) summary
Highlights Each province's minimum wage standard should be published and submitted to the central government. Improve Lowincome Groups Earnings Consumer Price Index (CPI) should be taken into consideration when deciding an employee's wage increase. Overtime pay, public subsidies, "three insurances and one pension" should not be counted in Minimum Wage. The wage and welfare adjustment in monopolized industry should be submitted to the government for approval and made public. The average wages level and increase in monopolized industry should be regularly made public. "Wage Margin Deposit" should be put into the income distribution safeguard mechanism. Labour union laws need to be further modified to enhance the role of labour union. Earlier statistics by Ministry of Human Resources and Social Security showed that the incomes of some industries, eg. Utility, telecom, financial, insurance, and tobacco, are much higher than average wage. The rules restrict earnings increase of high-income groups and make public their average wage level. The rules protect low-income groups from the actual income decrease due to CPI increase, vague "Minimum Wage" definition, etc. Impacts
The rules reduce occurrence of wages in arrears, offering security for income distribution.
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Heilongjiang
MW: 880
MW: 820 MW: 900 MW: 960 MW: 920 MW: 900
GDP PC: 26,319 GDP PC: 34,898 GDP PC: 68,788 GDP PC: 62,403 GDP PC: 24,284 GDP PC: 35,796 GDP PC: 21,544 GDP PC: 44,232
Gansu
Qinghai
Shandong
MW: 960
MW: 1,120 GDP PC: 78,225 MW: 720 GDP PC: 16,391
MW: 1,100 GDP PC: 44,335 MW: 720 MW: 900 MW: 850 GDP PC: 17,185 GDP PC: 33,051 GDP PC: 20,226
Guizhou
Macau Hainan * Including four provinces which still not released the information
MW: 830
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Exhibit 20. Average deposit growth for 10th and 11th FYPs (2000-2009)
(%) 40 Average deposit growth for 10th and 11th FYPs (2000-2009) 30.0% 30
Exhibit 21. Deposit growth breakdown by enterprise, government and savings (2000-2009)
(% y-y) 60 Enterprise deposit y-y % Government deposit y-y % Savings deposit y-y %
40 20.3% 20 16.2% 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008
2007 2008
Enterprise
Governement
Savings
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40
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20,000
0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2009
8,000
4,000
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2009
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20
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5 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Exhibit 27. Japans total wages as % of GDP vs GDP per capita (1960-2000)
(US$) 60,000 Japan GDP per capita (LHS) Wages as % of GDP (RHS) (%) 65
45,000
55
30,000
Wages as % of GDP surged when GDP per capita reaching to about US$3,000
GDP per capita in China reached US$3,687 in 2009 4,448 4,156 3,817 2,832 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
45
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We expect consumption as a percentage of GDP in China (which reached 49% in 2009) to bottom out soon. Again, taking Japan, Korea and the US as references, their consumption as a percentage of GDP started to rebound after hitting 52-61%. We note that the ratio has never reached below 50%, except during the World War II when it dropped to nearly 50% for the US. As such, we believe China is close to seeing its consumption picking up pace.
45,000
30,000
% 55
15,000
% 50 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
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75
45,000
65 Lowest consumption as % of GDP of 61% ex World War II 1929 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
30,000
55
15,000
45
85
4,500
70
3,000
55
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40 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
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Industry reforms
Low efficiency of domestic enterprises, especially SOEs, has become a major concern for the government
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Exhibit 32. Stocks relating to the seven emerging industries of strategic importance
Company
Energy saving and environmental protection Next generation information technology Biotechnology
China Everbright International (257.HK), Sound Global Ltd (SGL.SP), BEW (371 HK), Yanhua Smartech Co., Ltd (002178.CH), Jiuzhou Electric Co. (300040.CH), Das Intellitech (002421.CH), Tellhow Sci-tech Co. (600590.CH) ZTE (763.HK), Comba (2342.HK), AsiaInfo-Linkage (ASIA.US), O-Net (877.HK), Skyworth (751.HK), Digital China (861.HK), AutoNavi (AMAP.US), Searainbow Holding Corp., (000503.CH), Fujian Newland Computer Co., Ltd. (000997.CH), Changjiang Electronics Technology Co., Ltd. (600584.CH), Xiamen Xindeco Ltd. (000701.CH) Hualan Biological (002007.CH), Beijing Taintan Biological (600161.CH), Beijing SL Pharmaceutical (002038.CH), Shanghia RAAS (002252.CH), Shanghai Kehua (002022.CH), Mingyuan (233.HK), 3S Bio (SSRX.US), China Biological (CBPO.US), Yuan Longping High-tech Agriculture Co., Ltd. (000998.CH) China High Speed (658.HK), CSR Corporation Limited (1766.HK), Weichai Power (2338.HK), Zhuzhou CSR Times Electric (3898.HK), Dongfeng Motor (489.HK), Guangzhou Automobile Group (2238.HK), Zhongke Electric Co., Ltd (300035.CH) GCL Poly Energy (3800.HK), Trina Solar (TSL.US), JA Solar (JASO.US), Yingli Green Energy (YGE.US), Canadian Solar Inc (CSIQ.US), Suntech Power Hldg (STP.US), China High Speed (658.HK), Goldwind Science & Technology Co., Ltd. (002202.CH), Shanshan Co., Ltd (600884.CH) western Metal Materials Co. Ltd. (002149 CH), Advanced Technology & Materials Co., Ltd. (000969.CH), China Fiber Glass Co., Ltd. (600176.CH), Sinoma Science & Technology Co., Ltd (002080.CH), BGRIMM Magnetic Materials& Technology Co.,Ltd (600980 CH), TDG Holdings Co., Ltd. (600330.CH), China XD Plastics Company Ltd. (CXDC US) Dongfeng Motor (489.HK), Guangzhou Automobile Group (2238.HK), BYD (1211.HK), Tianneng (819.HK), Coslight (1043.HK), Beiqi Foton (600166.CH), Changan Auto (000625.CH), Anhui Ankai Automobile Co., Ltd. (000868.CH)
High-end manufacturing
New energy
New materials
Clean-energy vehicles
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Exhibit 33. Comparable sheet for stocks relating to the seven emerging industries of strategic importance
Company Energy saving and environmental protection China Everbright International Sound Global Ltd BEW Yanhua Smartech Co., Ltd Jiuzhou Electric Co. Das Intellitech Tellhow Sci-tech Co. Next generation information technology ZTE Comba AsiaInfo-Linkage O-Net Skyworth Digital China AutoNavi Searainbow Holding Corp., Fujian Newland Computer Co., Ltd. Changjiang Electronics Technology Xiamen Xindeco Ltd. Biotechnology Hualan Biological Beijing Taintan Biological Beijing SL Pharmaceutical Shanghia RAAS Shanghai Kehua Yuan Longping High-tech Agriculture Mingyuan 3S Bio China Biological High-end manufacturing China High Speed CSR Corporation Limited Weichai Power Zhuzhou CSR Times Electric Dongfeng Motor Guangzhou Automobile Group Zhongke Electric Co., Ltd New energy GCL Poly Energy Trina Solar JA Solar Yingli Green Energy Canadian Solar Inc Suntech Power Hldg China High Speed Goldwind Science & Technology Co., Ltd. Shanshan Co., Ltd New materials western Metal Materials Co., Ltd. Advanced Technology & Materials China Fiber Glass Co., Ltd. Sinoma Science & Technology Co., Ltd BGRIMM Magnetic Materials& Technology TDG Holdings Co., Ltd. China XD Plastics Company Ltd. Clean-energy vehicles Dongfeng Motor Guangzhou Automobile Group BYD Tianneng Coslight Beiqi Foton Changan Auto Anhui Ankai Automobile Co., Ltd. Ticker 257 HK SGL SP 371 HK 002178 CH 300040 CH 002421 CH 600590 CH 763 HK 2342 HK ASIA US 877 HK 751 HK 861 HK AMAP US 000503 CH 000997 CH 600584 CH 000701 CH 002007 CH 600161 CH 002038 CH 002252 CH 002022 CH 000998 CH 233 HK SSRX US CBPO US 658 HK 1766 HK 2338 HK 3898 HK 489 HK 2238 HK 300035 CH 3800 HK TSL US JASO US YGE US CSIQ US STP US 658 HK 002202 CH 600884 CH 002149 CH 000969 CH 600176 CH 002080 CH 600980 CH 600330 CH CXDC US 489 HK 2238 HK 1211 HK 819 HK 1043 HK 600166 CH 000625 CH 000868 CH Ratings BUY BUY BUY Not rated Not rated Not rated Not rated BUY BUY* NEUTRAL* BUY* Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated BUY NEUTRAL BUY BUY BUY BUY Not rated NEUTRAL BUY BUY BUY NEUTRAL BUY BUY Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated Not rated BUY BUY BUY Not rated Not rated Not rated Not rated Not rated Market cap (US$bn) 1.7 0.7 1.5 0.3 0.4 0.4 0.9 11.4 1.4 1.4 0.5 1.6 1.7 0.8 1.2 0.9 1.4 0.4 4.2 1.7 1.7 1.4 1.2 1.0 0.4 0.3 0.2 3.1 9.7 9.2 3.0 16.0 9.5 0.3 4.5 2.0 1.3 1.7 0.6 1.6 3.1 6.6 1.3 0.6 2.4 1.3 1.0 0.4 0.9 0.3 16.0 9.5 16.5 0.4 0.3 3.2 3.3 0.6 P/E (x) 2010F 2011F 22.4 2.7 17.5 100.1 34.8 60.3 33.1 31.7 14.7 24.6 20.1 7.9 14.4 41.5 n.a. 45.9 43.1 n.a. 35.6 46.4 33.2 47.0 29.9 92.8 15.8 21.7 6.9 15.3 30.3 13.1 22.2 8.9 13.8 n.a. 16.1 9.4 9.3 1.7 8.3 11.1 15.3 18.3 40.5 75.7 54.7 n.a. 43.8 n.a. n.a. 9.5 8.9 13.8 26.7 13.9 20.7 n.a. 12.0 72.2 18.0 2.0 14.6 81.9 26.6 41.9 23.0 25.4 12.4 20.1 15.0 6.8 11.9 27.6 n.a. 33.5 33.3 n.a. 30.5 40.6 26.0 37.1 22.9 62.6 13.2 18.4 6.1 11.4 23.3 12.0 17.0 8.2 12.7 n.a. 16.1 8.5 7.7 1.5 7.9 9.4 11.4 14.7 27.3 48.4 37.9 n.a. 30.2 n.a. 351.7 11.0 8.2 12.7 23.1 10.7 15.2 n.a. 10.9 46.6 P/B (x) 2010F 2011F 2.6 2.4 3.1 n.a. 1.5 5.9 3.5 4.0 3.5 4.0 4.5 1.9 2.8 n.a. n.a. n.a. n.a. n.a. 10.2 9.7 9.4 10.9 8.2 6.3 1.8 1.8 n.a. 2.6 3.6 3.3 4.4 2.7 3.3 n.a. 2.3 1.8 1.5 1.5 1.1 1.2 2.6 6.4 2.3 4.4 5.8 n.a. 4.4 n.a. n.a. n.a. 2.7 3.3 5.7 1.7 1.3 n.a. 2.1 n.a. 2.3 1.9 2.6 n.a. 1.4 5.3 3.2 3.3 2.8 3.1 3.4 1.9 2.8 n.a. n.a. n.a. n.a. n.a. 8.0 5.2 7.6 10.3 6.3 5.9 1.6 1.6 n.a. 2.2 3.1 2.5 3.8 2.1 2.7 n.a. 2.0 1.5 1.2 1.3 1.0 1.0 2.2 4.6 2.2 4.1 5.1 n.a. 3.9 n.a. n.a. n.a. 2.1 2.7 4.6 1.5 1.2 n.a. 1.7 n.a. ROE (%) 2010F 2011F 12.3 21.2 18.3 n.a. n.a. n.a. n.a. 16.1 27.5 23.7 34.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 23.5 14.7 35.7 21.5 35.6 25.5 n.a. 19.0 22.3 18.6 15.4 8.4 -4.7 23.5 n.a. n.a. n.a. 11.2 n.a. n.a. n.a. n.a. n.a. 35.6 25.5 23.1 n.a. n.a. n.a. n.a. n.a. 13.7 22.2 18.8 n.a. n.a. n.a. n.a. 17.6 26.0 26.1 26.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 22.3 17.3 28.8 24.0 28.7 27.7 n.a. 15.7 18.5 18.5 14.7 12.7 11.8 22.3 n.a. n.a. n.a. 14.1 n.a. n.a. n.a. n.a. n.a. 28.7 27.7 22.1 n.a. n.a. n.a. n.a. n.a.
Note: * Initiating coverage; Pricing as of 21 September 2010; Ratings and Price Targets are as of the date of the most recently published report (http://www.Nomura.com) rather than the date of this document Source: Bloomberg for non rated stocks, Nomura estimates
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Top 5 combined market shares: 40% in scaled cities Nike, Adidas, Li Ning, Anta
Mobile
China Mobile
Telecom Equipment -- Handset -- Network equipment Internet -- Online gaming -- Online brand ads -- Search business Cement Steel Oil and Gas Power China Wind Turbine China Wind Gearbox Top 5 combined market shares: more than 80% Top 5 combined market shares: 30% Top 5 combined market shares: 100% Top 5 combined market shares: 12% Top 5 combined market shares: 29% Top 3 combined market shares: 100% Top 5 combined market shares: 55% Top 3 combined market shares: 60% China High Speed Transmission owns 50% market share, domestic players aggregately own 90%+ of China market Not applicable as 90%+ of sales are overseas Tencent, Netease and Shanda Sina, Tencent, Sohu Baidu, Google Anhui Conch Angang Petrochina, Sinopec and CNOOC Huaneng Sinovel, Goldwind, Dongfang Electric China High Speed Transmission, Second Heavy Industrial, Dalian Heavy Industrial Top 5 combined market shares: around 40%(all handset), 75% (3G only) Top 5 combined market shares: 90% Nokia, Samsung Electronics ZTE
China Solar
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2001
2002
2003
2004
2005
2006
2007
2008
2009
1H10
450
20
300
10
150
0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: WIND, CEIC, Nomura research
(10)
Exhibit 37. Steel sector market cap as % of total and debt to asset ratio
(%) 10 8 6 4 2 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
26
A share steel sector market cap as % of total (LHS) A share steel sector debt to asset ratio (RHS)
(%) 70 56 42 28 14 0
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Agriculture
Secondary industry
(1.8) 6.0 0.8 3.5 (2.1) 10.2 6.4 (0.8) 2.9 6.0 2.1 1.5 2.3 12.3 2.0 n.a. n.a. n.a.
0.4 6.5 1.0 2.0 (0.1) 10.0 6.6 0.5 3.9 0.2 2.5 3.5 2.7 6.2 3.7 8.7 6.1 5.9
0.9 7.5 1.7 1.1 0.6 4.3 6.4 (0.6) 2.8 2.2 2.5 4.0 1.7 2.9 6.5 3.8 3.4 5.2 4.2
1.6 7.4 2.1 1.9 0.7 4.5 7.4 (0.1) 2.9 3.3 2.8 4.7 3.3 4.7 5.2 4.3 3.7 4.7 5.3
2 10.0 4.8 6.3 1.4 0.4 7.0 (0.4) 7.2 3.4 2.8 7.9 4.5 4.5 7.8 5.5 5.8 6.2 7.2
2.3 5.8 4.2 2.2 1.2 2.2 6.8 (0.4) 9.6 3.9 3.7 10.9 5.6 7.3 11.7 5.9 4.4 9.3 9.5
1.8 7.8 2.0 5.9 1.8 0.8 5.3 1.0 8.3 2.5 (1.3) 9.1 5.8 4.6 12.5 3.3 3.2 7.5 4.5
2.2 8.6 3.2 6.5 1.8 0.8 5.8 1.1 10.9 2.8 (1.3) 10.0 6.4 5.3 12.8 3.7 3.5 8.3 6.1
2.3 8.2 4.0 4.3 2.9 0.8 6.3 1.2 11.2 2.2 (1.1) 6.6 6.0 5.5 9.5 3.3 3.7 6.0 6.3
2.0 10.8 4.5 3.2 2.8 2.7 8.6 1.4 7.7 1.9 (1.0) 3.9 2.4 5.5 9.4 3.7 3.9 5.8 6.1
Down Up Down Down Up Down Up Up Down Down Down Down Down Down Down Down Down Down Down
Auto Manufacturing Building Material Industry Chemical Fundamental Material Gas Production & Supply IT Equipment Manufacturing Pharmaceutical Industry Water Production & Supply Coal Industry Electric Utility Industry Electronic Component Manufacturing Ferrous Metal Industry Food & Beverage Manufacturing Machinery Mining-Crude Oil & Natural Gas Stationary and Sporting Goods Tertiary industry Computer and Software Service IT Service Telecom Service
Source: WIND, Nomura research
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Central and western regions have a different competitive edge and growth path
Agricultures contribution to total employment declines at a faster pace than its contribution to the total economy, especially for central and western China
Maanshan Iron & Steel Sichuan Expressway Anhui Expressway China Blue Chemical Anhui Conch Cement Yurun Food China Railway Construction Zhuzhou CSR Times Electric Dongfeng Motor Great Wall Motor Tencent PetroChina China Mobile Shenhua Energy
Source: Bloomberg, Nomura research
323 HK 107 HK 995 HK 3983 HK 914 HK 1068 HK 1186 HK 3898 HK 489 HK 2333 HK 700 HK 857 HK 941 HK 1088 HK
60%+ sales to central and western China 100% sales to central and western China 100% sales to central and western China 50%+ sales to central and western China 30% sales to central and western China 40%+ slaughtering, 34%+ processing 40%+ Chinas railway constructions in central and western China 40%+ Chinas railway constructions in central and western China 40%+ sales to central and western china 40%+ sales to central and western china Relatively large exposure to lower tier cities and rural areas 70% production in central and western China 50%+ subscriber base in central and western China Productions primarily in central and western China
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Exhibit 40. Productivity comparison between eastern, central and western China (2008)
70%
1. Central and western China data is expected to move inbound along the equation line. 2. Agriculture contribution to total employment is decreasing at higher pace than that of agriculture contribution to total economy, which leads to Gansu productivity enhancement in future. Inner Mongolia
Shaanxi Henan Jilin
60%
Tibet
Yunnan
50%
40%
Guangdong
Ningxia Heilongjiang Anhui Qinghai China Central China Jiangxi Hebei Shandong Chongqing Liaoning Fujian Eastern China Hubei
30%
20%
Jiangsu Zhejiang
10%
0%
-10% -2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
(Growth) 25 20 15 10 5 0
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Exhibit 42. Where central and western China are leading in growth
Central and western China's leading economic measures Economic measures General Economy GDP GDP per capita Rural net income per capita Urban disposable income per capita Investment 2009 fixed asset investment growth by region Fixed asset investment: Rural Fixed asset investment: Urban Foreign direct investment Industrial production Power of agricultural machinery Generating capacity of hydropower station Gross industrial output Value added of industry No of industrial enterprise Gross output value of electronic industry Value-added of electronic industry Gross output value of construction industry Value-added of construction No of foreign funded enterprise Floor space under construction & y-y growth The secondary industry 5 11 22 12 26 1 1 20 17 42 8 5 8 14 32 16 30 31 34 25 26 116 19 8 10 2008 2 2007 32 2008 2 2008 26 2008 20 2009 23 2009 28 2009 22 2008 115 2008 17 2009 14 2009 Trade Export by location of exporter Export by location of producer Import by location of consumer Import by location of Importer Source: CEIC, Nomura research 15 (4) 17 17 34 7 30 31 39 2008 12 2008 30 2008 31 2008 Fiscal position Local government fund transfer CAGR (03-06) Tax income growth Local government revenue 7 19 19 14 25 24 12 2006 24 2008 26 2008 24 19 24 14 29 26 36 18 29 2009 27 2008 35 2008 57 2008 10 16 13 13 10 21 16 14 15 2009 21 2008 16 2008 15 2008 Most recent y-y growth (%) Ref. Eastern Central Western year Consumption Wholesale sales Retail sales Visitor arrival Hotel revenue Tourism revenue international Research and development expenditure Consumption of chemical fertilizer Auto sales Electronics industry sales Urban computer penetration Urban mobile penetration Urban auto penetration Rural computer penetration Rural mobile penetration Rural motorcycle penetration Internet users 65 18 7 11 6 23 (1) 45 1 9 4 34 0 12 1 21 71 19 6 9 6 31 4 48 31 10 4 73 40 17 7 43 37 2009 20 2009 8 2009 15 2007 15 2009 23 2008 5 2008 63 2009 20 2009 12 2008 4 2008 65 2008 35 2008 22 2008 7 2008 37 2009 central/western's leading economic measures Economic measures Most recent y-y growth (%) Ref. Eastern Central Western year
Exhibit 43. FAI growth in China rural areas since central and western development strategy (10th FYP)
(%) 80 Eastern Central Western
Exhibit 44. FAI growth in China urban area since central and western development strategy (10th FYP)
(%) 40
60
30
40
20
20
10
Eastern
Central
Western
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Note: Industry labour shortage ratio represents labour y-y growth minus output y-y growth Source: CEIC, Nomura research
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Exhibit 47. Overview of eastern, central, western and north-eastern China (2008)
Northeastern China: Heavy industry base, Developed transportation network
Heilongjiang
Jilin Xinjiang Liaoning Inner Mongolia Gansu Ningxia Qinghai Shaanxi Tibet Sichuan Sichuan
C g qin ng ho
Beijing Tianjin Hebei Shandong Shanxi Henan Hubei Jiangxi Hunan Fujian Jiangsu Anhui Shanghai Zhejiang
Eastern China: Developed industry system, rising labor and land costs, more correlated to world economy
Guizhou
Western China: Rich resources reserve, less developed transportation network, low labor costs and urbanization rate
Central China: Developed transportation network, relative lower labor and land costs
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Energy consumption
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450
(20)
(40)
(60)
Crude Oil
Natural Gas
Hydo Power
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60,000
50,000
40,000
30,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
45,000
18
30,000
12
15,000
0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
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30
(10)
20
(20)
10
(30)
(40)
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Appendix
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Under Chinas macro economic objectives, industrial targets are also set in the FYP to break down main tasks and strategic priorities. Taking advantage of a centralised management platform (the government monopolizes massive social resources), social resources are allocated purposefully. The force of policy under the China Model is so strong that it rarely fails to meet the governments objectives. We highlight the development trends of some sectors below to show how nationwide support has helped them.
Exhibit 56. Foreign trade take-offs after opening-up policy was put into practice (5th FYP)
(x) 6,000 base year: 1950 5,000 4,000 3,000 2,000 1,000 0
1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006
Exhibit 57. Government expenditure on education, science and civilisation increased after 6th FYP
(x) 3,000 base year: 1953 Agriculture Science Research Pension and Social Welfare
9th FYP Set 'Prosper China through science and education' as one of the fundamental
Export
2,500 2,000 1,500 1,000 500 0 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001
Source: CEIC, Nomura research
6th FYP Put in 'develop education, science and civilization' for the first time
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0 (10) (20)
With GDP growing steadily, Chinas industrial structure has continued to improve. For the tertiary industry, its share of total GDP reached 43.36% by the end of 2009 and met the target before the end of the 11th FYP period (12th FYP target 43.3%). Meanwhile, contribution from the primary industry has declined from 20% to 10% since the end of 8th FYP period. Along with industry restructuring, the capital returns of corresponding industries headed in different directions. In our view, the main focus of the next FYP will be to strengthen the trend and keep the target of having more balanced economic growth in 2011-15. We believe support will continue to be given to consumption, energy saving and productivity improvements. In our view, the 12th FYP will be critical in helping to transform Chinas economic growth model from an investment-driven and energy-consumption-driven one to a more balanced and sustainable growth model. In Chinas policy-driven model, those sectors that benefit should see rapid industry growth and, hence, respective stock outperformance. Historical data backs this up. For example, the deep industrial restructuring of the past has led industrial companies to see their performance raised to the market average level as further development and overcapacity slowed. We are now more positive on the consumption sector.
Exhibit 60. Five-year closing price comparison (Coal & Oil Mining)
(%) 600 500 400 300 200 Closing price-total A share Closing price-Mining
Exhibit 61. A-Share Market Historical ROE (Coal & Oil Mining)
(%) 60 50 40 30 20
Mining
100
10
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
10th FYP
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100
8 6
4 2
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008 2008
9th FYP
Source: Wind, Nomura research
10th FYP
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
9th FYP
Source: Wind, Nomura research
10th FYP
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2009
(100)
2009
(100)
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The Five-Year Plan (FYP) is the governments comprehensive blueprint for mediumterm economic and social development. The FYPs, the first of which debuted in 1953, has traditionally provided policy guidance on Chinas economic development as well as developments in other areas, including science, society, and culture. We expect the 12th FYP, which starts from 2011F, will not only play a similarly important policy role for the next five years, but will be closely scrutinised by investors given concerns about the quality and hence sustainability of Chinas high rates of GDP growth. Apart from the national FYP, each government department releases industry-specific plans and each province (even cities and towns) also releases its own FYP. The FYP is a broad name for all such plans.
Nov. 2008
Jun. 2009
All districts and departments started to perform preliminary investigation, Periodical round-up submitted to the State Council
Oct. 2010
Discuss the draft 12th Five-Year Plan Outline at Fifth Plenary Session of the 17th Central Committee of the Communist Party of China
Mar. 2011
The 12th FYP has received increasing public attention since the Central Committee of the Communist Party of China (CPC) announced that the outline of the 12th FYP would be discussed at the Fifth Plenary Session of the 17th CPC Central Committee meeting in October. The October meeting will decide on the guiding principles, policy orientation and major objectives of the 12th FYP.
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12th FYP likely to focus on three properties, two of them more green than economics greater energy efficiency, protecting the environment
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One factor is the need to change the pattern of growth from investment-led growth
1960
1968
1976
1984
1992
2000
2008
1960
1968
1976
1984
1992
2000
2008
The fundamental reason to invest is to increase the capacity for producing goods and services, in anticipation of future demand for such goods and services. The rapid increase in investment in China implies that Chinese entities expect a substantial increase in demand for their products. This strategy to invest aggressively appears to have worked well the expanded pool of production facilities has been used to meet rises in demand for both domestic consumption and exports. The stable inflationary environment that China has experienced over the past decade is partly the result of this high investment rate, which has enabled production capacity to increase to meet rising demand, without causing bottleneck inflation. Since investment is a forward-looking activity, the high ratio of investment-to-GDP that China is experiencing can be justified and sustained only if China maintains the high level of growth in demand for both domestic consumption and exports. However, the growth in demand for exports in the medium term looks increasingly uncertain and China is already the largest exporter in the world. The continuation of government stimulus plans is not a long-run solution to this issue, given the impact on fiscal sustainability. This leads to our conclusion that private consumption needs to grow robustly if China aims to maintain a high GDP growth rate in the medium term.
The Chinese economy has been able to run at full steam without inflation, as the nation has saved the excess
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The structure of Chinas economy is partly the result of a history of policies biased to capital accumulation. Government spending is geared more to investment in physical infrastructure than health and education. Industrial firms were promoted through favourable tax treatment as well as under-pricing of inputs, including capital, energy, and natural resources, in an effort to build an export powerhouse. The government did not encourage companies to raise the labour share of income (share that workers receive out of total surplus) under relatively loose labour market conditions. The Hukou system also discriminated against migrant workers. The second factor is income inequality. The falling share of consumption (especially for rural households) has caused social instability issues. For example, more crimes caused by social hatred have been reported (for example, the kindergarten tragedy, Caixin Weekly, 15 May, 2010). If the rural population does not sufficiently share the benefits from economic growth it is hard to expect it to support such a growth pattern for long. If the government can succeed in accelerating incomes of the poorer segments of the population, consumption can rise disproportionately owing to the greater propensity to consume in low-income households. The Exhibit below (righthand side) shows that apart from the high-income group, rural households have a higher propensity to consume than their urban counterparts, particularly in the case of low-income households.
Also interesting for a socialist communist country is that China has looked to grow industry, less to let workers share in the gains
Another factor is income equality; without this, social harmony, which the government values, is hard to maintain
1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Low
Urban
Rural
L middle
Middle
U middle
High
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Conference and Chairman of the All-China Federation of Industry and Commerce mentioned the intention to raise the minimum wage by more than 20% annually for the next five years, according to South China Morning Post, 21 September. On top of boosting rural incomes, the 12th FYP is likely to emphasise agricultural reform as another way to improve the living conditions of low-income households. We expect the government to continue to support farmers through measures such as setting relatively-high minimum prices for agricultural products and providing subsidies to agricultural production. China is also likely to introduce measures to strengthen the social welfare system such as healthcare, social security and education in the 12th FYP that indirectly stimulates consumption by reducing the high precautionary saving rate of households. Although the government started to accelerate reform in these areas at the onset of the global crisis, it is likely to take further steps to widen the social safety net. It has increased fiscal spending on social welfare by more than 20% pa since 2004, which has lifted welfare expenditure to more than 15% of total fiscal spending (next Exhibit, left).
Agricultural reform will try to raise income of rural households
Policies to improve social security, healthcare and education are likely to be included
Exhibit 71. Fiscal expenditure on social welfare (healthcare and social security)
(% y-y) 40 Share of social welfare expenditure in total fiscal expenditure (RHS) Growth of welfare expenditure (LHS) 30 15 (%) 16
(% share) 45
Rural household
Urban household
30
Goods
Services
20
14
15
10
13
0 Clothing Healthcare Food Residence Home applicances Insurance T&C REC Financial Others
12
Note: T&C stands for transportation and communication, REC stands for recreation, education and cultural services. The distinction between goods and services should be taken as a rough guide only, because some of the categories include goods and services. Source: CEIC, World Bank, Nomura research
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12
0 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: CEIC and Nomura Global Economics
Owing to the rapid growth of the past three decades, China surpassed Germany in 2009 to become the worlds third-largest economy in terms of nominal GDP (measured in US dollars at market exchange rates), with a nominal GDP of US$4.9tn (see Exhibit below). Recent data suggest China surpassed Japan in the first half of this year, and is now the worlds second-largest economy (see Exhibit Size of nominal GDP and GDP per capita China versus Japan).
Note: GDP is measured in US$ at market exchange rates. Source: World Bank and Nomura Global Economics
Note: GDP per capita is measured in US$ at market exchange rates. Source: World Bank and Nomura Global Economics
However, because it has the largest population in the world (1.3bn), China is still a low-income economy in per capita terms. Indeed, China is not in the top-100 countries by GDP (nominal) per capita. Chinas GDP per capita is only 8% of that of the US, and 45% of Brazils (Exhibit above). A closer comparison, with Japan, shows that Chinas current GDP per capita is similar to what Japans was in 1974, though total nominal GDP in both economies is now similar (see Exhibit below).
Income and consumption should grow fast from the current, relatively low income level
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Exhibit 76. Size of nominal GDP and GDP per capita China versus Japan
(US$trn) 6 5 4 Japan's GDP (LHS) 3 2 1 0 1970 1978 1986 1994 2002 Japan GDP per capita (RHS) China GDP per capita (RHS) China's GDP (LHS) (US$) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1H2010
Notes: For 1H10, GDP is annualised by taking the sum of GDP in the four quarters to 2Q10, while we estimate the population by assuming it grew by half the rate in 2009. Source: CEIC and Nomura Global Economics estimates
We believe China is still in a rapid developmental growth stage, with multiple factors favourable for growth including urbanisation, a rising middle-class population and developing infrastructure, especially in the inland regions, which should help raise productivity in various industries. 2. Urbanisation China embarked on its urbanisation process in 1949, when only 10.6% of its population lived in urban areas. By 2009, its urbanisation ratio had risen to 46.6%, which implies that 391mn people have moved from the countryside to cities during this period (see Exhibit below). Yet based on the experience of other countries, we believe Chinas urbanisation still has a long way to go indeed, it is a natural process of economic development as the rural labour reallocates to higher-paying jobs in the cities.1 We expect Chinas urbanisation ratio to rise to 53.2% by 2015F and 68.9% by 2030F. In other words, we expect another 150mn people to leave rural areas for cities over the next 10 years and for that number to reach 300mn over the next 20 years. (See China: Urbanisation as a growth driver, Global Weekly Economic Monitor, 20 August, 2010, for more details).
Urbanisation should support growth in income and consumption
15
10
0 1981 1986 1991 1996 2001 2006 2011 2016 2021 2026
Chinas urbanisation ratio, at 46.6% in 2009, was achieved by Japan in 1964 and South Korea in 1974; it is roughly half of the current ratio of the UK and the US, and is shy of the global average of 49.9%.
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Household consumption should grow strongly alongside urbanisation. Household consumption data show that, consistent with much higher income levels, urban households (per capita) spent 3x as much as their rural counterparts in 2009 (next Exhibit).2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Notes: Savings is defined as disposable/net incomes minus consumption expenditure. Source: CEIC, Nomura Research estimates
The composition of total consumption should also change, as urban households tend to spend more on transportation and telecommunication, recreation, education and cultural services, as well as clothing (next Exhibits). Rural migrants to the cities are likely to spend a larger share of their expenditure on such items.
Food 37%
Traffice & communication 11% Medical care 7% Household facility & service 6%
Residence 8%
Clothing 13%
Residence 17%
Clothing 10%
Urbanisation could also be a boon for a more sustainable expansion of the manufacturing sector. Ownership penetration of many consumer durable goods is far higher in urban than rural households. In 2008, on average, every 100 urban households owned 133 colour TV sets, 95 washing machines and 39 cameras. The corresponding figures for rural households were 99, 49 and four (next Exhibit). Higher urbanisation should therefore help reduce manufacturing overcapacity. It could also
Urbanisation creates positive feedback loop through a rise in demand for manufacturing goods
2 In 2009, average annual disposable income per capita of urban households in China was RMB17, 175 more than triple that of rural households (RMB5, 153)
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create a positive feedback cycle as stronger demand for manufactured consumer goods creates more urban jobs.3
Urban
Rural
Urbanisation should also help underpin investment, as demand for housing increases. While most may not be able to afford property immediately after their migration to the city, we would expect to see significant demand for low-rent housing and affordable houses. Sustainable construction investment on both commercial projects and public housing should bring benefits for many years while also supporting a positive mediumto long-term outlook for the property market (see Chinas property bubble, Global Weekly Economic Monitor, 1 November, 2008).
3 When household income reaches a certain level in cities, demand for services increases, and thus service jobs should increase in number. As such, the eastern region could absorb new migrants by boosting the service sector (which is labour-intensive), while we think manufacturing will move inland.
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Qinghai Tibet
Jiangsu Shaanxi Henan Shanghai Anhui Hubei Sichuan Sichuan Zhejiang Chongqing Guizhou Yunnan
xi
Hunan
Jiangxi Fujian
Hainan
Source: Nomura research
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Development history of CWC. Beginning with the market-based economic reforms of the 1980s and 1990s, the central government started favouring the Eastern region, owing to its potential to better adapt to market mechanisms due to its easier access to international trade and foreign investment. As a result, disparities among the three regions broadened as Eastern China spearheaded the nations economic growth while the other regions lagged (see Exhibits below).
(RMB) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Eastern Central Western
Eastern
Central
Western
Secondary
Tertiary
After 20 years of rapid economic growth in the East, the government in the late 1990s started turning its attention to promoting growth in CWC via increased fiscal transfers, infrastructure investment and other preferential policies all aimed at reducing regional disparity, facilitating industrial migration and rebalancing the economy away from the risk of over-dependence on exports. The government officially launched its western development plan in 2000, followed by boosting central region plan in 2006. The success of those special economic zones and sustained high economic growth strengthened Chinas fiscal conditions over time, which enabled the government to embark on its strategic development in CWC. CWC set to grow robustly. CWC has much lower labour and land costs than the Eastern region. For example, in 2008, average urban disposable income in central provinces was 30% lower than in the East; in 2009, land for commercial use in Wuhan (a major central city) was 65% cheaper than in Nanjing (a major eastern city). In addition to a large labour force with relatively low labour and land costs, CWC has more natural resource reserves. For example, 20% of Chinas natural gas reserves are in the Central region and 69% in the Western region. Nearly all of Chinas coal reserves are in the Western (84%) and Central regions (13%) (next two Exhibits).
Western development plan started in 2000, followed by boosting central region plan in 2006
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Central, 13%
Central, 20%
Western, 69%
Western, 84%
Expect relocation of manufacturers from Eastern China to CWC. The Eastern region has higher costs than CWC, particularly for land and labour, as the Exhibit below shows. Industrial-use land prices in Nanjing (Eastern) are about 1.5x as much as in Wuhan (Central) and Chengdu (Western) (see Exhibit below on the right). Rising costs and a subdued export outlook are important push factors for low-end manufacturers to relocate inland, and leave the Eastern region for high value-added, more service-oriented industries.
653
Also, the improvement in the investment environment in CWC through development projects should be an important pull factor for low-end manufactures in the Eastern region to move to CWC, in our view. Eastern China is now the most developed and the most densely populated region. It covers only about 11% of Chinas total land mass but holds 47% of the total urban population (56% urbanisation ratio) and contributed 58% to Chinas total GDP in 2009 (next Exhibit). Secondary industries (eg, metals, mining, power, gas and water supply, and construction) are predominantly located in Eastern China (58%), as are tertiary (service) industries (62%).
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Exhibit 89. Vital statistics on the Eastern, Central and Western regions (2009)
GDP (RMBbn) Eastern Central Western Total 20,974 8,563 6,687 36,223 (%) GDP per capita (RMB) Population (mn) 58 24 18 100 40,118 20,375 17,058 22,698 523 420 392 (%) 39 32 29 Urbanisation % 56 43 38 47 Size (000 sq km) 1,060 1,630 6,910 9,600 (%) 11 17 72 100
1,335 100
Note: National GDP per capita figure is for 2008. Source: National Statistics Bureau, Nomura International (Hong Kong) Limited
With cheaper labour and land costs, rapidly rising household incomes, ongoing improvements in infrastructure and favourable government policies, CWC looks set to become the growth engine of the Chinese economy over the next decade or two. Of the 65 economic indicators available with a regional breakdown, 43 show that CWC is already starting to outpace Eastern China in terms of growth over the past two to three years. In particular, real GDP growth in CWC has, for the first time in decades, exceeded that of the East in two consecutive years (2008 and 2009) (for details, see our Anchor Report: New dawn for Central and Western China,16 April, 2010). In addition to the development plans, the central government implemented the following three policies to support the regional developments.
We expect some manufacturers in the East to move to CWC
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With this detailed policy guideline we expect a substantial number of manufacturing enterprises to move inland. In addition, China is trying to realise industrial upgrading in the process, as the policy calls for the environment to be considered and to upgrade processing and assembling trading during industry transfer.
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1,000 500 0 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
1,000 20 500 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: BP; Bloomberg; Nomura Research estimates
Supply constraints on other natural resources, like water, are currently not as visible as for energy, but the impact is likely to be usually long-lasting. For example, water consumption per capita is a key indicator of living standards, and thus water consumption is expected to rise in step with rising GDP per capita (next Exhibit). Chinas per capita quantity of water flow is 2,200 cubic metres, only 24.7% of the worlds average water flow level. In addition, water reserves in China are concentrated in south China, while arable lands are concentrated in the north. The north China plain, the main area of wheat and cotton production, has cultivated about 40% of total arable land but has only 6% of total water reserves in the country.
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Water pollution from a factory can kill a whole river ecosystem and clean-up costs can be high. We note an increase in media reports (for example, Ting River contaminated with acidic copper waste, Caixin Weekly, 15 July, 2010) on pollution spills with large negative social and economic consequences. For example, Zijin Mining (a listed mining company) did not disclose the above pollution incident in timely fashion, prompting the Shanghai Stock Exchange to release a new rule requiring listed companies to disclose information on any serious environment accident within two days a step that is likely to increase investor scrutiny of environmentally unsafe companies. In our view, China needs to deal with energy and environmental issues before the costs become too high to sustain its high economic development path, and we believe that Chinese policymakers understand this.
Source: State Bureau; National Water Resources Development Statistical Communique;; Nomura Research estimates
In several regional development plans, the environmental targets are not only set by the central government, but are a fundamental factor for sustainable development, and in certain regions for example, the Yellow River Delta economic zone with its efficient eco-development plan environmental improvement has been treated as being as important as economic development 6 Reforms are needed to make it profitable to be energy efficient and to spur recycling. For example, household rubbish recycling projects are running in Taiyuan (a city in Shanxi province) since the local government charged fees for waste disposal. This new business model is likely to be replicated by many other cities in the years ahead.
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Perform socialist transformation of individual handicraft, individual farming and other private industries. Set up basis of socialist industrialisation. Speed up industrial development, especially for heavy industry.
Insist on heavy-industry-focus development pattern. Further consolidate and expand the system of ownership of the whole people and collective. Give priority to develop industry (double the value of industrial gross output), agriculture (increase 35% of agriculture gross output) and handicraft industry; develop transportation and commerce. Develop education to meet the needs of development. Strengthen national defence capability. Double the investment in capital construction.
Too aggressive development target resulted in imbalance within national economic system. Financial deficits occurred in successive years. Economic problems were exacerbated by three years of bad harvests in China from 1960 to 1962.
N.A.
Give priority to agriculture development. Strengthen national defence capability. Corresponding develop industry, transportation, commerce, civilization, education, science. Achieve 12.5% five-year average y-y growth in gross output of industry and agriculture. Make RMB130bn investment in capital construction over five years. By 1975, achieve annual production of grain (300-325bn kg), cotton (65-70mn tonnes), steel (30mn tonnes), raw coal (400-430mn tonnes). Shift in focus to socialist modernisation and economy development. Improve government finances. Achieve 4% average y-y growth in industry and agriculture output. Increase consumer goods supply and improve product quality to meet consumption demand. Cut down depletion of resources. Develop education, science and civilisation. Strictly control population growth. Develop business and economics, make good use of foreign capital and technology. Protect environment, reduce pollution. Achieve 6.65% average y-y growth in industry and agriculture output (4% for agriculture and 7.5% for industry respectively). By 1990, achieve annual production of grain (425-450bn kg), cotton (4.25m tonnes), steel (55-58mn tonnes), raw coal (10bn tonnes). Gradually put into practice the nine-year compulsory education policy. Develop education, science and civilisation. Keep the balance of social consumption demand and supply. Develop import and export business, expand the use of foreign capital and technology. Raise living standards, achieve 5% average y-y growth in household consumption capability during the period. Keep the balance in government finances.
N.A.
Removed the development key focus from industry to agriculture and national defence. Emphasised balanced development of national economy.
Adjusted down the economic development target to make it reasonable and feasible. Completed most of the target, except for the production of cotton and steel. Great increase achieved in GDP, industry and agriculture output, national income. Opening-up Policy put into practice Fiscal surplus. Achieved 11% average growth in industry and agriculture output Great increase achieved in the production of steel, coal, raw oil, grain, cotton. Great increase achieved in investment in capital construction. Government financial situation continued to improve; balanced income and expenditure. The value of exports ranked 10 worldwide by the end of 1984. Great increase achieved in household income.
Achieved 19.7% five-year CAGR of industrial output and 14% average growth of primary industry. Achieved over 7% average GDP growth. Achieved 4.3% average FAI growth. Improved the national economic structure; the GDP contribution of primary, secondary and tertiary industry was 27.1%, 41.6% and 31.3%, respectively, at period end. The total value of foreign trading achieved 10.6% average y-y growth. The total retail sales achieved 3.3% average y-y growth. Household income per capita increased above 5% average y-y growth.
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Period
Achievements and lessons Achieved 11% average y-y growth in the period; GNP of 1995 is 4.3x that of 1980. Production of coal, cement, cotton, grain, meat ranked top in the world, while steel and chemical fibre ranked 2nd. Achieved 17.9% average y-y growth in FAI, 13.6 pct higher than in the preceding period. Secondary industry and territory industry GDP average growth reached 17.3% and 9.5%, respectively. The proportion of these two industries to total GDP rose accordingly. Total export and value doubled in the period, with 19.5% average y-y growth. Household income increased with 7.7% average y-y growth, 3pct higher than in the preceding period. Retail sales achieved 10.6% average y-y growth. Average per capita floor area for urban and rural households reached 7.7 sqrm and 20.5 sqrm. Achieved 8.3% GDP average y-y growth. Urban household income per capita and rural net household income increased at CAGR of 8% and 7%, more than planned. 13.7% y-y CAGR of government expenditure in science and research. The population in 2000 was 1.27bn, within the target. GDP per capita of 2000 was RMB7,857 16.96x of that of 1980. Achieved 9.8% GDP average y-y growth Agriculture employees decreased by 20.73mn during the period, while secondary and tertiary industry employees increased by 58.13mn. The urban unemployment ratio ranged from 3.2% to 4.3% (below 5% target) over the five years. GDP contribution of primary, secondary and tertiary industry in 2005 reached 12%, 47% and 41%, respectively. Urbanisation rate stood at 43% in 2005. RR&D expenditure to GDP ratio reached 1.3% in 2005 short of the 1.5%. Total population at the end-2005 was 1.211bn, within the 1.33bn target. Industrial solid waste discharge was reduced at a -12% CAGR from 2000 to 2005, while industrial air emissions and water discharge still increased in volume. Average per capita floor area for urban and rural household stood at 26.11 sqrm and 29.68 sqrm in 2005, respectively. Initiated strategies of 'Western Development', 'Revitalising Northeast China' and 'Rising Central China'. GDP growth in 2006-09 was 12.7%, 14.2%, 9.6% and 9.1%, respectively. The GDP contribution of tertiary industry to total GDP increased from 40.9% to 43.4% from 2006 to 2009. The R&D expenditure to GDP ratio rose from 1.39% in 2006 to 1.60% in 2009 not reaching 2% target. Policies were issued to encourage energy-saving industry and stimulate rural consumption. Comparing 2009 energy consumption of per unit GDP with that of 2005, the ratio is down by 16%, for a -4% CAGR. Per capita disposable income of urban residents and per capita net income of rural residents reached RMB13,175 and RMB5,153, respectively, by end of 2009. By the end of 2009, urbanisation rate stood at 46.59%. Industrial solid waste discharge was reduced at a -22% CAGR from 2005 to 2008, while industrial air emission and water discharge still increased in volume but with lower growth rate. Since from 2006 to 2008, 1.196mn km of country roads had been built or upgraded. Nomura recent research report showed that 43 measures out of 65 economic indicator of Central and Western China have already outpaced growth in Eastern China (New dawn for Central and Western China, Anchor report, 16 April 2010). New policies has been issued to allow PE to participate in middle and small size financial institution set up and reform The export and import growth from 2005~2009 achieved 6.97% and 6.04% CAGR, respectively, despite of the economic crisis
Maintain rapid growth in national economy. Maintain growth in key products, eg, coal, cotton, grain, meat. Speed up fixed asset investment. Balance development of social economy. Continue to practice opening-up policy. Increase household income, improve living environment. Control the growth of population.
Achieve 8% GDP average y-y growth. Achieve 30% fixed assets to investment rate. Increase urban household income per capita and rural net household income per capita by 5% and 4% average y-y growth. Keep the total population under 1.3bn; quadruple per capita GDP of 1980 before 2000. Set 'Prosper China through science and education' as one of the fundamental strategies. Achieve 7% GDP average y-y growth. Divert 40mn agriculture labour and keep urban unemployment rate below 5% during the period. Improve socio-economic development structure (primary, secondary and tertiary Industry GDP contribution portion should be adjusted to around 13%, 51% and 36% before 2005, respectively); increase urbanisation. R&D expenditure to GDP ratio should be raised to above 1.5% by the end of 2005. Total population to be within 1.33bn by the end of 2005. Reduce energy consumption and pollutant emissions. Continue improving living standards; household net income should be increased by 5% y-y on average, while per capita urban household living space should increase to 22 sqrm by the end of 2005. Balance regional development.
Achieve 7.5% GDP average y-y growth. Improve socio-economic development structure; optimise and upgrade industrial structure and significantly raise the proportion attributable to the service industry. The R&D expenditure to GDP ratio should be raised to above 2%. Encourage energy-saving industry; energy consumption of per unit GDP to be lowered by 20%. Improve living standards; raise per capita disposable income of urban residents and per capita net income of rural residents to RMB13,390 and RMB4,150 respectively. Improve public services, such as public health, social security, education, in quality and quantity. Develop rural area from all sides; balance urban and rural development, lift urbanisation rate to 47%. Better inhabitation environment, reduce major pollutants emission volume by 10%; newly build and upgrade 1.2mn km of rural roads. Develop central and western China, invigorate northeast China while keeping the development of the east as a priority. Speed up financial institution reform, encourage social capital to participate in small and medium-sized financial institution set-up and reform. Carry out export and import structure plans; raise quality of trading products, rather than merely quantity.
Source: Respective Five Year Plan outline report, Nomura International (Hong Kong) Limited
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Exhibit 94. Announced regional economic development plan (December 2008 2010)
Regional economic development plan Planning period Region Development goals
The Outline of the Plan for the Reform and Development of the Pearl River Delta(2008-2020)
2009-2020
(Approved by NDRC)
By 2012, per capita GDP will reach RMB80,000, with service industries accounting for 53% of the growth; per capita incomes for urban and rural residents will increase sharply compared with those of 2007; urbanisation rate will exceed 80%; the amount of land for construction use needed for every 100 million yuan of newly added regional GDP will decrease. By 2020, per capita GDP of the region will reach RMB135,000, with service industries accounting for 60%; income levels for urban and rural residents will be double those of 2012; the urbanisation rate will reach 85%, and the energy consumption per capita GDP and the quality of the environment will be in line with or approaching quality in advanced economies elsewhere.
2009-2020
(Approved by NDRC)
Central regions which include the six provinces including Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan are major grain production bases, energy and raw material bases, equipment manufacturing bases and an integrated transport hub and play an important role in the economic and social development.
By 2015, the central region should achieve the following objectives: per capita GDP will reach the national average level (RMB36,000); Urbanisation rate of 48%; Grain production capacity of 16,800mn tonnes; Amount of energy consumption needed for every 1 million yuan of newly added regional GDP will decrease by 25%; The amount of water consumption needed for every 1 million yuan of newly added industrial production will decrease 30% to 105 tonnes; The amount of land for construction use needed for every 1 million yuan of newly added regional GDP and fixed asset investment will decrease; Average annual income growth rate of urban and rural residents will exceed 9%; Disposable income of urban residents will reach RMB24,000; Per capita net income of rural residents will reach RMB8,200; Cultivated land will remain 29mn hectares; Comprehensive utilisation rate of industrial solid waste will reach 80%; Forest coverage rate will be 38.0%; Registered unemployment rate in urban area will remain 4.0%; New rural cooperative medical insurance rates; By 2015, the region will have initially built a comprehensively well-off society; GDP per capita will reach RMB82,000 (core area: RMB100,000), with service industries accounting for 53% of the growth; urbanisation will reach 67% (core area: 70%); R&D expenditure accounting for GDP growth will reach 2.5% (core area: 3%). By 2020, the region will have basically realised modernisation ahead of other regions, forming an industrial structure featuring modern service industries. The per capita GDP of the region will reach RMB110,000 (core are: RMB130,000), with the service industries accounting for 53% (core area: 55%); urbanisation will have reached 72% (core area: about 75%).
2006-2020
Gulf Economic Zone is located in the southwestern tip of China's coastal areas, comprising Nanning, Beihai, Qinzhou, Fangchenggang of four municipalities under the jurisdiction of administrative areas.
General goal: BGEZ is to be built into a key region of economic growth along the coast of China in 10 to 15 years, and to take the lead in building a moderately prosperous society in West China. Specific targets: By 2020, Economic strength has markedly increased. Per capita GDP exceeded the national average, The proportion of economic output accounted for Guangxi province raised to about 45%. Total population will increase to 19mn The urbanization rate will increase 4%; The amount of energy consumption needed for every 10,000 yuan of newly added regional GDP will decrease to 0.66 tons of standard coal Total SO2 emission will remain 205,000ton as 2010 unchanged Total COD emission will decrease to 250,000ton Forest coverage rate will be 60%;
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Regional economic development plan Opinions on Implementation of Boost the Rise of Central Region Plan* (Approved by NDRC)
Region Central regions, which include the six provinces of Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan, are major grain production bases, energy and raw material bases, equipment manufacturing bases and an integrated transport hub, and play an important role in economic and social development.
Development goals 2015, "plan" to implement to achieve main goals GDP per capita will reach RMB36,000, Urbanisation rate will increase to 48%, Disposable income of urban residents and per capita net income of rural residents will reach RMB24,000 and RMB8,200, respectively. The amount of energy consumption needed for every 10,000 yuan of newly added regional GDP will decrease by 25%; The amount of water consumption needed for every 10,000 yuan of newly added industrial production will decrease 30%; Forest coverage rate will rise 2.3%; New rural cooperative medical insurance rates will close to 100%; Comprehensive utilisation rate of industrial solid waste will rise to 80%; By 2020, the central region should target the full realisation of being a well-off society.
Guidance on Boost the city cluster development of Central Region Plan* (Approved by NDRC)
2010-2020
Central regions, which include the six provinces of Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan, are major grain production bases, energy and raw material bases, equipment manufacturing bases and an integrated transport hub, and play an important role in economic and social development.
Further optimise the spatial layout of city clusters. Promote the optimisation and upgrading of industrial structure city clusters. Speed up the integrative development of urban agglomeration. Promote intensive development and environmental protection of city clusters. Strengthen policy support for city cluster development.
Several Opinions Concerning Support for the More Rapid Establishment of Economic Zone on the West Coast of Taiwan Strait by Fujian Province (Approved by State Council)
2009-2020
By 2012, to be based on an optimised structure, improved efficiency, reduced consumption and protecting the environment; GDP per capita close to or in line with average level of the eastern region, efforts to advance scientific development; urban and rural areas residents income increased significantly; basic public services level improved; big increase in local revenue; energy consumption of unit GDP to continue to decline; ecological environment to continue to improve; main channel of "three links" to continue to improve, cross-Strait cooperation more prominent. By 2020, build institutional mechanisms that are dynamic, efficient and more open and conducive to scientific development. Significantly improve overall coordination; social employment is full; the social security system is sound; more harmonious society. Resource utilisation to significantly improve; ecologically sound environment and sustainable development capacity enhanced, ecological civilisation construction to lead the nation; scientific development reach a new level; achieve the goal of building a well-off society. Economic integration between Fujian and Taiwan to continue to strengthen; promote formation of a new pattern of cross-Strait common development.
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Planning period
Region
Development goals
2009-2020
(Approved by NDRC)
By 2012, GDP per capita will above RMB40,000; a more solid basis for industrial development; advanced manufacturing has continued to rise, urbanisation rate will reach 55%; people's living standard and quality of life generally improve; enhanced capabilities of basic public services; full urban and rural employment; a social security system covering urban and rural areas; improving environmental quality; important ecological function areas to account for 15% of total land area, the unit GDP energy consumption fell and emissions of major pollutants cut to meet national control requirements. Region to be a fully well-off society. By 2020, GDP per capita to be at or above average level of East; further optimise the industrial structure; service industry surged, people's lives more prosperous; equal basic public services; urban and rural social security system basically completed; urbanisation rate to reach 65%, good ecological environment, realise preliminary modernisation by the end of planning period or the near future.
2009-2020
According to the Overall Development Plan of Hengqin, the island will have a population of 120,000 with per capita GDP hitting RMB120,000 by 2015 and 280,000 with per capita GDP of RMB200,000 by 2020. After 10 to 15 years efforts, build a connected Hengqin-Hong Kong-Macau, economic prosperity, liveable and enterprise "energy island"; knowledge-intensive, information developed "intelligent island", resource-saving, environmentally friendly "eco-island." Key development indicators are as follows: 2015 2020 Total population (million) 12 28 Per capita GDP (RMB) 12 20 R & D accounts for GDP (%) 3.5 5 Thousand yuan GDP water consumption (m3) 37 33 Sewage treatment rate (%)> 90 100 Urban living garbage disposal rate (%) 100 100 Green coverage rate (%) 47 50 Comprehensive economic strength to achieve a new leap forward. Innovation and new upgrade. Infrastructure construction of new breakthroughs.A new level of urbanisation increase.Public Service reach a new level.The ecological environment will make new progress Key Indicators of economic and social development indicators: 2012; 2020 Population (million): 2,940; 3,100 GDP (billion yuan) : 6,600; 16,400 Per capita GDP (yuan) : 22,500; 53,000 R & D expenditure to GDP ratio (%): 4.5; 6.0 Urban registered unemployment rate (%): 4.5; 4.5 Urbanisation rate (%): 50; 60 Forest cover (%): 42.0; 47.0 Unit GDP energy consumption decrease (%)(Compared with 2005) 21.0; 25.0 Unit of industrial value added water (M3 / million) 120; 100 Urban sewage treatment rate (%) 80; 90 Garbage treatment rate (%) 75; 100 Comprehensive utilisation of industrial solid waste (%) 75; 90 Urban green coverage rate (%) 42.0; 45.0
2009-2020
(Approved by NDRC)
With a combined area of 69,600 sq km and a total population of 28.42 million, the planned GuanzhongTianshui Economic Zone covers Xian, Xianyang, Tongchuan, Weinan, Baoji, certain counties in Shangluo, the Yangling Agricultural High-tech Industry Demonstration Zone, and the administrative district under Tianshui city in Gansu province.
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Planning period
Region
Development goals
2009-2020
Liaoning coastal economic belt consists of Dalian, Dandong, Jinzhou, Yingkou, Panjin, Huludao six coastal cities under the jurisdiction of 21 city and 12 coastal counties (Zhuanghe, Pulandian, Wafangdian, Changhai County, Donggang City, Linghai, Gaizhou, Dashiqiao City, Dawa, Panshan County, Xing City, Suizhong County). The main scope of this plan is the core areas of Tumen River Area, namely within the scope of Changchun City, Jilin Province, Jilin City, some regional and Yanbian, including Liaoning Province, Heilongjiang Province and Inner Mongolia Autonomous Region, and other regions involved in China Tumen River Area International cooperation.
By 2020, build Dalian international shipping centre in Northeast Asia and international logistics centre; build internationally competitive industrial belt near the coastal port, build a modern area with economic development, social progress and sound environment.
"Cooperation and Development Planning Outline of the Tumen River Area of China Setting Changjitu as the Development and Opening-up Pilot Area"
2009-2020
The "Planning Outline" proposed development goals in 2012 and 2020 focusing on development of Changjitu pilot area and Tumen River area. It sets a framework to set up five bases, namely a new industrial base, a modern agricultural demonstration base, a science and technology innovation base, a modern logistics base and Northeast Asia international business service base. It is expected that by 2012 the international cooperation in China Tumen River Area will make substantive progress, and Changjitu pilot area will become the new engine of economic development in Northeast China. By 2020, China Tumen River area will reach a new level of opening-up, with the gross economic product of the Changjitu area expanding by a factor of four to arrive at national advanced level. These goals are derived through repeated calculation and rigorous demonstration. They are challenging, but also can be achieved through hard effort. Plan to define the development of the Yellow River Delta through short-term and long-term goals. By 2015, economic and social development and resources and environment suited to effective carrying capacity of eco-economic development of a new model; by 2020, the first to build economic prosperity, sound environment, state-level high-efficiency ecological economic zone. Targets: 2015; 2020 GDP (billion yuan) 9,300; 15,000 Per capita GDP (yuan) 9,000; 14,000 Core protected area (mu) 550; 550 Unit GDP energy consumption decrease (%) 22; 15 Reduce water consumption of added-value industry (%) 20; 15 Comprehensive utilisation of industrial solid waste (%) 95, 97 Reduced emissions of major pollutants (%) 20; 15 Urban sewage treatment rate (%) 80; 85 Forest coverage (%), 25; 28 The total water supply capacity (mcm) 40; 45 Effective utilisation coefficient of irrigation water 0.57; 0.59 Urbanisation level (%) 54; 60 Disposable income of urban residents (yuan) 6,000; 4,400 Rural per capita net income (yuan) 1,250; 20,000 2009-2015: innovative institutional mechanisms to reinforce foundation for development, strengthen ecological and economic strength, preliminary formation of ecological and economic coordination of development of new models; 2016-2020: build strong protection of ecological security system, formation of an advanced and efficient eco-industry cluster to build a new eco-liveable urban agglomeration, in order to achieve modernisation by mid-century and lay out sound foundation.
2009-2020
(Approved by NDRC)
The Yellow River Delta is located in the southern Bohai Sea coastal areas of the Yellow River estuary, including the Shandong Province, Dongying, Binzhou, and Weifang, Dezhou, Zibo, Yantai City, involving a total of 19 counties (cities, districts).
Planning clear lake ecological and economic areas, including Nanchang, Jingdezhen, Yingtan three cities, as well as the Jiujiang, Xinyu, Fuzhou, Yichun, Shangrao, Ji'an City, some counties (cities, districts) a total of 38 counties (cities, districts).
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Planning period
Region
Development goals
Several Proposals of the State Council on Advancing the Development of Constructing Hainan International Tourism Island
2009-2020
Hainan island
By 2015 Tourism industry accounts for more than 8% of GDP. Tertiary industry accounts for 47% or more of economic structure. Proportion of employees in tertiary industry exceeds 45%. Province's per capita GDP and urban and rural residents income reach national medium level.
By 2020, Tourism industry accounts for 12% of GDP. Tertiary industry accounts for 60% or more of economic structure. The proportion of employees in tertiary industry exceeds 60%. Whole province's per capita GDP and urban and rural residents income reach national advanced level.
Shenzhen
Next step of Shenzhen reform will focus on breakthrough in six respects: deepening administrative reform, deepening economic reform, actively promote reform of the social sphere, improve mechanism for independent innovation system, focus on close cooperation between Shenzhen and Hong Kong establishment of resource-saving and environment-friendly institutional mechanisms. It is estimated that after the implementation plan, by 2020, the pilot areas GDP energy consumption, water consumption, chemical oxygen demand (COD) emissions, sulphur dioxide (SO2) will be down 24%, 68%, 58% and 63% from 2008 levels.
Qaidam
(Approved by State Council) Wanjiang City Belt to undertake transfer of industries with a demonstration area plan* 20092015,longterm outlook to 2020 Wanjiang city with the rise of the central region to implement strategy for the promotion of key development areas, including Hefei, Wuhu, Maanshan, Tongling, Anqing, Chizhou, Chaohu, Chuzhou, Xuancheng, as well as the Tongcheng and Liuan the Jinan area and Shucheng a total of 59 counties (cities, districts). Indicator (unit) 2015 GDP (billion yuan) 13,500 fiscal revenue (RMBbn) 1,700 Urbanisation rate (%) 55% Non-agricultural industry accounts for % of GDP: 93% Above-scale industrial added value in the zone (the proportion) reaches 65% R & D proportion of GDP accounted for 2.2% Science and technology to% 60 Disposable income of urban residents per capita (RMB) 28,500 Rural per capita net income (RMB) 9,900 Urban residents in employment per year (persons) 400,000 Of the basic old-age insurance programme (number of people) 2,850,000 The scale of vocational education students: 800,000 Unit GDP energy consumption fell % over total: 20% Tons of industrial value-added water: 175t Urban sewage treatment rate: 75% Comprehensive utilisation of industrial solid waste: 90%
To be announced: Chongqing Liangjiang New Area overall regional plan Chengdu economic area regional plan Tibet regional economic development plan Xinjiang regional economic development plan
* Central region related plans Source: Nomura International (Hong Kong) Limited
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Sector views
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Alternative Energy
Action
We believe that alternative energy will be a focus of the 12th Five-Year period, as the nation strives to enhance long-term energy security and meet 2020 climate change targets. We expect policy announcements on nuclear and large-hydro to present upside, and on wind and solar to be inline with market expectations. BUY China High Speed, JA Solar, and Yingli Green; China Longyuan: REDUCE.
NEUTRAL
Stocks for action
We like CHST for its leading position in the favourable wind gearbox segment, and like JA Solar and Yingli for LT cost leadership. REDUCE on Longyuan, given grid bottleneck, unattractive return profile and demanding valuations.
Price target 22.00 7.60 8.00 23.00
Catalysts
Favourable policy announcements, such as rising feed-in tariff, resolution of grid connection bottleneck, tax incentives and financial support for R&D. Anchor themes China has been more supportive of low-cost and large-scale alternative energy sources like nuclear, wind and large-hydro, as these are effective tools for it to meet its 2020 non-fossil fuel energy consumption targets. The country, however, has not been keen on triggering local demand for solar, in our view.
Stock China High Speed Transmission (CHST) China Longyuan JA Solar Yingli Green Energy
Rating
Price
BUY 11.67
Analyst
Ivan Lee, CFA Head of Asia Power, Utilities & Renewable Energy +852 2252 6213 ivan.lee@nomura.com
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Exhibit 95. NDRCs potential plan for alternative energies cumulative capacity
Existing 2020 targets (GW) Hydro Small hydro Nuclear Wind Solar Biomass 2009 172 55 9 25 0.3 1 2020F 300 75 40 30 1.8 30 09-20 CAGR (%) 5 3 15 2 18 36 Low version 300 75 70 100 10 30 Potential New 2020 targets 09-20 CAGR (%) 5 3 20 13 38 36 High version 300 75 70 150 20 30 09-20 CAGR (%) 5 3 20 18 46 36 Latest news 2020F 330 50 75 na na na v/s expectation Higher Lower Higher na na na
Note: 2020 potential targets for wind, solar and nuclear power are based on news flows in May 2009; latest news is based on news flows in July 2010. Source: CBN, China Energy News, Shanghai Securities News 21CBH, Nomura International (Hong Kong)
Potential positive if government refine guidelines for grid connection and operations
China would remain an unprofitable end market for listed solar companies unless new incentives are announced
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In our view, the Chinese government would gradually learn the levels of solar feed-in tariffs project investors would be willing to accept through multiple rounds of central level concession project biddings, a similar path taken by the nation for the wind industry back in 2007-2008. China recently concluded the second round of central level concession project bidding for 280MW of solar projects in multiple provinces. According to Reuters (China firms offer US$0.108/kWh feed-in rate in solar tender, 16 August 2010), the lowest bid submitted was around RMB0.70-0.72/kwh, a level only enabling solar projects to break keven. We continue to believe that China would not be a profitable end market for listed Chinese solar companies over the next one to two years, unless other forms of financial incentives are announced.
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(local) (US$mn)
Gamesa, Vestas and EDF Energies Nouvelles covered by Catharina Saponar. Acciona, Iberdrola Renovables and EDP Renovaveis covered by Raimundo FernandezCuesta. Note: Pricing as of 21 September 2010 Source: Bloomberg consensus estimates for not rated companies, Nomura estimates for others
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559 267.2
Note: Pricing as of 21 September 2010; NR = Not rated Source: Bloomberg consensus estimates for not rated companies, Nomura estimates for others
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Yankun Hou
NEUTRAL
Stocks for action
We like Dongfeng for its market leading position, comprehensive product line-up and robust profitability. We also expect its HDT products will become a new earnings driver, going forward.
Catalysts
Further policy announcements for industry consolidation and deal flows. Anchor themes We see a divergence in operating dynamics for JVs and domestic brands: JVs have limited capacity, healthy inventory and moderate price competition; domestic brands face overcapacity, high inventory and severe price competition.
Stock Dongfeng Motor Rating BUY Price (HK$) 14.44 Price target 17
Analysts
Yankun Hou +852 2252 6234 yankun.hou@nomura.com Ming Xu +852 2252 1569 ming.xu@nomura.com
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Yankun Hou
Consolidation policy will benefit large SOE and strong private automakers
According to the China Association of Auto Manufacturers (CAAM), there are more than 120 automakers in China, thus making China the most competitive auto market in the world. The intensified competition has resulted in low operating efficiency (low economic scales) and significant downward pressure on pricing, which in turn hurts industry profitability. In its Auto Industry Restructuring and Revitalisation Plan announced in March 2009, the government encouraged consolidation in Chinas auto industry and said that it aims to reduce the number of auto groups which account for 90% of the market share, to less than 10 by 2011 from 14 in 2008. The goals also include building two to three auto groups with above 2mn units of annual sales volume, and four to five groups with more than 1mn units of annual sales volume. Since the announcement of the policy, five of the eight auto groups named in the policy have made remarkable consolidation and acquisition moves. The market share of the top 10 auto groups rose to 86.1% in 1H10 from 83.4% in 2008. The market share leader, Shanghai Auto, reached 2mn unit sales in the first seven months of 2010, according to data from CAAM. We expect further consolidation during the 12-5 (2011-2015) period. The State Council of the Chinese government released a high-level guidance policy on industry consolidation and restructuring on 18 August, 2010. The new policy lists the auto industry as a first priority to push for consolidation. We believe a detailed industryspecific policy will be released soon. In this new wave of consolidation, three types of automakers will benefit, in our view: Established SOE auto groups, such as FAW, Dongfeng and Shanghai Auto. Aggressive SOE automakers who are slightly smaller in size but receive strong government support, such as Changan, BAIC and Guangzhou Auto. Strong private automakers such as Geely. On the other hand, we believe small and regional players, whether state-owned or private, will be most vulnerable.
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Yankun Hou
Exhibit 98. M&A moves by named auto groups since the policy announcement
Group FAW Dongfeng Encouraged for nationwide consolidation Shanghai Auto Chang'an BAIC Guangzhou Auto Encouraged for regional consolidation 2009 total sales M&A moves after ticker volume (k units) Revitalisation policy unlisted 1,944.6 no 489 HK 600104 CH 000625 CH unlisted 2238 HK 1,897.7 no Possible future moves Group listing Separate CV business out of DF Nissan
2,705.5 Further consolidation of Nanjing Auto Earmarked up to RMB 5bn for M&A operations 1,869.8 Acquired Changhe and Hafei 1,243.0 Acquired Baolong Light Vehicle 606.6 Privatize Denway and group listing; Acquired 29% of Changfeng Motor; Acquired Geo Motor 500.3 no 125.0 Acquired Chengdu Wangpai Expand into HDT segment Group listing Further expansion in Northern China
Chery Sinotruk
unlisted 3808 HK
Brilliance Zhonghua Jianghuai Auto Dongnan Motor Qingling Auto Lifan Motor Huatai Auto Zhongxing Youngman Auto Zotye Auto
0.20
0.15
0.10
0.05
Source: CEIC
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Yankun Hou
SAIC 19.8%
Zhonghua 1.6% Great Wall Xiali 1.8% 2.5% Kia 2.9% Changhe Suzuki 1.0% Chang'an Suzuki 1.8% Ford 2.9% Chang'an Mazda 0.8% FAW Mazda 1.1% PSA 3.2% Geely 3.8%
FAW VW 8.0% GM 8.7% FAW Toyota 5.0% GZ Toyota 2.5% GZ Honda 4.4% DF Honda 2.5%
Chang'an 13.7%
Dongfeng 13.9%
BYD 5.3%
Chery 5.8%
Nissan 6.6%
Hyundai 6.8%
Exhibit 104. GDP per capita vs. auto penetration, global comparison (2008 )
Penetration rate (units /1000 ppl) 900
800 US 700 Australia 600 Italy Japan 500 Poland 400 Taiwan Hungary Slovakia South Korea Portugal Czech Republic Greece Spain UK Canada Germany France Denmark Austria Sweden Netherlands Ireland
300 Malaysia 200 Romania Argentina 100 Thailand China 0 0 India 10,000 Russia Mexico Brazil Turkey
20,000
50,000
60,000
70,000
Nomura
74
29 September 2010
Strategy | China
Yankun Hou
17.7 15.3
20 15
8.7 7.2 5.8 5.1 4.7 4.5 4.3 4.0 3.6 3.3 3.1
10 5 0
2 0
1.2
1.5
Liaoning: Dalian Zhejiang: Hangzhou Shandong: Qingdao Hubei: Wuhan Shanxi: Taiyuan Henan: Zhengzhou Sichuan: Chengdu Shaanxi: Xi'an
29 September 2010
Beijing
Nomura
Guangdong:
2010E
2011E
2012E
2013E
2014E
2015E
75
Chongqing
Shanghai
2005
2006
2007
2008
2009
Strategy | China
Lucy Feng
Banks
Action
We are optimistic on the banking outlook for 2011F and selectively recommend Chinese bank stocks with an undemanding valuation. We reiterate the strong profitability of Chinese banks and their potential growth, driven by urbanisation. Our top pick is ABC, given that it may substantially benefit from Chinas urbanisation.
BULLISH
Stocks for action
We are positive on the sector, with ABC being our top H-share pick, given our belief that it will substantially benefit from Chinas urbanisation.
Catalysts
We believe near-term catalysts include: 1) a potential interest rate hike in 4Q10F; 2) better-than-expected asset quality disclosure for 3Q10 in October. Anchor themes The operating environment remains favourable for Chinese banks in 2011F, but negative sentiment from uncertainties over policies and asset quality continue to weigh on valuation. Directional change in macro policies (less tightening) could trigger a near-term re-rating.
Rating BUY
Price 3.84
Analysts
Lucy Feng +852 2252 2165 lucy.feng@nomura.com David Chung +852 2252 6210 david.m.chung@nomura.com
Nomura
76
29 September 2010
Strategy | China
Lucy Feng
16,000
12,000
12,000
9,000
8,000
6,000
4,000
3,000
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: CEIC, Nomura research
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: CEIC, Nomura research
Urbanisation will be a key growth engine for Chinas financial services industry
We believe that the above mentioned urbanisation trend will drive significant needs for financial services in particular at the consumer level. This great shift in population will be accompanied by significant demand for houses, household goods and services, which will drive up the growth for consumer lending, card business, insurance, investments services and so on. Labour in rural areas will undergo a gradual shift to work in the non-agriculture economy. In county-level areas there will emerge a large number of small cities; industry structure upgrading and urbanisation will accelerate the development of the county-level economy. We see enormous opportunities for financial companies that are well positioned to service this population and developments trend.
Urbanisation will drive demand for financial services
Nomura
77
29 September 2010
Strategy | China
Lucy Feng
Nomura
78
29 September 2010
Strategy | China
Battery
Action
BYDs competitors are Korean and Japanese companies who are vying for technology leadership in the car battery space. For BYD, we are sceptical about car batteries and more positive on grid batteries as governments start to mandate grid storage, owing to the accelerated renewables ramp. We await details on Chinas policy with respect to electric cars and storage in the 12th Five year plan.
BULLISH
Stocks for action
Potential catalysts for BYD: 1) new energy contracts and 2) inventory correction in auto ending 3Q10F marks the worst point, in our view.
Catalysts
Potential catalysts: 1) new energy contracts; and 2) inventory correction in auto ending 3Q10F marks the worst point. Anchor themes We expect 2010 to see the birth of an electric car battery market. Several issues need to be addressed: 1) technology is still nascent; 2) development of enabling factors such as battery leasing, charging infrastructure and government support.
Stock
BYD (1211 HK)
Rating
BUY
Price
HK$54.2
Price target
HK$62.0
Analysts
Chitra Gopal, CFA +65 6433 6980 chitra.gopal@nomura.com Raghvendra Divekar +91 22 6723 4335 raghvendra.diveka@nomura.com
Nomura
79
29 September 2010
Strategy | China
SK Energy (Li ) Altair Nano (Li) Enerdel (Li) Electrovaya (Li) Kokam (Li) Gaiaa/LTC (Li) Valence (Li) American Lithium Energy (Li)
Start-Ups
Source: Nomura research
A123 Systems (Li) Johnson Controls - Saft (NiMh, Li) Toshiba (Li) Hitachi Vehicle Energy (Li)
Wild Cards
Exhibit 110. 10 MOUs in six months will contracts eventually pan out?
Automaker JV Toyota Nissan Mitsubishi Motors Daimler Honda SAIC Supply Agreement General Motors Ford Hyundai Suzuki Hyundai Ford MOU Volkswagen Volkswagen Volkswagen BMW BMW BMW Coda Automotive Volvo Volvo Tesla THINK Changan Automobile Wanxiang Group Eaton Corp
Source: Nomura research
Battery suppliers Panasonic (20% stake) NEC (49% stake) GS Yuasa (51%) BYD (50%) Evonik (50%) GS Yuasa (51%) A123 Systems (49%)
Date signed
Car timeline
"Volt" PHEV "Transit Connect" Van "Sonata" HEV. PHEV in 2012 "Swift" PHEV i10 EV Ford Focus EV
Sanyo Electric Toshiba BYD Johnson Controls - Saft SB LiMotive A123 Systems Lishen Enerdel LG Chemical Panasonic Enerdel LG Chemical Enerdel LG Chemical
MOU for PHEV MOU for HEV MOU MOU MOU MOU MOU for EV MOU for EV "C30" Plug in diesel hybrid MOU MOU MOU Letter of intent MOU for commercial vehicles
May-08 May-09 Oct-08 Aug-09 May-09 Jun-09 Sep-09 Apr-10 Jan-10 Jan-10 Feb-10 May-10 Jul-10
Nomura
80
29 September 2010
Strategy | China
Nomura
81
29 September 2010
Strategy | China
Josephine Ho
Cement
Action
We remain Bullish on Chinas cement sector. Backed by government efforts to increase industry concentration, we expect cement industry consolidation to speed up over Chinas 12th FYP period, thus lending support to cement prices. Our top two picks in the China cement space are Anhui Conch and Sinoma.
BULLISH
Stocks for action
Anhui Conch and Sinoma are our top picks in the China cement space. We like Anhui Conch for its leading market share while Sinoma stands out for its big exposure to lucrative West China market.
Price Stock Rating Price ($) Target Anhui Conch (914 HK) BUY HK$33.6 HK$36.3 CNBM (3323 HK) BUY HK$17.34 HK$22.0 Asia Cement (1102 TT) BUY NT$31.65 NT$40.89 Taiwan Cement BUY NT$33.3 NT$40.8 (1101 TT) China Shanshui BUY HK$4.99 HK$5.80 (691 HK) Sinoma (1893 HK) BUY NT$6.29 HK$8.70 Prices as of 21 September market close
Catalysts
Catalysts are seen in stronger-than-expected demand growth, faster cement price hikes, industry consolidation and favourable government policies. Anchor themes We consider cement the best proxy for Chinas investment-driven economic growth, since it is used 100% in the construction sector. Nomuras China economics team calls for 30% y-y FAI growth in 2010F, providing solid support to the cement demand outlook.
Analyst
Josephine Ho +852 2252 2177 josephine.ho@nomura.com
Nomura
82
29 September 2010
Strategy | China
Josephine Ho
since 2010. In Qinghai province, we expect the post-quake reconstruction to stimulate demand greatly for building materials, such as cement and steel. As for Xinjiang, in May 2010, the China government stated it would raise the per capita gross domestic product there to the national average by 2015F from the present figure (79% of the national average), which means heavy government investment on its dilapidated infrastructure over Chinas 12th FYP period.
Gansu Xinjiang
Qinghai
Mar-09
Nov-09
Aug-09
Sep-09
Dec-09
Feb-09
Feb-10
Mar-10
Mar-10
Jul-09
Jun-09
Oct-09
Apr-09
Jan-10
Backed by significant FAI and rich natural resources, Northwest China has long enjoyed higher-than-national average cement prices but relatively lower coal prices. Thus, Northwest China has the highest gross margin usually above 25% versus 1018% for the rest of China and around 15% for the national average, according to data from China Cement Net. Our recent conversation with Xinjiang-based Tianshan Cement echoed the data: Tianshans cement gross margin in Xinjiang is generally >30% (gross profit/t of RMB70-80/t), while the gross margin in its eastern market usually hovers around 10%. We believe Northwest China will remain a promised land for cement business over the next five years as the West China Development Plan will continue into 12th FYP period, meaning continued massive government investment.
Exhibit 112. Cement price movements in West China versus national average
(Rmb/t) 700 Gansu Ningxia National average Qinghai Xinjiang
500
300
100 May-08 May-09 May-10 Nov-08 Mar-08 Sep-08 Sep-09 Nov-09 Mar-09 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
Nomura
Apr-10
29 September 2010
Strategy | China
Josephine Ho
Nomura
84
29 September 2010
Strategy | China
Josephine Ho
Nomura
85
29 September 2010
Strategy | China
Emma Liu
BULLISH
Stocks for action
Using a bottom-up approach, looking for earnings resilience and growth, as input costs are about 80% of COGS for most stocks, we believe our top picks are likely to perform the best in a cost-push scenario.
Price Price target Rating (HK$) (HK$) BUY REDUCE 29.05 34.00 45.55 33.00
Catalysts
Product price hikes (in reaction to cost push) and wage increases. Anchor themes We are positive on consumption growth for F&B in China in the long run, given increased personal income and urbanisation. However, due to short-term risks such as inflation, we prefer market leaders with strong pricing power.
Stock China Yurun (1068 HK) Tsingtao Brewery (168 HK)
Note: closing as of 21 Sep, 2010; Ratings and Price Targets are as of the date of the most recently published report (http://www.Nomura.com) rather than the date of this document
Analysts
Emma Liu +852 2252 6172 emma.liu@nomura.com Anita Chu +852 2252 1425 anita.chu@nomura.com
Nomura
86
29 September 2010
Strategy | China
Emma Liu
Japan
Hong Kong
Taiwan
China
US
Mexico
Brazil
Russia
China
Exhibit 116. Packaged/processed F&B as percentage to total food consumption per capita (2009)
(%) 100 90 80 70 60 50 40 30 20 10 % 0
US
(Litres) 120 100 80 60 40 20 0 Germany Switzerland Luxemburg Norway Belgium Austria Italy Poland Portugal Finland Lithuania France Turkey Ireland Spain China UK
Packaged/processed F&B
Others
Brazil
France
Russia
Due to sustainable personal income growth and a higher number of safety scandals, Chinese consumers are becoming more demanding when they purchase F&B products. On one hand, consumption demand is upgrading to mid- to high-end products from low-end products and on the other hand, consumers are focusing more on premium brands, the products of which are perceived as safer. We expect market leaders with strong capability in product launches to benefit and win market share amid this industry trend. In our view, Yurun, Want Want, Tingyi, UPC and Mengniu will likely see an ongoing product mix upgrade with their strong execution in product launches going forward.
Japan
Due to sustainable personal income growth and a higher number of safety scandals, Chinese consumers are becoming more demanding when they purchase F&B products
Nomura
87
29 September 2010
China
India
Strategy | China
Emma Liu
In our view, the expected faster economic growth in Central and Western China will benefit the nationwide F&B players across the board. However, it is worth mentioning that although they have established position in Central China, most of the nationwide F&B plays have yet to build a significant presence in Western China. Based on our estimate, Western China accounts for less than 10% of the sales for most of the nationwide F&B companies (Tingyi, Mengniu, Want Want, etc). Among the nationwide plays, Yurun and CRE are relatively more exposed to the Central and Western regions and we believe they should benefit most from faster development in these regions.
Exhibit 117. Yurun and CRE's exposure to Central and Western China
(%) Region Eastern Central Western
Note: data as of 1H10 Source: Company data, Nomura research
Yurun (slaughtering capacity) 31 61 8 100 (downstream processing) 57 39 5 100 (no. of brewery plants) 48 28 24 100
Nomura
88
29 September 2010
Strategy | China
Emma Liu
We think any cost pressure as a result of price rises in soft commodities poses just a short-term threat to market leaders in Chinas F&B industry since they can pass on cost pressure via a more value-added product mix or by hiking product prices. Should cost pressure from food-related raw materials surprise on the upside, we see an increasing likelihood for the market leaders to raise their product prices in 2011F. In our view, companies such as Want Want, Yurun, Tingyi and UPC have relatively strong pricing power: given 1) high concentration of their respective markets; 2) consumers low price sensitivity to their respective products; and/or 3) strong track record of raising product prices. We have more detailed analysis with regard to this issue in our report Two Sides to the Cost Story dated 14 July 2010.
Should cost pressure from foodrelated raw materials surprise on the upside, we see increasing likelihood for market leaders to raise their product prices in 2011F
Note: we assigned 50/50 weightings on market structure and consumers' price sensitivity Higher figures represent higher pricing power Market structure 5-point scale: ranked from 1 (very diversified) to 5 (very concentrated) Consumers' price sensitivity 5-point scale: ranked from 1 (very sensitive) to 5 (insensitive) Source: Company data, AC Nielsen, Nomura research
Nomura
89
29 September 2010
Strategy | China
Emma Liu
Exhibit 121. F&B market leaders track record of product price hikes
Historical product price hikes to pass on cost pressure
Tingyi instant noodle
(Gross margin) 35% 30% 25% 20% 15% 10% 5% 0% 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 Jul 07: high-end pack noodle +16% low-end pack noodle +11% Jul 09: high-end pack noodle +10% with product upgrade meanwhile
Tingyi beverage
(Gross margin) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 Jan 08: +2.5% ASP in tea & other beverages; +4.5% ASP in bottled water.
Yurun LTMP
(Gross margin) 35% 30% 25% 20% 15% 10% 5% 0% 1H07 2H07 1H08 2H08 1H09 2H09 FY07: +8% ASP Jan 08: +5% ASP Oct 09 & Jan 10: +3-5%
1H09
2H09
Nomura
90
29 September 2010
Strategy | China
Gordon Wai
Fertiliser
Action
Despite our view that demand could recover, particularly for potash, after two years of under-application, we think oversupply in urea and phosphate could limit price and margin upside. We prefer China BlueChem (upstream producer) to Sinofert (distributor) as we believe the former should benefit from the consolidation theme in the 12th Five Year Plan. We rate China BlueChem a Buy as it is a cost leader with a strong balance sheet (net cash) which it can leverage for potential acquisitions.
NEUTRAL
Stock for action
We have a BUY rating on China BlueChem as it is a cost leader in the industry with a net cash position.
Catalysts
Expected demand increase in FY11F could be a catalyst while industry consolidation should improve the demand/supply imbalance and boost prices over the medium term. Anchor themes Over the long term, economic and population growth, coupled with limited planting acreage, should drive fertiliser demand.
Price (HK$) 5.72 4.47 Price target (HK$) 6.0 3.75
Consolidation is key
Consolidation and energy conservation will be fertiliser sector
themes in the 12th Five Year Plan
We believe industry consolidation, outdated capacity elimination, and energy conservation will be the main themes for the fertiliser sector in the 12th Five Year (2011-15) Plan. Urea fertiliser producers are scattered all over China, while the majority of phosphate producers are located in Yunnan, Guizhou, Sichuan and Hubei. However, both urea and phosphate products are in overcapacity domestically. We think the government could control urea and phosphate capacity expansion and accelerate industry consolidation to eliminate inefficient producers. For potash, the government is likely to encourage domestic potash producers to expand capacity to increase self-sufficiency in China. On the energy conservation front, the government could further suppress natural gas usage as a feedstock for chemical fertiliser production and favour fertiliser producers to use coal as a feedstock for production. Hence, securing coal reserves will be important for fertiliser producers to further expand production capacity. We think China BlueChem could leverage its strong balance sheet (net cash) to acquire fertiliser producers to increase its market share or diversify its product mix and also acquire coal mines to secure feedstock for further urea capacity expansion over the next five years (2011-2015). This is in line with the themes of the governments 12th Five Year Plan.
Analysts
Gordon Wai +852 2252 6176 gordon.wai@nomura.com Cheng Khoo +852 2252 6180 cheng.khoo@nomura.com
Nomura
91
29 September 2010
Strategy | China
Gordon Wai
Nomura
92
29 September 2010
Strategy | China
Gordon Wai
4,000
3,000
2,000
1,000 02 03 04 05 06 07 08 09 10
Nomura
93
29 September 2010
Strategy | China
Gideon Lo
Healthcare
Action
The 12th Five-Year Plan will continue the development of a medical insurance system for full-coverage of the entire population with affordable healthcare costs and accessible healthcare infrastructure. Policy spotlight will be on the upgrade of the biotech industry and consolidation of the pharmaceutical distribution market.
N/A
Catalysts
Solid sector growth visibility and sustainability as well as enhancement of stocks trading liquidity and market capitalization will likely remain re-rating catalysts. However, investors should be aware of mispricing risks and opportunities on stocks amid the inflection point in the era of major policy change. Anchor themes While the seed of healthcare reform has been sowed, we expect the domestic healthcare sector will continue to blossom due to unleashed demand from the rural market, continuous urbanization and the growth of Chinas aging population.
Analyst
Gideon Lo +852 2252 6190 gideon.lo@nomura.com
Nomura
94
29 September 2010
Strategy | China
Gideon Lo
In addition, the Chinese government is also expected to carry out new measures to accelerate the restructuring and consolidation of the fragmented pharmaceutical manufacturing and distribution markets. Supportive financial and administrative measures will be applied to encourage the market leaders to expand and acquire the smaller and less-efficient players. Those non-efficient and outmoded facilities will be forced to close down under the increasingly stringent regulations. The biotech, pharmaceutical distribution and medical device sub-sectors will issue its 12th FYP in the next couple of weeks. According to local news sources, China will offer subsidies of over RMB10bn to support core R&D projects for innovative medicines and offer other incentives like special funding, tax benefits and financial support. The Chinese government will also seek to consolidate the fragmented pharmaceutical distribution market and support a few nationwide distributors to achieve over RMB100bn annual sales revenue and about 20 regional leading distributors to achieve over RMB10bn sales revenue. New measures will also be introduced to encourage the export of medical devices. Investors should be aware of the possible investment opportunities from those major beneficiaries in these sub-sectors.
Major implications
Given the policy targets from the healthcare reform and 12th FYP, we believe the sector will move into the direction of more innovation, product upgrades, cost controls, energy saving and environmentally friendly development. All these changes will force enterprises to invest in R&D, production facilities and logistics services to meet the higher regulatory requirements. Against the backdrop of the shift in market paradigm, we expect market leaders to be in a better financial and market position to adapt to the changes and accelerate their expansion in the market.
Nomura
95
29 September 2010
Strategy | China
Gideon Lo
Exhibit 129. Market share of China drug market in the world (2009)
World market size = US$808b China 4% (Rank 5th by countries) Others 14% North America 40%
Exhibit 130. Market share of China drug market in the world (2015F)
World market size = US$1,162b Others 21%
15 11 9 8 8
11 8 5
10
100 90 80 70 60 50 40 30 20 10 0
83
89 81 57
92 75 49
33 24
Italy
Germany
Germany
Canada
France
France
Spain
China
China
Italy
Nomura
96
29 September 2010
Canada
Japan
Japan
Spain
UK
USA
USA
UK
Strategy | China
Gideon Lo
002007 CH 600161 CH 002038 CH 002252 CH 002022 CH 000518 CH 000078 CH 399 HK SSRX US CBPO US
CNY CNY CNY CNY CNY CNY CNY HKD USD USD
49.3 23.39 43.99 58.4 16.42 7.18 12.8 0.195 13.95 9.89
Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Jun-09 Dec-09 Dec-09
(6.2) (7.3) (6.9) (4.3) (9.4) (8.8) (10.5) (1.0) 2.0 5.8
0.7 2.5 9.3 18.6 2.1 16.0 (3.1) (4.3) 8.9 (13.0)
56.5 (7.5) 24.6 123.4 12.3 120.9 0.9 (5.4) 35.2 49.6
HKD 4.16 HKD 2.97 HKD 3.35 HKD 2.34 HKD 3.49 HKD 2.79 HKD 10.6 HKD 3.4 HKD 15.5 HKD 0.72 USD 10.24 CNY 119.91 CNY 21.49 CNY 49.96 CNY 22.21 CNY 116.03 CNY 13.51 CNY 40.5 CNY 72.02 CNY 28.89 CNY 31.79 CNY 29 CNY 11.89 CNY 78.04 HKD 25.11 CNY 26.41 CNY 20.05 CNY 43.71 CNY 19.72 CNY 15.6 CNY 11.76
Nomura
97
29 September 2010
Strategy | China
Gideon Lo
HKD HKD HKD CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY
Nomura
98
29 September 2010
Strategy | China
Yankun Hou
Industrials
Action
With the 1,776km Lanzhou-Xinjiang high-speed railway under construction, which is outside the governments eight passenger dedicated lines plan, we believe railway construction in the 12th 5-year plan has significant potential to be revised up. Due to longer-term growth potential, we prefer railway equipment makers over construction companies, with Zhuzhou CSR as our top BUY.
BULLISH
Stocks for action
We prefer railway equipment makers over construction companies for their longer-term growth potential, with Zhuzhou CSR as our top BUY, followed by China CNR Corp and China Railway Group.
Catalysts
Enlarged railway construction plans and increasing operation density will add incremental value to railway equipment makers, in our view. Anchor themes We expect the railway and metro subway rolling stock market in China to grow rapidly over the next few years. Zhuzhou CSR is likely to be a major beneficiary.
Stock Zhuzhou CSR Times (3898 HK) China CNR Corp (601299 CH) China Railway Group (390 HK)
Rating
Price
Price target
Analysts
Yankun Hou +852 2252 6234 yankun.hou@nomura.com Paul Gong +852 2252 6177 paul.gong@nomura.com
Nomura
99
29 September 2010
Strategy | China
Yankun Hou
In the centre of Asia, Xinjiang connects Gansu, Qinghai and Tibet in China, with countries including Mongolia, Russia, Kazakhstan, Kirgizstan, Tajikistan, Afghanistan, India and Pakistan. While Xinjiang has 2.19 trillion tonnes coal reserve, taking over 40% of China, the production volume was 67.4mn tonnes in 2008, dwarfed by Shanxis 645.0mn tonnes and Inner Mongolias 502.2mn tonnes (source: CEIC). Also, while 56% of Shanxi and Inner Mongolias coal production was delivered out, Xinjiang had only 15%. The transportation capacity bottleneck is the major reason for the low output ratio and low production volume. Since there is no water transportation available in Xinjiang at all, railway transportation became the most needed means for coal delivery. According to government plans, coal production in Xinjiang will reach 1,000mn tonnes by 2020F. Without strong railway transport capacity, such goal will be impossible. Currently the only railway stretching out of Xinjiang is the Lanzhou Xinjiang railway, running both passenger trains and freight train. By 2014F, when the Lanzhou Xinjiang passenger dedicated railway is finished, the old railway will be used for freight only, and the capacity will more than double to 424mn tonnes per year. According to MoR data, coal was 52.7% of total freight goods taken by railway in 2009.
Nomura
100
29 September 2010
Strategy | China
Yankun Hou
30 20 10 0
Inner Mongolia
Xinjiang
2004
2005
2006
2007
2008
Sub-line 2 : Harbin-Dalian Line Length: 906 km Investment: 92 Bn RMB Start: 2007.8 End: 2009.11
Xuzhou Lanzhou Line Sub-line 1: Xuzhou Zhengzhou Line Length: 357 km Investment: 37 Bn RMB Start: 2005.8 End: end of 2009 Sub-line 2 : Zhengzhou Xian Line Length: 454 km Investment: 55 Bn RMB Start: 2006 End: 2009.12.28 Sub line 3: Xian Baoji Line Length: 148 km Investment: 20 Bn RMB Start: 2009.7 End: 2012 Sub-line 4: Baoji Lanzhou Line Length: 400 km Investment: 65 Bn RMB Start: end of 2009 End: 2013
Beijing Shanghai High-Speed Railway Length: 1318 km Start: 2008.4.18 Investment: 221 Bn RMB End: 2013
Gansu
Ningxia Qinghai Lanzhou Shanxi Taiyuan Tianjin Hebei Shijiazhuang Shandong Shannxi
Shenyang
Sub-line 1: Beijing Shijiazhuang Line Length: 281 km Investment: 44 Bn RMB Start: 2008.6 End: end of 2011 Sub-line 2: Shijiazhuang Wuhan Line Length: 841 km Investment: 117 Bn RMB Start: 2008.10.15 End: 2012 Sub-line 3: Wuhan Guangzhou Line Length: 995 km Investment: 93 Bn RMB Start: 2005.6 End: end of 2010 Sub-line 4: Guangzhou Shenzhen Line Length: 105 km Investment: 17 Bn RMB Start: 2008.8.20 End: end of 2012 Sub-line 5: Shenzhen Hongkong Line Length: 26 km Investment: 35 Bn RMB Start: 2009 End: 2014
Nanjing Wuhan Chengdu Line Sub-line 1: Hefei Nanjing Line Length: 166 km Investment: 15 Bn RMB Start: 2005.8 End: end of 2008 Sub-line 2: Hefei Wuhan Line Length: 351 km Investment: 17 Bn RMB Start: 2005.7 End: 2008.9 Sub line 3: Wuhan Yichang Line Length: 293 km Investment: 24 Bn RMB Start: 2008.9.17 End: 2012 Sub-line 4: Yichang Wanzhou Line Length: 377 km Investment: 17 Bn RMB Start: 2006.9.15 End: end of 2009 Sub-line 5: Chongqing Lichuan Line Length: 264 km Investment: 26 Bn RMB Start: 2008.12.29 End: 2012 Sub-line 5: Suining Chongqing Line Length: 165 km Investment: 5 Bn RMB Start: 2009.1.18 End: 2012 Sub-line 6: Dazhou Chengdu Line Length: 386 km Investment: 11 Bn RMB Start: 2005 End: 2009.6.30
Xian
Tibet Lhasa
Sichuan
Chongqing
Hangzhou Ningbo Changsha Guizhou Yunnan Guiyang Guangxi Nanning Guangdong Hunan Nanchang Jiangxi Zhejiang Wenzhou Fuzhou Fujian Taiwan
Shanghai Shenzhen Line Sub-line 1: Shanghai Hangzhou Line Length: 154 km Investment: 26 Bn RMB Start: 2008.11 End: 2010 Sub-line 2: Hangzhou Ningbo Line Length: 150 km Investment: 21 Bn RMB Start: 2009.4 End: 2011 Sub-line 3: Ningbo-Taizhou-Wenzhou Line Length: 268 km Investment: 17 Bn RMB Start: 2005.10.27 End: 2009.10.1 Sub-line 4: Wenzhou-Fuzhou Line Length: 298 km Investment: 17 Bn RMB Start: 2005 End: 2009.7.1 Sub-line 5: Fuzhou-Xiamen Line Length: 275 km Investment: 15 Bn RMB Start: 2005 End: 2009.11.1 Sub-line 6: Xiamen-Shenzhen Line Length: 502 km Investment: 42 Bn RMB Start: 2008.1 End: 2011
Kunming
Hangzhou Kunming Line Sub-line 1: Hangzhou Changsha Line Length: 902 km Investment: 116 Start: 2H 2009 End: n.a Sub-line 2: Changsha Kunming Line Length: 1175 km Investment: 163 Bn RMB Start: end of 2009 End: 2014
Nomura
101
29 September 2010
Strategy | China
Yankun Hou
Japan
Germany
China - 2012
68%
67%
67%
65%
7,000
4% 30%
9% 28% 2009
4,000 2,000 0
3,176
2005
2006
2008
2006
2007
2008
2010F
2015F
Nomura
102
29 September 2010
Strategy | China
Yankun Hou
3339 HK 1766 HK 3898 HK 1333 HK 000157 CH 600031 CH 600320 CH 601299 CH 000528 CH CAT US DE US JOYG US PH US CMI US
Neutral Neutral Buy Not rated Not rated Buy Not rated Buy Not rated Not rated Not rated Not rated Not rated Not rated Not rated Buy Neutral Buy Neutral Buy Neutral Not rated Buy
7.7 7.0 21.6 4.7 10.7 27.1 6.4 5.2 23.2 76.4 73.0 69.0 69.5 89.1 4.9 38.0 79.3 461 1,853 1,923 317 81,600 32,600
BBD/B CN
ALO FP SIE GR 6302 JT 6305 JT 6301 JT 7011 JT 034020 KS 012630 KS
Note: pricing date 21 September, 2010. * Rating suspended Source: Bloomberg, Nomura estimates
Nomura
103
29 September 2010
Strategy | China
Jin Yoon
BULLISH
Stocks for action
We believe Tencent is the key consumer growth story in the China Internet segment as the company is in various verticals including gaming, SNS and advertising.
Catalysts
Growth in overall consumer spending and in Internet penetration should further expedite spending on the Internet. Anchor themes Shielded from the slowing global economy (minimal revenue from outside China) and with low Internet penetration, we believe Chinese online gaming stocks offer defensive and growth components for a China portfolio, given their countercyclical business model and high cashflow generation.
Rating BUY
Price 159.8
Analyst
Jin Yoon +852 2252 6204 jinkyu.yoon@nomura.com
Nomura
104
29 September 2010
Strategy | China
Jin Yoon
see greater emphasis by corporates in the developing Central and Western China. Companies such as Perfect World recently launched 2D and 2.5D games to target Central and Western China; Sohu focused on marketing campaigns in creating a user base in these markets and Focus Media is largely keen on expanding its LCD network in tier 2 and 3 cities as tier 1 cities are fully penetrated. We estimate that for display advertising and search alike, more than 80% of revenues come from IP addresses in tier-1 cities. Hence, we expect leading Internet companies will be more inclined to target growth in Central and Western China as these territories still remain uncharted for the most part.
Nomura
105
29 September 2010
Strategy | China
Jin Yoon
Government influence
Operators are required to file a record regarding the type, price and quantity of issued virtue currencies to the provincial cultural administrative department of its place of registration.
Nomura
106
29 September 2010
Strategy | China
Jin Yoon
Virtual items transaction: Virtual items transaction services cannot be provided to minors. Cannot provide virtual items transaction service for unexamined or unregistered online games. Valid ID along with bank account that is consistent with the ID has to be provided when the transaction takes place. Operators should offer help to determine the legality of transaction upon requests from parties involved in the transaction and other authorities. Illegal transactions should be terminated and the record should be kept. Transaction and accounting records should be kept for at least 180 days. Real Identity Operators shall ask users to register their real names with valid identity cards and save the registration information.
Nomura
107
29 September 2010
Strategy | China
Charlene Liu
Macau Gaming
Action
As a leveraged consumption play, we expect Macaus gaming sector to continue to benefit collectively from the internal consumption growth driven by both economic advancement and urbanisation supported by the 12th FYP in China. Infrastructure improvements should also increase Macaus accessibility and deepen the penetration of its customer base favourable for long-term growth.
BULLISH
Stocks for action
We like SJM for its 40%+ mass market share, 3% yield prospects for 2010 and undemanding valuation at 9x FY10 EBTIDA versus the sector at 12-14x.
Catalysts
Strong and healthy monthly gaming revenue numbers that dismiss concern over growth sustainability of the overall sector. Anchor themes We favour mass market focused plays, which we think will benefit proportionally more from enhanced internal consumption power and infrastructure upgrades. Our top pick, SJM, has an inexpensive valuation and resilient qualities in a downturn.
Rating
Price
BUY HK$8.35
Analyst
Charlene Liu +852 2252 6134 charlene.liu@nomura.com
Nomura
108
29 September 2010
Strategy | China
Charlene Liu
Infrastructure upgrade increase accessibility Our China team suggested that one of the four ripple effects from the 12th FYP would be that more infrastructure investments will need to be injected to cope with inter-region transportation demands. Therefore, while we note that infrastructure spending would likely target transferring manufacturing inland, developments such as the National High-Speed Passenger Rail Network will benefit Macau as it will increase accessibility. Macaus growth has mainly been banking on the southern China due to transportation bottlenecks elsewhere; so, improved infrastructure should enlarge Macaus customer base in China. This should allow Macau to benefit more from the next round of growth in other regions of China. Mass market has the limelight We think Chinas enhanced internal consumption power and infrastructure upgrades would benefit the mass market relatively more, as those factors could potentially increase both visitation and per visitor spending. Both of which are strong driving forces for the growth of Macaus mass market business. Therefore, in order to play the 12th FYP theme, we will favour stocks with comparatively higher mass market exposure than the rest.
Monthly Gaming Revenue (MOP bn) 18 16 14 12 10 8 6 4 2 0 Jan 07 Mar 07 May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 July 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10 yoy change (R.H.S.)
Source: DICJ
Source: DICJ
Nomura
109
29 September 2010
Strategy | China
Cheng Khoo
BULLISH
Stocks for action
Our top BUY call in the China oil & gas sector is Petrochina, based on 58% implied upside.
Catalysts
Upstream oil stocks are closely correlated to oil prices. Companies with strong production growth should see their stock prices enhanced. Anchor themes Tightening fundamentals over next two years, a weak US dollar, lax CFTC trading rules, abundant money supply and potentially higher inflation expectations could fuel higher oil prices. We think prices could cross the US$100/bbl level next year.
Stock Petrochina Sinopec CNOOC Shanghai Petro Rating BUY BUY BUY BUY Price (HK$) 8.67 6.61 14.70 3.29 Price target (HK$) 13.7 8.2 16.5 4.0
Transformational changes
12 Five Year Plan Focus
th
Analysts
Cheng Khoo +852 2252 6180 cheng.khoo@nomura.com cheng.khoo@nomura.com Gordon Wai +852 2252 6176 gordon.wai@nomura.com
We think that the 12th Five Year Plan for the oil, petroleum and petrochemical industry will focus on: Promoting clean fuels for a cleaner environment Energy efficiency gains and conservation Industry structural reform Moving up the value chain in petrochemical products
Nomura
110
29 September 2010
Strategy | China
Cheng Khoo
Exhibit 152. China Energy Consumption, 2009 (2.2bn tonnes of oil equivalent)
Renewable energy, 6.4% Nuclear, 0.7%
Exhibit 153. China Energy Consumption, 2015 (2.6bn tonnes of oil equivalent)
Hydropower, 8.6% Oil , 17.2%
Oil , 18.6%
Nuclear, 1.9%
Gas , 3.7%
Gas , 8.0%
Coal, 70.6%
Coal, 64.4%
Import: 112bcm
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
Nomura
111
2015E
29 September 2010
Strategy | China
Cheng Khoo
Valuation
We think Sinopecs valuations are compelling, at 7.2x FY11F PE and 1.1x FY11F PB, which are the lowest among its peers. However, in terms of earnings growth, Petrochina has the highest earnings growth in FY11F on high crude oil prices and strong earnings growth in natural gas and pipeline segment.
Sinopec compelling valuations; Petrochina strong earnings growth in FY11F
Nomura
112
29 September 2010
Strategy | China
Cheng Khoo
Valuations
CNOOC: Our 12-month price target of HK$16.50 is based on FY10/11F ROACE/WACC (28.6%/10%). The stock is trading at 2.1x avg FY11F P/B and 29% FY11F ROACE, which we believe to be undemanding. On P/E, the stock is currently at 10.4x FY11F lower than its past four-year average of 13x. PetroChina: Our price target of HK$13.70 is derived from the sum of: 1) HK$10.90 per share, based on an average 2010-11F ROACE/WACC (13%/8.1%), and; 2) HK$2.80 from our estimated oil and gas discoveries' value. Sinopec: Our PT of HK$8.20 is derived from FY10-11F ROACE/WACC (12.3%/9.2%). Sinopec Shanghai Petrochemical: Our price target of HK$4.00 is based on average FY10/11F ROACE/WACC (10.9%/8.7%).
Nomura
113
29 September 2010
Strategy | China
Alvin Wong
Real Estate
Action
We believe under the 12th Five-Year Plan, the Chinese government will reiterate the target of providing affordable housing to the low-income group. The government is likely to speed up the construction of public housing to meet the demand of different income groups, in our view.
N/A
Catalysts
Due to the low margins of public housing development, there could be more business opportunities for contractors rather than real estate developers under this initiative. Anchor themes We believe the provision of public rental housing should help ease public concerns regarding current high property prices. However, we believe it should only have limited impact on the private sector, as local governments do not have the capacity to flood the market with low-rent housing.
Analysts
Alvin Wong +852 2252 1563 alvin.wong@nomura.com Sunny Tam, CFA +852 2252 6226 sunny.wong@nomura.com
Nomura
114
29 September 2010
Strategy | China
Alvin Wong
50mn sqm GFA over 2010-2015F, representing a 43% increase compare with the average annual completion of ~35mn sqm GFA over 2004-2009 (see Exhibit below). We believe the targets of low-rent housing supply and rent subsidies will be challenging to meet, especially for some local cities where local governments have relatively weak balance sheets. Local governments have committed to various targets to supply either low-rent housing or rent subsidies to low-income groups, and we estimate that to finance these, the total cost could account for 10% or more of some local governments annual expenditure such as Gansu, Heilongjiang, Ningxia, Qinghai, etc (see second Exhibit). In our calculations, we assume RMB1,500/sqm construction costs for low-rent housing, and for rent subsidies, we assume local governments would subsidise up to 50% of minimum wage for each household. Even if we were to take into account the central government grants for constructing low-rent housing, it appears that the capex would still be a bit too heavy for some provincial governments.
(%) 80
60
20
* 7.7m or 50% of the targeted low-income households to be filled by economic housing by end-2015 ** Assuming 39sqm per unit (3 person x 13sqm). Source: CEIC, Nomura estimates
Nomura
29 September 2010
Strategy | China
Alvin Wong
Additional low-rent houses Area Anhui Beijing Chongqing Fujian Gansu Guangdong Guangxi Guizhou Hainan Hebei Heilongjiang Henan Hubei Hunan Inner Mongolia Jiangsu Jiangxi Jilin Liaoning Ningxia Qinghai Shaanxi Shandong Shanghai Shanxi Sichuan Tianjin Tibet Xinjiang Yunnan Zhejiang Total '000 units 96 4 71 35 73 12 34 79 10 52 119 107 38 99 50 12 59 120 54 19 34 86 40 12 79 126 25 2 137 110 5 1,799
Construction expenditure** (RMBmn) 5,616 234 4,154 2,048 4,271 702 1,960 4,622 585 3,042 6,967 6,260 2,223 5,792 2,925 702 3,452 7,020 3,159 1,112 1,989 5,031 2,340 702 4,622 7,371 1,463 117 8,015 6,435 293 105,218
Rent subsidy expenditure*** (RMBmn) 104 17 53 54 85 31 91 78 10 49 279 130 589 128 211 35 104 148 130 20 28 64 44 27 102 133 160 11 161 179 33 3,285
Local govt revenue (RMBmn) 72,462 202,680 68,183 93,230 28,670 364,900 62,083 41,646 17,820 106,620 64,160 112,610 81,480 84,500 85,070 322,880 58,120 48,708 159,100 11,150 8,770 73,391 219,853 254,030 80,580 117,416 82,138 3,009 38,880 69,820 214,237 3,248,196
* Grant from Central Government for low rent housing construction: RMB400psm for western areas, RMB300psm for central areas and RMB200psm for Fujian, Liaoning and Shandong. ** Construction expenditure is estimated based on RMB1,500/sqm for construction cost, and assuming 39sqm per unit (3 person x 13sqm). *** Rent subsidy per household is assumed to be 50% of monthly minimum wages Source: Nomura research, MOHURD,CEIC
Nomura
116
29 September 2010
Strategy | China
Candy Huang
Retail
Action
The upcoming 12th Five-Year Plan will be positive for discretionary consumption, given that more supportive policies are in the pipeline we expect the government to roll out more policies to support the developments of Central and Western China and to encourage industry consolidation. We expect branded low-end retailers and the service sector to benefit the most, which include Gome and Ctrip.
BULLISH
Stocks for action
Gome is most geared to minimum salary increase guidelines in tier-2 and tier-3 cities, while Ctrip is most geared to lifestyle upgrade, rising salaries and social benefits.
Price ($) 2.36 43.84 15.02 24.95 19.46 Price target 4.1 48.0 16.0 34.0 28.5
Catalysts
Improved margins and better-than-expected SSS due to the upcoming national holidays are potential catalysts Anchor themes With Nomuras economics team projecting Chinas GDP growth will accelerate to 10.5% in 2010F, we are positive on the growth outlook for retail and service stocks, owing to better earnings visibility and improving employment conditions.
Stock Gome (493 HK) Ctrip (CTRP US) Belle (1880 HK) Li Ning (2331 HK) Ports (589 HK) Rating BUY BUY BUY BUY BUY
Pricing as of 21 Sep 2010; Ratings and Price Targets are as of the date of the most recently published report (http://www.Nomura.com) rather than the date of this document
Analyst
Candy Huang +852 2252 1407 candy.huang@nomura.com
We remain upbeat on the outlook for consumption in China. The upcoming 12th Five-Year Plan to be discussed in October 2010 during the the Fifth Plenary Session of the 17th CPC Central Committee meeting will be positive for consumption, at which we expect more supportive policies to be rolled out to boost consumption, such as raising government agricultural goods prices, rising minimum wages, improving social welfare coverage and increasing government expenditure on social welfare. The developments of Central and Western China will be emphasised, in our view, which should provide plenty of room for retailers to extend networks, along with rising income and urbanisation in the regions.
Nomura
117
29 September 2010
Strategy | China
Candy Huang
However, if there is a need to further increase the base salary for low-income staff, we believe labour-intensive companies will suffer in the initial stage, given their heavy cost structures and low margins, with staff costs accounting for 31-36% of their total expenses and low-income workers salaries accounting for 40-50% of total staff cost, based on our estimates. These companies include Lianhua, Wumart and Belle under our coverage. The impact for department stores and high-end retailers should be limited, given their diversified product mixes and that they are geared towards highly discretionary consumption. These companies include Parkson, Golden Eagle, Intime and Ports under our coverage. We believe branded low-ticket discretionary and highticket daily necessity retailers with light assets will benefit more, such as Li Ning and Gome under our coverage, given the rising demand for budget shoes/apparel, TVs and washing machines
Exhibit 158. Annual income and expense breakdown for urban households (2009)
Total Expenditure As % to population High income Upper middle income Middle income Lower middle income Low income 15 18 20 22 30 Per household income (RMB) 37,434 21,018 15,400 11,244 6,725 Expenditure (RMB) 24,043 14,964 11,310 8,739 5,833 income ratio (%) 64.2 71.2 73.4 77.7 86.7 household income (RMBbn) 3,407 2,295 1,869 1,501 1,224 Income growth by 30% (RMBbn) 1,022 689 561 450 367 Additional disposable income (RMBbn) 656 490 412 350 318 As % to China retail sales 09 (%) 5.2 3.9 3.3 2.8 2.5
Nomura
118
29 September 2010
Strategy | China
Candy Huang
Exhibit 159. Top 100 chain store sales and as % of total retail sales in China
(RMBbn) 1,600 1,400 1,200 1,000 800 600 400 200 0 2005
Source: CCFA, Nomura research
Top 100 chain store sales Top 100 chain store sales (LHS) as % of total retail sales as % of total retail sales (RHS)
(%) 12 11 10 9 8 7
2006
2007
2008
2009
(mn tickets) 30 25 20 15 4.0 10 5 0 2004 2005 2006 2007 2008 2009 2010F 1.4 2.7 5.8 Air-ticket sold (LHS) Market share (RHS) 8.1 9.4 11.1
(%) 12 10 8 6 4 2 0
Nomura
119
29 September 2010
Strategy | China
Candy Huang
China Services Ctrip CTRP US New Oriental Average EDU US Mkt Cap weighted average
BUY NEUTRAL
43.84 109.80
6,482 4,292
* Bloomberg consensus for non rated stocks; Price as of 21 Sep 2010; Ratings and Price Targets are as of the date of the most recently published report (http://www.Nomura.com) rather than the date of this document Source: Company data, Bloomberg consensus for not rated stocks; Nomura estimates
Nomura
120
29 September 2010
Strategy | China
Josephine Ho
Steel
Action
Steel names in our China/Taiwan space have appreciated by 8% to 30% over the past three months, outperforming the local index by 5% to 20%. We are now selectively positive on the China/Taiwan Steel sector with BUY ratings on Angang and China Steel, and NEUTRAL on Baosteel and Maanshan.
BULLISH
Stocks for action
Angang is best positioned in our China/Taiwan steel space, given its semiintegration to iron ore. China Steel, a lowbeta steel stock, tends to outperform peers when the steel cycle turns.
Stock
Angang (347 HK) Baosteel (600019 CH) Maanshan (323 HK)
Catalysts
Steel demand growth; steel price movement; government policy changes; interest rate changes; price movement of raw material prices. Anchor themes We believe that the steel equities in China/Taiwan are likely to see range-trading, as iron ore spot prices tend to move in tandem with steel prices. We see little opportunity for steel makers to boost margins significantly if iron ore contract prices are reviewed on a monthly basis, as is being proposed by iron ore miners.
Rating
BUY NEUTRAL NEUTRAL
Pricing as of 21Sept 2010 market close and local currencies for prices
Time to cherry-pick
Near-term performance supported by widening margin from
power rationing
Backed by the production cuts from power rationing since mid-August, Chinas spot steel prices have risen by 2-4%, while steel inventories have decreased by 3% in the past month. Based on our channel checks, so far, the leading producers in our coverage are yet to be affected by power rationing and, thus, have benefited from the recent price recovery. Even if power rationing is extended to leading producers, our sensitivity analysis shows that steel companies earnings are more sensitive to price changes than to volume changes. For every 1% change in shipments, the impact on earnings is 1-3%. However, for every 1% change in average selling price, the impact on earnings is 7-12%. We, therefore, believe that production losses at leading steel mills, if any, would be more than offset by any price gain as a result of supply cutbacks.
Analyst
Josephine Ho +852 2252 2177 josephine.ho@nomura.com
Nomura
121
29 September 2010
Strategy | China
Josephine Ho
6,000
0 Jan-04 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jul-10
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Nomura
122
29 September 2010
Jan-10
Jul-10
Strategy | China
BULLISH
Stocks for action
We have a BUY on ZTE on the network convergence and The Internet of Things concept. We also think AutoNavi and Digital China may benefit from Digital City, while Skyworth may benefit from IPTV.
Catalysts
Positive catalysts include increasing spending from telecom operators or governments, and favourable industry policies such as VAT tax refund. Negative catalysts include ban of Chinese projects by foreign countries for security reasons. Anchor themes Network convergence is the most important theme for the telecom equipment and IT software industry, in our view.
Stock ZTE
Rating BUY
Price 32.05
Analysts
Leping Huang, PhD +852 2252 1598 leping.huang@nomura.com Danny Chu, CFA +852 2252 6209 danny.chu@nomura.com
Network convergence Optical network Digital City IPTV The internet of things Source: Bloomberg, Nomura
Map, database AutoNavi, software digital China Set top box RFID Skyworth ZTE
IPTV: Skyworth
IPTV service was deregulated for telecom operators in the new network convergence policy. Compared to traditional cable TV, it is superior in terms of programme playback and interactive functions. Set-top box is one enabling technology of IPTV, and we think Skyworth, the largest setup box vendor in China, is a potential beneficiary of this trend.
Nomura
123
29 September 2010
Strategy | China
Telecom MIIT 870 Wireline Voice 147 306 ~40 Wireline broadband 108 113 ~80 SARFT 185 cable TV 29 174 19
Television
Nomura
124
29 September 2010
Strategy | China
Telecoms
Action
With the governments plan to further develop the Central and Western provinces, we expect GDP per capita of these regions to improve over time. As mobile penetration tends to be in tandem with GDP per capita, we expect mobile subscriber growth to continue and operators to benefit from earnings growth.
NEUTRAL
Stock for action
We like China Telecom because: 1) strong momentum of gaining CDMA subscribers; 2) potential shorter timeframe required for EBITDA breakeven for mobile business; and 3) faster broadband net adds.
Catalysts
Better-than-expected financial results; growth of DPS on absolute terms; increase in market share; higher-than-expected subscriber growth are potential catalysts. Anchor themes We believe investment theme should shift from equipment side (as 3G network rollout completed in China) towards service operators (ARPU uplift due to 3G migration) and handset manufacturers (handsets replacement).
Rating BUY
Price 4.13
Analysts
Danny Chu, CFA +852 2252 6209 danny.chu@nomura.com Leping Huang, PhD +852 2252 1598 leping.huang@nomura.com
Nomura
125
29 September 2010
Strategy | China
With the governments focus to further develop the Central and Western provinces (eg, Chongqing), we expect GDP per capita of these provinces to increase in many years. Given the close correlation between mobile penetration and GDP per capita, we expect Chinese mobile operators to benefit from the governments initiative to develop those provinces.
Exhibit 167. Scatter plot of provincial wireless penetration vs. GDP per capita
120
Wireless penetration (%)
Nomura
126
29 September 2010
Strategy | China
Jim Wong
Transport
Action
We remain bullish on various Chinese transport segments. We see continued strong China domestic demand incrementally driving growth for Chinese transport players versus regional peers. Our top picks are Jiangsu Exp for Expressways, Cosco Pacific for Ports and CSD for Shipping. As for airlines, we continue to like CEA for its increased dominance in the major hub of Shanghai.
BULLISH
Stocks for action
Our top picks are Jiangsu Exp for Expressways, Cosco Pacific for Ports and CSD for Shipping.
Catalysts
Sustained strong volumes and/or yield numbers in Oct 2010. Oct is a crucial month as it should provide an indicator of whether full-year 2010 will surprise up or down. Anchor themes Strong Chinese domestic demand has helped Chinese transport stocks weather the global economic downturn better than most regional peers. We see this trend continuing for the foreseeable future.
Stock Jiangsu Expressway Cosco Pacific China Shipping Development Rating BUY BUY BUY Price 8.04 11.88 11.32 Price target 11.95 13.20 15.60
Analysts
Jim Wong (Regional Transport & Infrastructure) +852 2252 2195 jim.wong@nomura.com Andrew Lee (Shipping) +852 2252 6197 andrew.lee@nomura.com Shirley Lam (Airlines) +852 2252 2196 shirley.lam@nomura.com Cecilia Chan (Shipping) +852 2252 6181 cecilia.chan@nomura.com
Nomura
127
29 September 2010
Strategy | China
Jim Wong
Exhibit 169. China Eastern Airlines (670 HK): Traffic trend a) RPK trend
RPK (LHS) Growth rate (RHS)
May-05
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Nomura
128
29 September 2010
May-09
Sep-06
Jan-04
Jan-08
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Strategy | China
Jim Wong
Exhibit 170. Jiangsu Expressway (177 HK): toll revenue trend on the Shanghai-Nanjing Expressway a) Long-term trend
(RMBmn/day) 14 12 10 8 6 4 2 0 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Daily toll revenue (LHS) Growth rate (RHS) (%) 270 220 170 120 70 20 (30) (80) (130) 6 4 2 0 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10
Source: Company data
b) Short-term trend
(RMBmn/day) 14 12 10 8 10 0 (10) (20) Daily toll revenue (LHS) Growth rate (RHS) (%) 40 30 20
Exhibit 171. Chinas top eight container ports: aggregate throughput trend a) Long-term trend
(mn TEUs) 12 10 8 6 4 2 0 May-01 May-03 May-05 May-07 May-09 Sep-00 Jan-00 Sep-02 Jan-02 Sep-04 Jan-04 Sep-06 Jan-06 Jan-08 Sep-08 Jan-10 Throughput (LHS) Growth rate (RHS) (%) 60 50 40 30 20 10 0 (10) (20) 6 5 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10
Source: MOC, SNET
b) Short-term trend
(mn TEUs) 11 10 9 8 7 Throughput (LHS) Growth rate (RHS) (%) 30 25 20 15 10 5 0 (5) (10) (15) (20)
Exhibit 172. Baltic Dry Index (BDI) and China Container Freight Index (CCFI) a) BDI
(Baltic dry index) 12,500 10,500 8,500 6,500 4,500 2,500 500 May-01 May-05 May-09 Sep-06 Sep-02 Sep-10 Jan-00 Jan-04 Jan-08
b) CCFI
US$/TEU 1,250 1,200 1,150 1,100 1,050 1,000 950 900 850 800 750 700 Jan-00 Jan-01
CCFI (LHS) Growth rate (RHS)
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Source: Bloomberg
Nomura
129
29 September 2010
Jan-09
Strategy | China
Catalysts
Other than policies to reduce energy consumption, we believe new energy will be highlighted in the plan and emphasis will be on, in sequence, nuclear, natural gas, small hydro, wind, solar and biomass energy. Anchor themes To realise a low carbon economy, China has two major targets increase the use of non-fossil energy to 15% of primary energy consumption in 2020 (from ~9% currently), and to reduce carbon intensity by 40-45% in 2020, from 2005 levels.
CHST China Longyuan JA Solar Yingli Green Energy Huaneng CR Power CR Gas Beijing Enterprise Shenhua China Everbright China Water Affair Beijing Enterprise Water Guangdong Investment
Analysts
Ivan Lee, CFA +852 2252 6213 ivan.lee@nomura.com Elaine Wu +852 2252 2194 elaine.wu@nomura.com
Nomura
130
29 September 2010
Strategy | China
Nomura
131
29 September 2010
Strategy | China
Also, investment in waste water treatment is forecast to double to RMB700bn during 2011-15F (from RMB330bn); out of which RMB150bn is projected for sludge treatment. We believe water tariffs will continue on an uptrend during 2011-15F to promote water conservation and efficiency. As of 1H10, water tariffs at 36 major cities grew by 8% from RMB1.7/m3 in 1H09 to RMB1.84/m3 in 1H10, according to H2O China, accelerating from a 3% increase during 1H08 to 1H09. We continue to favour wastewater treatment over tap water supply due to expected near-term capacity growth as China catches up with international peers on treatment penetration and environmental standards. Our top picks are China Everbright International (quality play in WTE) and Guangdong Investment (monopoly in HK, attractive valuation). Beijing Enterprises Water remains an attractive waste water treatment play with projected daily capacity of 6.0mn m3 by end-FY10F. We also like China Water Affairs (good tap water play) and Sound Global (EPC player turned integrated BOT operator). We remain NEUTRAL on Hyflux and have a REDUCE rating on Tianjin Capital Environmental Protection (proposed tariff cut).
Nomura
132
29 September 2010
Strategy | China
Sector valuation I
Exhibit 173. Asia ex-Japan utilities stocks valuation summary
Reporting Company Hongkong Electric CLP Holdings Hong Kong & China Gas CKI HK utilities average Type Integrated Integrated Gas Integrated Ticker 6 HK 2 HK 3 HK 1038 HK currency HKD HKD HKD HKD Share o/s (mn) 2134 2406 7,182 2,254 Free float 61.1 78.4 98.2 15.2 Rating Buy Neutral Reduce Buy Price target Local ($) 55.10 56.50 16.50 36.60 Price Local ($) 47.40 60.75 19.40 31.35 Market cap (US$mn) 13,034 18,833 17,953 9,105 14,731 09 3.14 3.41 0.79 2.47 2.45 EPS (local $) 10F 3.35 3.70 0.67 2.08 2.45 11F 3.75 3.85 0.74 2.63 2.74 09 2.11 2.48 0.35 1.20 1.53 DPS (local $) 10F 2.11 2.22 0.40 1.25 1.50 11F 2.22 2.31 0.45 1.58 1.64 Net profit (local $ m) 09 6,697 8,196 5,175 5,568 6,409 10F 7,154 8,911 4,839 4,699 6,401 11F 7,996 9,259 5,295 5,927 7,119
Datang Intl Huaneng Power Intl Huadian Power Intl China Power Intl China Resources Power China power average
Coal
1088 HK
CNY
19,890
26.1
Buy
44.60
30.75
79,783
1.59
1.89
2.12
0.53
0.69
0.77
31,706
37,494
42,090
Suntech Canadian Solar Trina Solar Yingli Green LDK Solar JA Solar Solargiga GCL Poly China solar average
China Everbright Intl Guangdong Investment China Water Affairs Beijing Enterprises Water Hyflux Limited Sound Global Ltd Tianjin Capital China water average
ENN Energy Towngas China China Resources Gas China Gas Beijing Enterprises China gas average
0.26 0.30
0.31 0.42
0.40 0.42
Integrated Gas
015760 KS 036460 KS
KRW KRW
642 72.60854701
46.0 32.0
Buy Buy
43,000.00 52,000.00
29,800 46,050.00
0 983.36 491.68
(107) 238.00 65
Solar Solar
3452 TT 6244 TT
TWD TWD
205 376
73.3 60.9
Reduce Reduce
40.00 97.00
43.3 125.0
2.00 1.00
2.00 1.00
2.00 1.00
(2,340) 33 (1,153)
Indonesia Perusahaan Gas Negara Gas PGAS IJ IDR 24,242 43.0 Buy 4,300.00 3950.00 10,688 222.79 211.06 236.62 163.61 115.00 127.37 5,227 5,087 5,736
Malaysia Tenaga Nasional YTLP Tanjong Plc Malaysia utilities average Integrated Integrated Integrated TNB MK YTLP MK TJN MK MYR MYR MYR 4,337 6,753 403 40.1 26.0 57.3 Buy Neutral Rating Suspended 9.40 2.30 NA 9.06 2.34 21.8 12,754 5,487 2,843 7,028 0.50 0.11 NA 0.31 0.62 0.18 NA 0.40 0.65 0.19 NA 0.42 0.13 0.13 NA 0.13 0.23 0.11 NA 0.17 0.22 0.12 NA 0.17 2,157 647 NA 1,402 2,707 1,126 NA 1,917 2,801 1,264 NA 2,033
Philippines Energy Development Corp Meralco Philippines utilities average Power Power EDC PM MER PM PHP PHP 18,750 1128 58.2 69.1 Buy Reduce 6.40 134.10 6.2 215.00 2,630 5,520 4,075 0.39 2.05 1.22 0.45 13.33 6.89 0.47 16.58 8.52 0.10 2.50 1.30 0.11 4.00 2.05 0.14 5.80 2.97 7,381 2,272 4,826 8,347 15,028 11,688 8,732 18,694 13,713
Suzlon
WTG
SUEL IN
INR
1557
35.9
Neutral
88.80
55.25
2,111
7.67
1.33
5.70
11,328
2,025
8,868
Note: Ratings and Price Targets are as of the date of the most recently published report (http://www.Nomura.com) rather than the date of this document. Priced on 28-Sep-10, as of last market close. *Annualised. Source: Bloomberg, Nomura International (Hong Kong) Ltd estimates
Nomura
133
29 September 2010
Strategy | China
Sector valuation II
Exhibit 174. Asia ex-Japan utilities stocks valuation summary
EPS growth (%) Company Hongkong Electric CLP Holdings Hong Kong & China Gas CKI HK utilities average 09 (16.6) (21.3) 21.9 25.9 2.5 10F 6.8 8.7 (14.4) (15.6) (3.6) 11F 11.8 3.9 9.4 26.2 12.8 (0.1) (0.0) 5.8 1.4 09 DPS growth (%) 10F 0.00 (10.40) 14.28 4.14 2.01 11F 5.00 3.90 12.50 26.15 11.89 Net earnings growth (%) 09 (16.59) (21.37) 20.28 25.89 2.05 10F 6.83 8.72 (6.50) (15.62) (1.64) 11F 11.77 3.90 9.43 26.15 12.81 Net Gearing (%) 09 13.72 44.43 22.07 net cash 26.74 10F 34.49 50.22 22.45 30.92 34.52 11F 34.49 50.22 22.45 30.92 34.52 EV/MW (local $) 09 NA NA NA NA NA 10F NA NA NA NA NA 11F NA NA NA NA NA 09 15.11 17.83 24.66 12.69 17.57 P/E (x) 10F 14.14 16.40 28.80 15.04 18.60 11F 12.65 15.79 26.32 11.92 16.67 Yield (%) 09 4.45 4.08 1.80 3.83 3.54 10F 4.45 3.65 2.06 3.99 3.54 11F 4.67 3.80 2.32 5.03 3.96
Datang Intl Huaneng Power Intl Huadian Power Intl China Power Intl China Resources Power China power average
19.0
18.3
12.3
15.2
29.37
12.31
19.01
18.26
12.26
6.00
3.04
3.04
NA
NA
NA
16.89
13.83
11.55
1.97
2.63
3.15
Suntech Canadian Solar Trina Solar Yingli Green LDK Solar JA Solar Solargiga GCL Poly China solar average
NA NA NA NA NA NA NA NA NA
NA NA NA NA NA NA NA NA NA
NA NA NA NA NA NA NA NA NA
38.93 26.13 15.80 50.81 157.13 net cash net cash 28.08 52.81
68.95 65.82 net cash 41.03 155.88 16.02 net cash 14.72 60.40
68.95 65.82 net cash 41.03 155.88 16.02 net cash 14.72 60.40
NA NA NA NA NA NA NA NA NA
NA NA NA NA NA NA NA NA NA
NA NA NA NA NA NA NA NA NA
China Everbright Intl Guangdong Investment China Water Affairs Beijing Enterprises Water Hyflux Limited Sound Global Ltd Tianjin Capital China water average
NA NA NA NA NA NA NA NA
NA NA NA NA NA NA NA NA
NA NA NA NA NA NA NA NA
ENN Energy Towngas China China Resources Gas China Gas Beijing Enterprises China gas average
NA NA NA NA NA NA
NA NA NA NA NA NA
NA NA NA NA NA NA
20.0 NA 40.2
15.83 NA 39.43
30.47 NA 0.57
NA NA NA
NA NA NA
NA NA NA
NA NA NA NA
NA NA NA NA
NA NA NA NA
NA (28.1) (28.1)
NA (14.3) (14.3)
NA (16.0) (16.0)
NA (14.27) (14.27)
NA (28.06) (28.06)
NA (14.27) (14.27)
NA NA NA
NA NA NA
NA NA NA
NA 14.05 14.05
8.28 11.90 10
0.00 2.14 1
2.73 1.83 2
NA 6,407.7 6,407.7
NA 6.4 6.4
NA 0.00 0.00
NA 0.00 0.00
NA 8,035.47 8,035.47
NA 6.44 6.44
NA NA NA
NA NA NA
NA NA NA
NA 1,134.20 1,134.20
NA 17.43 17.43
Indonesia Perusahaan Gas Negara 102.3 (5.3) 12.1 1,085.5 (29.71) 10.76 106.82 (2.69) 12.77 47.35 net cash net cash NA NA NA 18.31 18.81 16.68 4.14 2.91 3.22
NA NA NA NA
NA NA NA NA
NA NA NA NA
Malaysia Tenaga Nasional YTLP Tanjong Plc Malaysia utilities average (15.8) (43.2) NA (29.5) 25.4 56.7 NA 41.1 3.5 5.2 NAA 4.4 (10.7) 15.0 NA 2.2 69.86 (11.17) NA 29.3 (0.47) 1.50 NA 0.5 (15.73) (37.76) NA (26.75) 25.48 74.21 NA 49.84 3.50 12.23 NA 7.86 63.26 277.77 NA 170.52 52.91 206.23 NA 129.57 52.91 206.23 NA 129.57 NA NA NA NA NA NA NA NA NA NA NA NA 18.21 28.46 NA 23.33 14.52 16.28 NA 15.40 14.03 14.74 NA 14.38 1.47 5.53 NA 3.50 2.49 4.91 NA 3.70 2.48 4.98 NA 3.73
Philippines Energy Development Corp Meralco Philippines utilities average 26.2 (19.2) 3.51 13.1 549.9 281.51 4.6 24.4 14.50 (64.7) 40.8 -11.96 11.63 59.87 35.75 25.53 45.12 35.32 26.49 (18.86) 3.82 13.10 561.45 287.27 4.61 24.39 14.50 125.84 51.96 88.90 81.68 53.40 67.54 81.68 53.40 67.54 NA NA NA NA NA NA NA NA NA 15.65 104.86 60.25 13.84 16.13 14.98 13.23 12.97 13.10 1.62 1.16 1.39 1.81 1.86 1.83 2.27 2.70 2.48
Suzlon
(15.6)
(82.7)
329.6
(100.0)
NA
NA
(13.88)
(82.12)
337.87
137.25
105.38
105.38
NA
NA
NA
7.58
43.97
10.04
0.00
0.00
0.00
Note: Priced on 28-Sep-10, as of last market close. *Annualised. Source: Bloomberg, Nomura International (Hong Kong) Ltd estimates
Nomura
134
29 September 2010
Strategy | China
Datang Intl Huaneng Power Intl Huadian Power Intl China Power Intl China Resources Power China power average
33.25
36.37
36.39
8.58
9.82
11.25
3.14
2.57
2.10
9.35
7.63
6.44
48.13
49.09
48.76
13.32
14.0
13.9
19.9
20.5
20.1
10.8
11.4
11.6
Suntech Canadian Solar Trina Solar Yingli Green LDK Solar JA Solar Solargiga GCL Poly China solar average
China Everbright Intl Guangdong Investment China Water Affairs Beijing Enterprises Water Hyflux Limited Sound Global Ltd Tianjin Capital China water average
ENN Energy Towngas China China Resources Gas China Gas Beijing Enterprises China gas average
30.00 58.50
30.00 58.50
27.89 13.94
26.20 13.10
NA 31.27 31.27
Indonesia Perusahaan Gas Negara 73.44 54.49 53.83 460.09 684.72 939.47 8.59 5.77 4.20 10.39 10.05 8.68 54.96 55.90 58.25 31.44 19.4 17.9 86.5 40.4 31.4 30.1 19.3 18.1
Malaysia Tenaga Nasional YTLP Tanjong Plc Malaysia utilities average 26.73 113.95 NA 70.34 36.20 64.60 NA 50.40 34.81 62.31 NA 48.56 6.00 1.03 NA 3.51 6.45 1.13 NA 3.79 7.16 1.20 NA 4.18 1.51 2.27 NA 1.89 1.40 2.08 NA 1.74 1.26 1.95 NA 1.61 8.04 10.71 NA 9.38 6.75 10.41 NA 8.58 6.23 10.01 NA 8.12 23.98 43.45 NA 33.71 26.35 20.64 NA 23.49 25.97 20.63 NA 23.30 1.89 2.72 NA 2.30 5.3 4.1 NA 4.73 8.4 5.1 NA 6.72 3.6 10.3 NA 6.95 9.7 16.4 NA 13.09 13.9 16.1 NA 14.99 1.3 2.1 NA 1.7 3.6 3.2 NA 3.4 5.6 3.6 NA 4.6
Philippines Energy Development Corp Meralco Philippines utilities average 25.33 121.96 73.64 25.00 30.00 27.50 30.00 35.00 32.50 1.54 50.87 26.20 2.01 57.33 29.67 2.33 68.10 35.22 4.01 4.23 4.12 3.07 3.75 3.41 2.64 3.16 2.90 11.75 16.22 13.98 7.75 7.69 7.72 7.54 6.14 6.84 47.96 7.14 27.55 57.43 12.68 35.06 56.17 14.44 35.30 5.50 2.26 3.88 14.6 13.4 14.0 11.2 15.3 13.2 11.9 4.1 8.0 31.3 24.6 28.0 21.4 26.4 23.9 4.3 1.3 2.8 12.8 8.8 10.8 10.9 10.7 10.8
Suzlon
0.00
57.61
57.39
63.09
0.96
0.96
0.88
6.31
9.08
7.52
12.42
9.29
10.74
1.12
0.8
3.5
2.8
2.3
9.5
0.7
0.6
2.6
Note: Priced on 28-Sep-10, as of last market close. *Annualised. Source: Bloomberg, Nomura International (Hong Kong) Ltd estimates
Nomura
135
29 September 2010
Strategy | China
Valuation methodologies
Exhibit 176. Valuation methodologies and investment risks
Company Hongkong Electric Ticker Valuation methodology 6 HK Our price target for HKE remains unchanged and is derived using the DCF methodology, assuming an SOC return of 9.99%, WACC of 6.2% and a terminal growth rate of 2%. 2 HK SOTP valuation, which values CLPs core electricity business at HK$60.3/share with a reduction of HK$3.8/share to reflect the potential writedown on Yallourn and earnings risk from Australias carbon trading scheme. Risks Risks to our investment view include a strengthening of the US dollar and the Japanese yen, lower-than-expected SOC capex spent during FY08-13F and poor operating performance at overseas projects. Lower SOC capex in Hong Kong, poor operating results from overseas investments, potential writedown on its Yallourn plant and earnings risks from the carbon trading scheme in Australia.
CLP Holdings
3 HK SOTP valuation, which implies 22x FY10F P/E Regulatory risks, larger-than-expected mark-to-market loss (3.1x book) for the Hong Kong Towngas business, of investment securities and investment property writedown. 32x FY10F P/E (2.1x book) for the China business and no NAV discount for the property portfolio. Upside risks include acquisitions of more projects in China and share buy-backs. Strengthening of US dollar and the Japanese yen, lower1038 HK SOTP valuation based on 8.5% cost of equity for assets in Australia, Canada, New Zealand and the than-expected SOC capex spent during FY08-13F, poor UK, and a 10% cost of equity for its China and HK operating performance at overseas projects. materials businesses. 991 HK DCF (with a WACC of 9% and 2% terminal growth Risks includes: Profit margins of the Chinese independent rate for 2023 and thereafter), plus a 15% discount power producers are not protected by contracts or due to low market visibility. regulatory regimes. Without any automatic pass-through mechanism, major cost items (eg, fuel cost) are subject to market price fluctuations. Competition and the macroeconomic downturn could also have a negative impact on generation output and plant utilisation over time. 902 HK DCF (with a WACC of 9% and 2% terminal growth Risks includes: Profit margins of the Chinese independent rate for 2023 and thereafter), plus a 15% discount power producers are not protected by contracts or due to low market visibility. regulatory regimes. Without any automatic pass-through mechanism, major cost items (eg, fuel cost) are subject to market price fluctuations. Competition and the macroeconomic downturn could also have a negative impact on generation output and plant utilisation over time. 1071 HK DCF (with a WACC of 9% and 2% terminal growth rate for 2023 and thereafter), plus a 15% discount due to low market visibility, and 25% discount as risk premium for its smaller market capitalisation. Risks includes: Profit margins of the Chinese independent power producers are not protected by contracts or regulatory regimes. Without any automatic pass-through mechanism, major cost items (eg, fuel cost) are subject to market price fluctuations. Competition and the macroeconomic downturn could also have a negative impact on generation output and plant utilisation over time. Risks includes: Profit margins of the Chinese independent power producers are not protected by contracts or regulatory regimes. Without any automatic pass-through mechanism, major cost items (eg, fuel cost) are subject to market price fluctuations. Competition and the macroeconomic downturn could also have a negative impact on generation output and plant utilisation over time.
CKI
Datang Intl
2380 HK DCF, (with a WACC of 9% and 2% terminal growth rate for 2023 and thereafter), plus a 15% discount due to low market visibility, and 25% discount as risk premium for its smaller market capitalisation.
836 HK DCF (with a WACC of 9% and 2% terminal growth Risks includes: Profit margins of the Chinese independent rate for 2023 and thereafter), plus a 15% discount power producers are not protected by contracts or due to low market visibility. regulatory regimes. Without any automatic pass-through mechanism, major cost items (eg, fuel cost) are subject to market price fluctuations. Competition and the macroeconomic downturn could also have a negative impact on generation output and plant utilisation over time. 2688 HK PT is based on 14.5x 2011F P/E, a 10% discount to the peer average of 16.1x to reflect companyspecific risks. The discount has been reduced from 20% previously, as we believe investors confidence in the company has gradually improved, of late, on the back of the above positive notes. Downside risks to our price target include: 1) The adverse impact of any economic slowdown on gas sales to C&I users and 2) looming wellhead price reforms, which could hurt end-demand. We note, however, that ENN should be relatively unaffected by the anticipated wellhead price increase, since most of its projects are based in more prosperous cities making it easier to pass on costs to customers. Upside risks include more gas volume sales to higher margin C&I and vehicle users, more new project wins and a higher-than-wellhead price increase on its retail gas tariffs. Other upside risks may include a possibility of being an acquisition target amid industry consolidation.
ENN Energy
Nomura
136
29 September 2010
Strategy | China
Risks
1083 HK Our price target of HK$2.20, rounded from Major investment risks include: 1) better-than-expected new HK$2.15, is based on our assumption of a terminal connections and gas sales; 2) value-accretive asset growth rate of 0% and a WACC of 8.18% (debt injection; and 3) significant share purchases from HKCG. cost of 6.0%, a raw beta of 1.40, a risk-free rate of 2.5%, a risk premium of 5.5% and a long-term debt-to-equity ratio of 35%) (price target and rating unchanged). Our price target implies an FY10F P/E of 14x, below the industry average of 17x, which we consider reasonable, given TCCLs lukewarm ROEs. 1193 HK We use a sum-of-the-parts (SOTP) methodology to derive our 12-month price target of HK$14.40, of which HK$12.20 is from existing projects, while HK$2.20 is from to-be-injected projects. For to-beinjected projects, we assign a 50% discount to the DCF value to reflect uncertainty. We estimate that the asset injection can enhance value by HK$4.40 per share assuming acquisition valuation of 2.5x book value. 384 HK We use the DCF method (unchanged) to derive our price target of HK$4.30 (rounded down from HK$4.32). We assume a terminal growth rate of 0%, a WACC of 8.27% (a cost of debt of 5%, raw beta at 2.00, a risk-free rate of 2.50%, a risk premium of 5.50%, and long-term debt-toequity ratio of 75%). To be conservative, we use the number of diluted shares to reach our price target. 658 HK Based on DCF valuation, with a WACC of 9.5% and terminal growth of 1% after FY2020F. We have a positive view on the companys overall operation, but are wary of a macro slowdown and the implications on commercial and industrial (C&I) demand. Meanwhile, the value from future asset injections would be hurt by higher-than-expected considerations, in our view. We also see the lack of upstream projects as a risk to CR Gass long-term development. It may take some time for the looming wellhead price increase to be passed on, which could also hit the bottom line. We see three major risks to China Gas: option dilution, interest rate hikes and lower-than-expected LPG margin. Industry wide, the looming wellhead price increase may lead to temporary margin contraction in our view. Upside risks include higherthan- expected LPG margin and more gas projects.
China Gas
Uncertainty of government policies for wind power; tightening global credit market; development of direct-drive wind turbine technology; the company's failure to improve technology to compete with foreign competitors; severe shortage of raw materials; delay in capacity expansion. Risks includes: If the industry recovers by more than our expectation, our estimates may prove too conservative. Meanwhile, if China's power demand falters, the outlook for Chinese power generation equipment vendors could take a hit and our estimates may prove elusive. Raw material costs are also significant, as is government's energy policy. Risks includes: If the industry recovers by more than our expectation, our estimates may prove too conservative. Meanwhile, if China's power demand falters, the outlook for Chinese power generation equipment vendors could take a hit and our estimates may prove elusive. Raw material costs are also significant, as is government's energy policy. Risks includes: If the industry recovers by more than our expectation, our estimates may prove too conservative. Meanwhile, if China's power demand falters, the outlook for Chinese power generation equipment vendors could take a hit and our estimates may prove elusive. Raw material costs are also significant, as is government's energy policy. Essentially all of KEPCOs earnings are denominated in won, while almost all of its fuel costs are in US dollars. This exposes earnings to the volatility of the forex and energy markets. Changes in government electricity tariff policy and the macro backdrop can also have a large impact on KEPCOs earnings. Further, earnings are highly leveraged to revenue growth, which poses a direct risk if the street cuts sales forecasts. Uncertainty from governments policy supports, failure in migrating technology forward, higher-than-expected product liability provisions, delay in recovery of WTG demand, and failure in enhancing cashflow and balance sheet quality. Upside risks to our price target: Canadian Solars being able to expand margins ahead of our expectations on the back of faster cost reductions. Downside risks to our price target: 1) slower market share gains in new regions; and 2) demand at new growth centers being unable to offset lower demand from Germany. Upside risks to our price target include: 1) E-Tons raising additional funding at attractive rates, and; 2) a faster-thanexpected ramp-up of new R&D projects helping improve cost structure meaningfully.
Shanghai Electric
2727 HK We believe 14x earnings multiple is reasonable for SEG despite challenging industry outlook because SEG is one of the leading Chinese industrial companies.
Dongfang Electric
Harbin Power
015760 KS Based on an EV/MW target of US$750,000. This is the median of the November 1997 to June 1999 period, as current conditions for power demand, the Korean won, the tariff outlook, and our expectations for a recovery in free cashflow all resemble conditions during that Asian crisis period, with a share price range of W12,90050,500. SUEL IN One-year forward P/E multiple of 16xFY11F earnings.
Suzlon
Canadian Solar
CSIQ US We use the simple average FY11F P/BV of global players to value the company and assign a 20% discount to reflect SEC overhang (earlier: FY10F P/BV, method unchanged). On our updated numbers, we increase our price target to US$12.20 for a target P/BV of 0.9x, implying potential upside of 0% from current levels. 3452 TT Our price target is based on FY11F P/BV average of global independent PV cell makers (previously: FY10F P/BV), to which we assign a 20% discount (previous: 10%) to reflect E-Tons weakened balance sheet.
E-Ton
Nomura
137
29 September 2010
Strategy | China
Company Motech
Ticker Valuation methodology 6244 TT We use the average FY10F P/BV of greater China solar peers to value the company and include a 20% premium on account of Motechs stronger balance sheet and TSMCs backing.
Risks Upside risks to our price target come from: 1) Motechs entry into new business area / faster vertical integration, which would change its risk profile; 2) faster-than expected ramp of AE Polysilicon, which could provide margin upside, and; 3) faster than expected demand recovery that could provide some ASP stability. Downside risks to our price target: 1) Demand in new growth centres being unable to offset lower demand from Germany following the change in subsidies; and 2) slowerthan-expected market-share gains. Downside risks to our price target: 1) slower-than-expected market share gains; and 2) demand at new growth centers being unable to offset lower demand from Germany following the change in subsidies. Investment risks include progress on LDKs in-house polysilicon production, expansion strategy into the downstream, upside or downside surprises from government policy changes, earnings dilution risks from potential equity financing, and whether the company can continue to improve its balance sheet quality. Risks to our price target include uncertainty over the governments policies on solar energy, execution on inhouse polysilicon production, progress on disruptive technology R&D, and slower-than-expected capacity expansion. Uncertainty regarding government policies on solar energy, execution of R&D initiatives (SE Cells), and progress on landing overseas business partners.
Suntech Power
STP US Our price target is derived from average FY10F P/BV of global PV module makers.
Trina Solar
TSL US Our price target was derived using a simple average of global module makers FY10F P/BV of 1.8x . LDK US Our price target of US$8.00 is based on our FY10F earnings estimate and 12.5x P/E multiple, which is the average FY10F P/E of solar companies in China .
LDK
Yingli Green
YGE US Our price target of US$23.00, is based on 22x FY10F earnings, representing a 15% premium to the current peer average of 19x FY10F earnings. We believe that Yingli deserves to trade at valuation premium JASO US Our price target of US$8.00 per share is based on FY10F earnings and a 9x P/E multiple, the peer group average.
JA Solar
Solargiga
757 HK We value the company using the average 09F P/E Solar demand could be a lot stronger than we expected, the of listed solar companies in the greater China company could attain more sales contracts to enhance region at 8x. visibility, and uncertainty over government policy and subsidies. NATP IN Sum-of-the-parts methodology, valuing the companys core business using DCF to equity holders, with a cost of equity of 11% and terminal growth rate of 2%. TPWR IN SOTP methodology by valuing its Mumbai business at INR 274, Delhi distribution business at INR 71, Tala Transmission at INR 27, Mundra UMPP at INR 187, the stake in Indonesias coal mines at INR 188, the Maithon project at INR 61, Merchant Power at INR 65, IEL at INR 16, investments at INR 205, others at INR 76 and adjust for the debt for SPV at the end of FY10E from our valuation. We value all Indian Power businesses using DCF to Equityholders methodology with a cost of equity at 12%; however, the Indonesian coal mine stake is valued using a cost of equity of 18% (including 6% country risk). Slow pace of reforms, regulatory uncertainty, availability of fuel supply and capacity slippages pose credible risks. Deferment of projects in 11th and 12th five-year plan. Change in coal prices, delay in project execution, slow pace of reforms and regulatory uncertainty pose risks to our price target. Fuel availability for project life remains a major risk as the offtake from BUMI Resources will only partly fulfil the requirement.
NTPC
Tata Power
Power Grid
Strong pace of capital expenditure, increase in regulated PWGR IN We value Power Grid using a DCF-to-equity returns, and delays of planned projects would pose risk to holders' methodology, using a cost of equity of 11.0% and a terminal growth rate of 3% in FY18E our earnings and target price. to arrive at our 12-month price target of INR89 per share. 257 HK DCF methodology, employing a WACC of 10.5% and 2% growth rate. Our target prices are subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our target prices. Our target prices are subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our target prices. Our target prices are subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our target prices.
Guangdong Investment
Nomura
138
29 September 2010
Strategy | China
Ticker Valuation methodology 371 HK DCF methodology, employing a WACC of 10.5% with no terminal growth rate.
Risks Our target prices are subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our target prices. Our target prices are subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our target prices. Our target prices are subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our target prices. Our target prices are subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our target prices. 1) significant (positive or negative) discontinuities in Malaysias regulatory framework with regard to tariffs, the regulated gas price and, on a broader level, the industry structure; 2) further downside in nearterm volumes on a slower-than-anticipated recovery in Malaysias manufacturing sector; 3) fuel-related risk, which is borne almost exclusively by TNB; and 4) significant changes to market sentiment and liquidity Key risks include the Malaysian regulatory environment; exchange rate risk, specifically relating to YTLP's Wessex Water in the UK. Rating Suspended
Tianjin Capital
1065 HK Our price target is derived using DCF, with a WACC of 12.0% and no terminal growth rate.
Hyflux Limited
HYF SP Our price target is based on DCF valuation, with a WACC of 7.5% and a terminal growth rate of 4.5%.
Sound Global
SGL SP Based on SOTP, by valuing the EPC division using an 18x P/E over FY10F EPS, and the BOT division based on DCF method using a 10% WACC with no terminal growth.
Tenaga Nasional
TNB MK Free cashflow (FCFF) framework with a WACC of 8.6% (down from 8.8% previously) and a terminal growth assumption of 1.5% (unchanged).
YTLP MK SOTP valuation based on COE of 9.0% for Malaysia, 17% for Indonesia. We value Wessex Water at 1.08x FY09F RAB and PowerSeraya at 11.5x EV/EBITDA TJN MK Rating Suspended
The risks to our investment call are: 1) government policies, 036460 KS SOTP methodology based on NAV estimate of W52,091 per share, which comprises W26,267 for 2) interest expenses, and 3) execution risk in E&P projects. Kogass core NG business, W24,071 for its E&P projects and W1,753 for its affiliates. Each of the first two parts is separately calculated using a discounted cashflow (DCF) methodology, while the last part is calculated based on 1x of book value. PGAS IJ We use a 10-year DCF and adopt a WACC of 10.7% and a terminal growth rate of 2.0%, given the strong potential of gas in the long term, PGNs relatively strong positioning and its ability to maintain a market share of more than 90%. The gas supply bottleneck; derivative revaluation losses; the 4% stake to be unwound by the government from April 2010. A long-term risk is gradually rising gas costs.
GLOW TB FCFE valuation methodology with Ke = 10.8% and Weaker-than-anticipated industrial demand, project delays a 1.5% terminal growth assumption. and sentiment-related selldowns on political instability. EGCO TB FCFE valuation methodology with Ke = 9.78% and Delays to projects pipelines and sentiment-related a 1.0% terminal growth assumption. selldowns on political instability. RATCH TB FCFE valuation methodology with Ke = 9.78% and Further delays to projects in Laos and sentiment-related a 1.5% terminal growth assumption. selldowns on political instability. 600900 CH Sum-of-the-parts valuation, in which we value the hydropower business and holding securities at RMB15.23 and RMB1.28, respectively, based on the number of shares post private placement to the parent, concluded on 29 September 2009. 1088 HK We use a sum-of-the-parts valuation methodology for Shenhua. We apply DCF analysis to assess the enterprise value (EV) of Shenhuas coal (9% WACC, 2.5% terminal growth rate) and power businesses (8% WACC and 1% terminal growth rate), given their different business characteristics and growth profiles. We then sum up the values to arrive at the groups EV, adjusted for consolidated net debt and minority interest. EDC PM DCF with WACC= 9.6% and terminal growth assumption of 2.0% 1) fluctuation in utilisation hours; 2) the pace and magnitude of potential tariff hikes; 3) A-share market trends; and 4) potential interest rate hikes.
China Shenhua
Investment risks include: 1) higher-than-expected coal prices; 2) weaker-than-expected recovery in Chinas economy; 3) higher-thanexpected cost hikes; 4) higher coal imports boosted by a strengthening RMB, and 5) Nomura 4 30 August 2010 overall market weakness given the stocks high correlation to the market index (HangSeng Index).
EDC
Nomura
139
29 September 2010
Strategy | China
Ticker Valuation methodology MER PM DCF with WACC= 9.1% and terminal growth assumption of 1.5% 3800 HK Our current price target of HK$1.30 is at par with the current share price. We maintain our NEUTRAL rating on GCL Poly.
Risks Further inflated bids for Meralco's shares Investment risks include: execution of in-house wafer production ramp up, attainment of approval to procure electricity directly from power producers, potential change in technology platform, and uncertainties from solar subsidies and policies.
Longyuan
916 HK DCF with a WACC of 11.8% and a terminal growth CER VER registration risks, resolution of grid connection assumption of 1% after FY2019F bottleneck in China, uncertainties from wind subsidies and policies 392 HK Valuation Methodology. Our 12-month PT is HK$60.9 based on 2010F NAV of HK$60.9. Key downside risks are: (1) a slower-than-expected gas demand; and (2) margin pressure for gas/brewery from rising cost pressures.
BEHL
Nomura
140
29 September 2010
Strategy | China
Nomura
141
29 September 2010
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
lucy.feng@nomura.com david.m.chung@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
ABC is in a sweet spot of county banking in China, as its target county customers are mainly residents of the county and county-level cities, private businesses (and their owners) and affluent rural households. We believe these segments will benefit the most from Chinas urbanisation and west/central development. We reiterate our BUY rating and price target of HK$4.30 on the stock.
HK$3.84
HK$4.30
(set on 26 Aug 10)
Catalysts
BTE 3Q10 numbers at the earnings results in Oct could act as a positive catalyst. Anchor themes Tightening is likely to lead to better loan pricing power and higher NIMs for Chinese banks, that can control deposit costs. The operating environment remains favourable for Chinese banks in 2010F, but negative sentiment from uncertainties over policies and asset quality continue to weigh on valuation.
Nomura vs consensus
Our net profit forecast is higher than consensus due to our higher NIM and lower credit cost assumptions.
Absolute (HK$) Absolute (US$) Relative to Index Market c ap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) MOF Huijin
Source: Company, Nomura estimates
Nomura
142
29 September 2010
Lucy Feng
Valuation methodology
Our TP of HK$4.30 is based on 2.06x P/BV applied to the average FY10F and FY11F BVPS. Our sustainable ROE is 16.2 %. We use a Gordon Growth model (target P/BV = (sustainable ROE long-term growth)/(cost of equity long-term growth)) to derive our fair P/BV range, assuming a cost of equity of 12% and a terminal growth rate of 8.1%. We derive our terminal growth rate by applying a 50% payout ratio to our longterm sustainable ROE assumption.
Nomura
143
29 September 2010
Lucy Feng
Financial statements
Profit and Loss (RMBmn) Year-end 31 Dec Interest income Interest expense Net interest income Net fees and commissions Trading related profits Other operating revenue Non-interest income Operating income Depreciation Amortisation Operating expenses Employee share expense Op. profit before provisions Provisions for bad debt Other provision charges Operating profit Other non-operating income Associates & JCEs Pre-tax profit Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/book (x) Price/adjusted book (x) Net interest margin (%) Yield on interest earning assets (%) Cost of interest bearing liabilities (%) Net interest spread (%) Non-interest/operating income (%) Cost to income (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (%) Operating ROE (%) Operating ROA (%) Growth (%) Net interest income Non-interest income Non-interest expenses Pre-provision earnings Net profit Normalised EPS Normalised FDEPS
Source: Nomura es timates
FY08 321,855 (121,852) 200,003 23,798 (571) (9,214) 14,013 214,016 (11,423) (98,752) 103,841 (39,858) (11,620) 52,363 (14) 52,349 (896) 51,453 21 51,474 51,474 51,474
FY09 296,147 (114,508) 181,639 35,640 271 6,087 41,998 223,637 (10,775) (98,792) 114,070 (44,289) 4,147 73,928 73,928 (8,926) 65,002 (10) 64,992 64,992 (20,000) 44,992
FY10F 393,975 (165,223) 228,752 43,505 48 3,001 46,553 275,305 (11,314) (115,247) 148,744 (30,843) 117,902 117,902 (28,296) 89,605 (11) 89,594 89,594 (20,159) 69,435
FY11F 479,534 (204,190) 275,344 53,467 421 3,168 57,056 332,400 (11,879) (133,200) 187,320 (35,003) 152,318 152,318 (35,795) 116,523 (12) 116,511 116,511 (52,435) 64,076
FY12F 587,056 (265,637) 321,419 65,975 611 4,690 71,276 392,695 (12,473) (152,966) 227,256 (36,092) 191,164 191,164 (44,923) 146,240 (13) 146,227 146,227 (65,808) 80,419
12.9 14.4 12.9 3.0 3.0 3.13 5.03 2.01 3.02 6.5 51.5 1.7 (23.5) 0.84 (24.0) 0.85
13.4 15.1 13.4 2.3 2.5 2.5 2.28 3.71 1.51 2.20 18.8 49.0 12.1 30.8 20.5 0.82 23.3 0.93
10.7 11.9 10.7 1.9 1.9 1.9 2.49 4.29 1.87 2.42 16.9 46.0 24.0 22.5 20.5 0.93 27.0 1.22
8.6 9.6 8.6 5.2 1.6 1.6 2.63 4.58 2.01 2.57 17.2 43.6 23.5 45.0 20.1 1.04 26.3 1.36
6.7 7.5 6.7 6.7 1.4 1.4 2.69 4.92 2.28 2.64 18.2 42.1 23.5 45.0 21.7 1.13 28.3 1.48
Nomura
144
29 September 2010
Lucy Feng
Balance Sheet (RMBmn) As at 31 Dec Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other interest earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, debentures Other interest bearing liabilities Total interest bearing liabilities Non interest bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-performing assets (RMB) Balance sheet ratios (%) Loans to deposits Equity to assets Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross loans (%) Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Growth (%) Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) DPS (RMB) PPOP PS (RMB) BVPS (RMB) ABVPS (RMB) NTAPS (RMB)
Source: Nomura es timates
FY08 107,147 1,145,884 2,269,060 246,370 3,100,159 (85,175) 3,014,984 155 103,883 17,107 109,761 7,014,351 6,097,428 346,894 51,774 6,496,096 227,714 6,723,810 96 260,000 12,022 18,423 290,445 7,014,351 134,067
FY09
FY10F
FY11F
FY12F
111,128 124,463 139,399 156,127 1,517,806 2,038,857 2,220,775 2,327,528 2,504,496 2,787,232 3,102,115 3,452,826 421,093 463,202 509,523 560,475 4,138,187 4,933,182 6,005,136 7,362,171 (126,692) (152,862) (182,811) (214,804) 4,011,495 4,780,319 5,822,325 7,147,367 141 141 141 141 111,973 114,212 116,497 118,827 19,659 17,693 15,924 14,331 184,797 68,622 69,309 70,002 8,882,588 10,394,743 11,996,007 13,847,623 7,497,618 8,708,128 10,135,681 11,801,584 714,218 763,475 825,933 901,717 163,681 223,762 234,852 247,050 8,375,517 9,695,366 11,196,465 12,950,351 164,146 167,842 171,653 175,586 8,539,663 9,863,208 11,368,119 13,125,937 106 107 108 109 260,000 324,794 324,794 324,794 39,817 20,000 23,002 342,819 (8,660) 20,159 195,134 531,428 33,286 52,435 217,264 627,780 86,513 65,808 244,462 721,577
50.8 4.1
55.2 3.9
56.7 5.1
59.2 5.2
62.4 5.2
Nomura
145
29 September 2010
Angang Steel 3 4 7 H K
B AS I C M AT E R I AL S / M E T AL S & M I N I N G | C H I N A
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
Josephine Ho
josephine.ho@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
We reaffirm BUY on Angang with a price target of HK$16. Semi-integrated to iron ore, for which prices are reviewed every six months, Angang appears better positioned than its non-integrated peers. Also, Angang has been aggressive in consolidating domestic steel producers.
HK$12.62
HK$16.00
(s et on 20 Sep 10)
Catalysts
Steel demand growth; steel price movement; government policy changes; interest rate changes; price movement of raw material prices. Anchor themes We believe that steel equities in China/Taiwan are likely to range-trade. Since iron ore spot prices tend to move in tandem with steel prices, there will be little room for steel makers to significantly lift margins if iron ore contract prices are reviewed monthly.
Nomura vs consensus
Our price target is higher than consensus, as we place a higher value on Angangs integration to iron ore.
110 100 90 80 70 60 50
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Angang Group
So urce: Comp any, Nomura estimates
Nomura
146
29 September 2010
Angang Steel
Josephine Ho
1-year forward PB
One standard above = 1.7x Average = 1.0x One standard below = 0.3x
Note: Angang was re-rated after 2006 after becoming an fully integrated (to blast furnace) steel company Source: Nomura estimates
One standard below = -2x May-01 May-03 May-05 May-07 Sep-00 Jan-02 Sep-02 Sep-04 Jan-04 Jan-06 Sep-06 Jan-08 Sep-08
Note: Angang was re-rated after 2006 after becoming an fully integrated (to blast furnace) steel company Source: Nomura estimates
Nomura
29 September 2010
Angang Steel
Josephine Ho
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 78,985 (70,839) 8,146 (3,685) 4,461 9,236 (4,775) 4,461 (694) 80 3,847 (854) 2,993
FY09 70,057 (65,904) 4,153 (2,512) 1,641 7,910 (6,269) 1,641 (764) 877 (166) 711 41 752 752 (434) 318
FY10F 92,755 (79,703) 13,052 (5,565) 7,487 15,561 (8,074) 7,487 (1,636) 5,851 (1,170) 4,681 4,681 4,681 (1,872) 2,809
FY11F 104,256 (88,456) 15,800 (6,255) 9,545 17,776 (8,231) 9,545 (1,628) 7,916 (1,583) 6,333 6,333 6,333 (2,533) 3,800
FY12F 106,679 (91,538) 15,141 (6,401) 8,740 17,824 (9,084) 8,740 (326) 8,414 (1,683) 6,731 6,731 6,731 (2,693) 4,039
26.9 34.1 26.9 1.9 7.5 1.5 11.1 22.8 10.3 11.7 5.6 3.8 22.2 50.8 18.6 3.1 5.6 5.3
100.3 127.2 100.3 0.6 176.2 1.4 13.4 64.7 5.9 11.3 2.3 1.1 18.9 57.7 9.1 1.0 1.4 1.7
16.1 20.4 16.1 2.5 10.3 1.4 6.0 12.5 14.1 16.8 8.1 5.0 20.0 40.0 8.9 1.0 8.7 8.0
11.9 15.1 11.9 3.4 7.4 1.3 5.3 9.8 15.2 17.1 9.2 6.1 20.0 40.0 8.0 1.0 11.1 10.7
11.2 14.2 11.2 3.6 5.8 1.3 5.2 10.7 14.2 16.7 8.2 6.3 20.0 40.0 7.8 0.9 11.4 9.6
Nomura
148
29 September 2010
Angang Steel
Josephine Ho
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 9,236 5,455 (3,974) 10,717 (14,684) (3,967) (1,377) 5 77 (5,262) (3,977) 4,425 55 503 (4,759) 7,733 2,974 23,192
FY09 7,910 (3,653) (3,829) 428 (6,341) (5,913) 853 (143) 23 368 (4,812) (1,519) 3,056 2,543 4,080 (732) 2,974 2,242 30,623
FY10F 15,561 (1,789) (6,424) 7,349 (8,300) (951) (951) (434) (300) 14,295 13,561 12,610 2,242 14,852 17,713
FY11F 17,776 (891) (6,644) 10,241 (8,300) 1,941 1,941 (1,872) (300) (599) (2,771) (830) 14,852 14,023 18,242
FY12F 17,824 (154) (4,596) 13,074 (8,300) 4,774 4,774 (2,533) (300) (1,612) (4,445) 329 14,023 14,351 17,614
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 2,974 5,796 10,372 3,658 22,800 2,252 43,256 18 26,500 94,826 8,601 13,383 2,165 24,149 17,565 141 41,855
FY09 2,242 7,887 10,658 5,851 26,638 1,399 53,807 13 21,269 103,126 21,363 13,733 2,732 37,828 11,502 139 49,469 1,366 7,235 45,056
FY10F 14,852 7,942 8,546 6,082 37,421 1,399 46,993 13 16,054 101,880 21,213 10,043 2,806 34,062 11,352 45,414 1,366 7,235 47,865
FY11F 14,023 8,926 9,615 5,959 38,523 1,399 49,660 13 15,460 105,054 21,063 11,145 2,745 34,953 11,202 46,155 7,235 51,664
FY12F 14,351 9,134 9,951 5,960 39,395 1,399 49,155 13 15,182 105,144 20,913 11,534 2,746 35,193 11,052 46,245 7,235 51,664
7,235 45,736
52,971 94,826
52,291 103,126
55,100 101,880
58,899 105,054
58,899 105,144
0.94 6.4
0.70 2.1
1.10 4.6
1.10 5.9
1.12 26.8
2.51 43.8
3.87 58.6
1.14 32.1
1.03 31.0
0.99 29.9
Nomura
149
29 September 2010
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
Josephine Ho
josephine.ho@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
Anhui Conch remains one of our top picks in the cement sector, for its leading market position, solid management and growing presence in western China. Power rationing across East and Central China will likely lead to better-than-expected 3Q10 earnings. We reiterate our BUY rating and price target of HK$36.3.
HK$33.60
HK$36.30
(set on 11 Jan 10)
Catalysts
Catalysts are seen in stronger-than-expected demand growth, faster cement price hikes, industry consolidation and favourable government policies. Anchor themes We consider cement the best proxy for Chinas investment-driven economic growth, since it is used 100% in the construction sector. Nomuras China economics team calls for 30% y-y FAI growth in 2010F, providing solid support to the cement demand outlook.
Nomura vs consensus
The street has been catching up with our previously above-consensus bullish call.
Mar10
Jan10
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Anhui Conch Holdings
So urce: Comp any, Nomura estimates
Jul10 3m 27.0 27.2 24.1 6m 36.9 36.8 35.4 7,646 80.1 33.90/21.50 22.96 Easy 29.7
Nomura
150
29 September 2010
Josephine Ho
by 15% y-y and 1% m-m in August, given strong demand in neighbouring Guangdong province. it is reported that Guangxi joined the power-rationing club from September 4, 2010 till end 2010. (Source: China Cement Net, Cement prices increased across China due to supply cuts, Sept 8). With potential supply cuts versus recovering demand in 2H10, we expect cement prices in Guangxi to increase further, thus pushing up prices in neighbouring Guangdong province.
Nomura
151
29 September 2010
Josephine Ho
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 24,228 (18,321) 5,908 (1,822) 4,086 5,526 (1,403) (38) 4,086 (821) 4 3,269 (591) 2,678 (71) 2,607 2,607 (391) 2,216
FY09 24,998 (17,971) 7,027 (2,066) 4,961 6,442 (1,429) (52) 4,961 (451) (1) 4,508 (882) 3,626 (121) 3,506 3,506 (526) 2,980
FY10F 31,132 (21,326) 9,805 (2,800) 7,006 8,706 (1,642) (58) 7,006 (1,183) 5 5,827 (1,049) 4,778 (251) 4,528 4,528 (679) 3,849
FY11F 36,828 (24,877) 11,951 (3,375) 8,576 10,496 (1,855) (64) 8,576 (1,446) 5 7,135 (1,284) 5,851 (307) 5,544 5,544 (832) 4,712
FY12F 43,481 (28,705) 14,776 (4,121) 10,654 12,793 (2,068) (71) 10,654 (1,657) 5 9,002 (1,620) 7,382 (387) 6,995 6,995 (1,049) 5,946
20.1 21.7 19.1 0.7 10.5 2.1 10.2 13.8 24.4 22.8 16.9 10.8 18.1 15.0 20.0 3.4 14.8 12.6
14.0 15.1 14.0 1.1 7.5 1.7 8.5 11.1 28.1 25.8 19.8 14.0 19.6 15.0 30.5 5.3 13.3 12.6
21.7 23.4 21.7 0.7 31.5 3.1 6.9 8.6 31.5 28.0 22.5 14.5 18.0 15.0 24.5 4.6 15.0 15.0
17.7 19.1 17.7 0.8 11.5 2.7 5.6 6.9 32.5 28.5 23.3 15.1 18.0 15.0 17.6 3.5 16.1 16.4
14.0 15.2 14.0 1.1 10.8 2.3 4.5 5.4 34.0 29.4 24.5 16.1 18.0 15.0 14.9 3.1 17.6 18.5
Nomura
152
29 September 2010
Josephine Ho
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 5,526 628 (1,417) 4,738 (4,836) (98) (0) (1,047) 70 (547) (1,622) (4) 11,282 (3,931) (342) 7,004 5,382 1,418 6,799 4,029
FY09 6,442 1,702 (1,629) 6,515 (7,628) (1,113) 4 (3,092) 424 5,238 1,461 (526) (1,252) (2,855) (4,633) (3,172) 6,799 3,627 5,950
FY10F 8,706 (3,504) (2,086) 3,115 (7,628) (4,513) (5,877) (712) (193) (11,295) (679) 8,015 6,732 14,068 2,773 3,627 6,400 11,192
FY11F 10,496 745 (2,735) 8,506 (6,484) 2,022 747 (1,859) 910 (832) 6,412 1,116 6,697 7,607 6,400 14,006 9,998
FY12F 12,793 (427) (3,281) 9,085 (6,484) 2,600 (1,361) 2,604 3,844 (1,049) 5,130 (1,239) 2,841 6,685 14,006 20,691 8,443
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 6,799 5,184 1,870 19 13,872 163 26,431 264 1,653 42,384 4,795 6,086 293 11,174 6,033 289 17,496 466 1,766 22,655
FY09 3,627 4,694 2,172 16 10,509 160 31,098 493 4,745 47,004 4,183 7,724 166 12,073 5,394 712 18,179 537 1,766 26,521 28,287 47,004
FY10F 6,400 4,972 3,382 14,754 160 30,397 442 10,622 56,374 4,598 5,859 10,457 12,994 23,450 788 1,766 30,369 32,136 56,374
FY11F 14,006 5,882 2,703 22,591 160 35,665 490 9,875 68,781 4,930 6,834 11,764 19,074 30,838 1,095 1,766 35,082 36,848 68,781
FY12F 20,691 6,945 3,119 30,754 160 38,607 538 11,236 81,295 5,196 7,885 13,082 23,938 37,019 1,482 1,766 41,027 42,794 81,295
24,421 42,384
1.24 5.0
0.87 11.0
1.41 5.9
1.92 5.9
2.35 6.4
0.73 16.5
0.92 21.0
1.29 34.8
0.95 27.1
0.66 19.7
Nomura
153
29 September 2010
BYD 1 2 1 1 H K
TE C H N O L O G Y / H AN D S E TS | C H I N A
Maintained
NOMURA SINGAPORE LIMITED
chitra.gopal@nomura.com
BUY
Closing price on 21 Sep P rice target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
3Q10 is likely to see a 15% q-q drop in auto shipments in our view, this should mark the bottom, with the stock largely pricing in weakness. BYD is now setting the stage for investment in new energy ventures, which we think should become the focus in FY11F. BUY.
HK$56.2
HK$62.0
(set on 16 Aug 10)
Catalysts
Catalysts have to emerge from (a) Inventory correction in auto ending 3Q10 marks the worst point; and (b) Contracts on new energy. Anchor themes We expect 2010 to see the birth of an electric car battery market several issues need to be addressed: a) technology is still nascent b) development of enabling factors such as battery leasing, charging infrastructure and government support.
Nomura vs consensus
We are below consensus but expect cuts after the latest results
Absolute (HK$) Absolute (US$) Relative to Index Mark et cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Mr. Wang Chuan-fu Mr. Lu Xiang-yang
Source: Compan y, Nomura estimates
Nomura
154
29 September 2010
BYD
Nomura
155
29 September 2010
BYD
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold G ross profit S G&A E mployee share expense O perating profit E BITDA Depreciation A mortisation E BIT Net interest expense A ssociates & JCEs O ther income E arnings before tax Income tax Net profit after ta x Minority interests O ther items P referred dividends Normalised NPAT E xtrao rdinary items Reported NPAT Divi dends Transfer to reserves V aluation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Divi dend yield (% ) P rice/cashflow (x) P rice/book (x) E V/EBITDA (x) E V/EBIT (x) G ro ss margin (%) E BITDA margin (% ) E BIT margin (%) Net margin (%) E ffective tax rate (%) Divi dend payout (%) Capex to sales (%) Capex to depreciati on (x) ROE (%) ROA (pretax %) G rowth (%) Reven ue E BITDA E BIT Normalised EPS Normalised FDEPS P er share Reported EPS (RMB) Norm EP S (RMB) Fully diluted norm EPS (RMB) B ook value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 26,788 (21,569) 5,219 (4,055) 1,164 2,495 (1,211) (120) 1,164 (401) 601 1,364 (88) 1,276 (254)
FY09 3 9,469 (30,905) 8,565 (4,488) 4,077 5,807 (1,594) (136) 4,077 (237) 669 4,509 (431) 4,078 (285)
FY10F 45,707 (36,146) 9,561 (5,235) 4,326 6,710 (2,249) (136) 4,326 (157) 716 4,885 (440) 4,445 (271)
FY11F 52,092 (41,071) 11,021 (5,937) 5,084 8,135 (2,915) (136) 5,084 (157) 692 5,618 (506) 5,113 (290)
FY12F 59,9 52 (47,193) 12,7 59 (6,802) 5,9 57 9,6 75 (3,582) (136) 5,9 57 (157) 6 93 6,4 93 (584) 5,9 08 (313)
98.4 108.6 98.4 75.9 8.9 47.7 102.2 19.5 9.3 4.3 3.8 6.5 23.0 5.1 9.3 4.2
27.7 30.6 27.7 0.7 8.7 6.3 19.4 27.7 21.7 14.7 10.3 9.6 9.5 18.6 18.0 4.5 27.1 11.7
26.7 29.5 26.7 26.5 5.7 17.7 27.5 20.9 14.7 9.5 9.1 9.0 21.9 4.4 23.1 9.9
23 .1 25 .5 23 .1 14 .4 4 .6 14 .8 23 .8 21 .2 15 .6 9 .8 9 .3 9 .0 19 .2 3 .4 22 .1 9 .5
19.9 22.0 19.9 12.8 3.7 12.6 20.4 21.3 16.1 9.9 9.3 9.0 16.7 2.8 20.7 9.5
14 .0 21 .2 17 .5 15 .5 15 .5
Nomura
156
29 September 2010
BYD
Cashflow (RMBmn) Year-end 31 Dec E BITDA Change in working capital O ther operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisi tions Reduction in other LT assets A ddition in other LT liabilities A djustments Cashflow a fte r investing acts Cash dividends E quity issue Debt issue Conve rtible debt issue O thers Cashflow from financial acts Net cashflow B eginning cash E nding cash E nding net d ebt
Source: Nomura estimates
FY08 2,495 (1,229) 58 1,324 (6,158) (4,834) 61 (188) (484) 367 426 (4,652) (701) 701 1,039 (149) (75) 814 (3,838) 5,540 1,701 7,461
FY09 5,807 6,125 84 1 2,016 (7,108) 4,908 (1) (57) (1,316) (142) 1,449 4,841 1,581 (5,519) (287) (4,226) 616 1,701 2,317 1,337
FY10F 6,710 (1,457) (1,052) 4,202 (10,000) (5,798) 450 (5,348) (707) 5,280 4,573 (776) 2,317 1,541 7,393
FY11F 8,135 27 (435) 7,727 (10,000) (2,273) 450 (1,823) 1,000 1,000 (823) 1,541 718 9,215
FY12F 9,6 75 (478) (514) 8,6 83 (10,000) (1,317) 4 50 (867) 1,0 00 1,0 00 1 33 7 18 8 52 10,0 82
Balance sheet (RMBmn) As at 31 Dec Cash & equiva lents Marketable securities A ccounts receivable Inventories O ther current assets Total current ass ets LT investments Fixed assets G oodwill O ther intangibl e assets O ther LT assets Total assets S hort-term debt A ccounts payable O ther current liabilities Total current liabilitie s Lon g-term deb t Conve rtible debt O ther LT liabilities Total liabilities Minority interest P referred stock Common stock Retained earnings P roposed dividen ds O ther equity an d reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EB ITDA (x) Net debt/equity (%) Activity (da ys) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 1,701 5,566 6,916 717 14,900 2 14,716 59 730 2,485 32,891 4,371 6,849 3,176 14,395 4,792 367 19,554 2,052 2,050 9,235 11,286 32,891
FY09 2,317 1 9,793 4,408 678 1 7,197 2 1 8,907 59 771 3,801 4 0,736 547 1 1,519 6,312 1 8,377 3,107 225 2 1,708 2,345 2,275 1 3,656 751 1 6,682 4 0,736
FY10F 1,541 1 11,270 5,447 678 18,937 2 26,658 59 635 3,801 50,091 1,000 11,884 7,006 19,889 7,934 225 28,047 2,616 2,275 17,109 43 19,428 50,091
FY11F 718 1 12,845 6,751 678 20,993 2 33,743 59 499 3,801 59,096 1,000 13,503 8,293 22,796 8,934 225 31,954 2,905 2,275 21,919 43 24,237 59,096
FY12F 8 52 1 14,7 83 7,7 58 6 78 24,0 71 2 40,1 61 59 3 63 3,8 01 68,4 56 1,0 00 15,5 16 8,7 46 25,2 62 9,9 34 2 25 35,4 20 3,2 18 2,2 75 27,4 99 43 29,8 18 68,4 56
1.04 2.9
0.94 17.2
0.95 27.6
0.92 32 .4
0.95 38.0
Improving BS
2.99 66.1
0.23 8.0
1.10 38.1
1.13 38 .0
1.04 33.8
84 .5 54 .2 112 .8 25 .9
Nomura
157
29 September 2010
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
gordon.wai@nomura.com cheng.khoo@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
We believe China BlueChem should be a beneficiary of the consolidation theme addressed by the 12th Five Year Plan, as the company can leverage its strong balance sheet to raise capital for further acquisitions to increase its market share in the sector. We reiterate our BUY call and price target of HK$6.0, based on FY11F ROACE/WACC (16%/7.7%).
HK$5.72
HK$6.00
(set on 31 Aug 10)
Catalysts
Upside catalysts include a rebound in fertiliser demand and higher-than-expected fertilizer and/or methanol prices and positive government policy changes. Anchor themes Over the long term, economic and population growth, coupled with limited planting acreage, should drive fertilizer demand.
Nomura vs consensus
We believe our FY11F earnings forecast are largely in-line with consensus.
Beneficiary of consolidation
Securing resources for capacity expansion
We believe industry consolidation, outdated capacity elimination and energy conservation will be the main themes for the sector in the 12th Five Year (2011-15) Plan. We believe China BlueChem should be a beneficiary of the 12th Five Year Plan as government policy is in favour of China BlueChem to acquire coal mines to secure feedstock for further urea capacity expansion and to acquire fertilizer producers to increase its market share or diversify its product mix.
34.0 25.5 38.6 17.6 14.0 10.1 7.4 5.9 4.2 2.1 1.9 1.7 1.9 2.3 3.2 12.8 14.3 17.6 cash net cash net cash 1,655 0.36 2,295 0.50
1,320 0.29
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) CNOOC Group
Source: Company, Nomura estimates
Compelling valuations
Valuation is compelling. China Bluechem is trading at 14.0x FY11F P/E and 2.3x FY11F P/B, which is at a discount compared with international peers at 15.3x and 3.6x FY11F PB (Bloomberg consensus estimates). We reiterate our BUY call and PT of HK$6.0, based on FY11F ROACE/WACC (16%/7.7%). Downside risks to our call include (i) higher-than-expected natural gas price hikes, (ii) weak fertilizer prices and (iii) natural disaster.
Nomura
158
29 September 2010
Gordon Wai
2010E to 2012E earnings multiples are based on closing price of HK$5.72 on 21 September Source: Company data, Nomura estimates
2009 520 800 520 1,840 600 200 800 350 150 500
2010F 520 800 520 1,840 600 800 200 1,600 60 350 150 500
2011F 520 800 520 1,840 600 800 200 1,600 60 350 150 500
2012F 520 800 520 520 2,360 600 800 200 1,600 60 700 300 1,000
Nomura
159
29 September 2010
Gordon Wai
4,000
3,000
2,000
1,000 02 03 04 05 06 07 08 09 10
Nomura
160
29 September 2010
Gordon Wai
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 6,812 (4,505) 2,306 (376) 1,930 2,545 (600) (14) 1,930 4 5 15 1,953 (132) 1,822 (213)
FY09 5,795 (4,075) 1,719 (437) 1,283 2,283 (987) (14) 1,283 18 15 (3) 1,312 (198) 1,115 (130)
FY10F 6,935 (4,696) 2,238 (536) 1,702 2,772 (1,063) (7) 1,702 52 16 (3) 1,766 (270) 1,496 (177)
FY11F 8,825 (5,865) 2,960 (600) 2,360 3,488 (1,121) (7) 2,360 59 16 (3) 2,433 (510) 1,923 (268)
FY12F 11,054 (7,104) 3,951 (672) 3,279 4,542 (1,256) (7) 3,279 79 17 (3) 3,372 (706) 2,665 (371)
14.7 15.4 14.7 1.9 9.6 2.3 7.8 10.2 33.9 37.4 28.3 23.6 6.7 27.2 10.4 1.2 17.5 24.4
23.6 24.8 23.6 1.4 12.2 2.4 9.3 16.4 29.7 39.4 22.1 17.0 15.1 32.8 26.8 1.6 9.9 13.2
17.6 18.5 17.6 1.9 8.2 2.1 7.4 12.0 32.3 40.0 24.5 19.0 15.3 32.8 28.8 1.9 12.8 15.4
14.0 14.7 14.0 2.3 9.7 1.9 5.9 8.7 33.5 39.5 26.7 18.8 21.0 32.8 22.7 1.8 14.3 19.1
10.1 10.6 10.1 3.2 5.6 1.7 4.2 5.7 35.7 41.1 29.7 20.8 21.0 32.8 18.1 1.6 17.6 24.3
Nomura
161
29 September 2010
Gordon Wai
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 2,545 (146) 58 2,457 (708) 1,749 303 12 (163) 89 223 2,214 (369) (114) (265) (748) 1,466 2,781 4,246 (3,887)
FY09 2,283 (196) (178) 1,909 (1,555) 354 (652) (1,945) (351) (13) 1,138 (1,468) (438) (359) (37) (833) (2,302) 4,246 1,945 (1,944)
FY10F 2,772 352 (285) 2,839 (2,000) 839 (16) (1,600) 80 2 1,641 946 (323) (323) 624 1,945 2,568 (2,567)
FY11F 3,488 (576) (526) 2,386 (2,000) 386 (16) 7 2 82 460 (432) (432) 28 2,568 2,596 (2,595)
FY12F 4,542 332 (724) 4,149 (2,000) 2,149 (17) 7 2 104 2,245 (543) (543) 1,702 2,596 4,298 (4,297)
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 4,246 120 836 292 5,494 13 7,052 16 615 13,191 148 132 1,105 1,385 212 261 1,858 1,050 4,610 2,874 2,799 10,283 13,191
FY09 1,945 163 798 699 3,604 665 7,395 16 966 12,646 148 1,304 1,452 1 249 1,702 1,258 4,610 3,468 1,609 9,686 12,646
FY10F 2,568 157 544 750 4,018 681 8,622 16 886 14,223 163 1,432 1,595 1 250 1,846 1,435 4,610 4,263 2,069 10,942 14,223
FY11F 2,596 246 1,132 806 4,780 697 9,501 16 879 15,872 180 1,573 1,752 1 252 2,005 1,702 4,610 5,260 2,295 12,165 15,872
FY12F 4,298 259 898 868 6,323 714 10,245 16 872 18,170 198 1,728 1,925 1 253 2,179 2,073 4,610 6,643 2,664 13,917 18,170
3.97 na
2.48 na
2.52 na
2.73 na
3.28 na
Nomura
162
29 September 2010
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
ivan.lee@nomura.com elaine.wu@nomura.com
BUY
Closing price on 21 Sep HK$3.62
Action
CEI stands to be a major beneficiary of the 12 Five Year Plan from its exposure in wastewater treatment and WTE. Project growth remains healthy with recent wins in Guangdong and Anhui. Trading at 18x FY11F EPS, vs peers 16x, we think the premium is warranted as WTE expansion should provide higher returns. We believe potential new projects would be catalysts for share price. Reaffirming BUY.
th
Price target Upside/downside Difference from consensus FY11F net profit (HK$mn) Difference from consensus
Source: Nomura
HK$5.50
(set on 1 Feb 10)
Catalysts
Recent equity funding has strengthened its internal war chest to bring in further projects in environment protection. CEIs growth profile is becoming more visible. Anchor themes Chinas per capita water resources are only a quarter of the global average, while its water consumption (per unit of GDP) is 5.5x the global average. Shortages, pollution, geographical disparity and inefficient water use cost 8-10% of the nations GDP. More than 400 cities suffer water shortages of 16mn m3/day.
Nomura vs consensus
We believe CEI will continue project execution in FY10-11F, driving growth. Longer term, new projects would likely trigger upgrades to consensus estimates.
We expect continued support from Chinas central government policies on wastewater treatment (potential investment of RMB700bn during 2011-15F) and expansion of waste-to-energy plants (300 WTE plants by end-FY15F, from ~100 in FY08). As a leader in WTE with already high emissions standards, we believe CEI will benefit from the growth in the WTE sector.
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) China Everbright Holdings
Source: Company, Nomura estimates
Nomura
163
29 September 2010
Valuation methodology: Our price target is based on DCF methodology, using a WACC of 10.5% and 2% terminal growth (methodology unchanged). Risks to our investment view: Our price target is subject to growth assumptions for treatment volumes (including tap water supply, wastewater treatment, and waste to energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations for the water industry may result in changes in our forecasts, hence our price target.
Nomura
164
29 September 2010
Financial statements
Income statement (HK$mn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (HK$) Norm EPS (HK$) Fully diluted norm EPS (HK$) Book value per share (HK$) DPS (HK$)
Source: Nomura estimates
FY08 1,863 (1,198) 665 (127) 538 574 (13) (24) 538 (147) 18 408 (95) 313 (26) 287 52 339 (50) 289
FY09 1,766 (947) 819 (165) 654 693 (15) (24) 654 (170) 1 18 503 (99) 404 (37) 367 5 372 (75) 297
FY10F 3,090 (1,981) 1,109 (189) 921 975 (18) (36) 921 (198) 62 785 (157) 628 (35) 593 593 (120) 473
FY11F 3,778 (2,345) 1,433 (242) 1,192 1,248 (21) (36) 1,192 (231) 38 998 (220) 778 (46) 732 732 (148) 584
FY12F 4,278 (2,524) 1,754 (232) 1,522 1,581 (24) (36) 1,522 (282) 27 1,267 (317) 950 (63) 888 888 (179) 708
40.7 61.8 33.5 0.4 na 4.0 26.3 28.1 35.7 30.8 28.9 18.2 23.3 14.8 54.5 78.6 12.9 11.3
34.0 51.6 33.0 0.6 78.1 2.9 20.5 21.8 46.4 39.2 37.1 21.1 19.7 20.2 30.8 37.3 10.1 10.7
22.4 34.0 22.2 0.9 14.5 2.6 15.6 16.6 35.9 31.6 29.8 19.2 20.0 20.2 51.9 87.5 12.3 12.4
18.0 27.3 18.0 1.1 12.5 2.3 13.1 13.8 37.9 33.0 31.5 19.4 22.0 20.2 48.2 88.4 13.7 12.9
14.8 22.6 14.8 1.4 10.3 2.1 11.0 11.4 41.0 37.0 35.6 20.7 25.0 20.2 41.2 74.9 14.8 13.6
Nomura
165
29 September 2010
Cashflow (HK$mn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 574 (116) (584) (126) (1,015) (1,141) 37 9 39 128 (927) (50) 8 986 52 995 68 631 699 1,912
FY09 693 (216) (320) 157 (545) (388) 1 4 66 (12) (329) (63) 1,445 518 (246) 1,654 1,325 699 2,024 1,077
FY10F 975 (214) 146 907 (1,604) (697) 0 10 (687) (120) 16 228 (207) (83) (771) 2,024 1,253 2,075
FY11F 1,248 (154) (38) 1,056 (1,821) (765) (0) 2 (764) (148) 822 (233) 440 (323) 1,253 930 3,220
FY12F 1,581 (154) (151) 1,277 (1,764) (487) 0 (13) (500) (179) 744 (269) 296 (204) 930 726 4,168
Balance sheet (HK$mn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 699 98 12 582 1,391 22 145 46 578 4,118 6,301 546 471 9 1,026 2,065 79 3,170 311 314 2,505 2,820 6,301
FY09 2,024 198 13 708 2,944 21 144 46 554 4,959 8,667 696 481 10 1,188 2,405 145 3,738 357 364 4,209 4,573 8,667
FY10F 1,253 186 15 1,032 2,488 21 145 46 518 6,301 9,519 451 580 12 1,042 2,878 145 4,065 392 364 4,698 5,062 9,519
FY11F 930 225 19 1,326 2,501 21 151 46 482 7,953 11,153 545 758 16 1,319 3,605 145 5,069 438 364 5,283 5,647 11,153
FY12F 726 282 27 1,700 2,736 21 161 46 445 9,544 12,954 691 1,038 22 1,750 4,204 145 6,098 501 364 5,991 6,355 12,954
1.36 3.7
2.48 3.8
2.39 4.7
1.90 5.1
1.56 5.4
Nomura
166
29 September 2010
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
ivan.lee@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
Although managements recent share placement could be viewed negatively by the market in the near term, we reaffirm our BUY rating on CHST, given its solid position along the global wind value chain, strong margin profile, and attractive valuations (11x FY11F P/E). We also maintain our price target at HK$22.00.
HK$17.40
HK$22.00
(set on 13 Sep 10)
Catalysts
Launch of higher-end wind products, new sales contracts to overseas customers, and Chinese government support for offshore wind development stand as catalysts. Anchor themes We see wind as the best investment option, since it is the worlds most commercial green energy. Its low-cost and stable output should underpin installed capacity growth of around 30% pa globally over the next five to ten years. We expect better growth opportunities down the value chain in Asia.
Nomura vs consensus
We are more positive on CHSTs top-line growth over FY10-12F. We believe consensus has not yet adjusted for the rights issue.
120 115 110 105 100 95 90 85 80 May10 Jul10 Aug10 3m (5.3) (5.2) (8.3) 6m 2.0 2.0 0.5 3,082 78.0 19.58/14.64 22.87 Easy 16.0 8.1 Jun10
Feb10
Mar10
1m 3.0 Absolute (HK$) 3.1 Absolute (US$) (0.9) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Fortune Apex (Management Shareholders) JP Morgan Chase
Source: Company, Nomura estimates
Nomura
167
Jan10
29 September 2010
Apr10
Clarisse Pan
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 3,439 (2,447) 992 (447) 545 706 (145) (16) 545 (29) 10 238 764 (72) 693 (0) 692 692 (274) 419
FY09 5,647 (3,786) 1,861 (528) 1,334 1,550 (193) (23) 1,334 (100) 16 (83) 1,166 (200) 966 1 966 966 (329) 638
FY10F 8,116 (5,569) 2,547 (876) 1,670 1,979 (272) (37) 1,670 (186) (8) 212 1,689 (287) 1,402 1,402 1,402 (420) 981
FY11F 10,194 (7,037) 3,157 (1,040) 2,117 2,499 (333) (49) 2,117 (249) (10) 293 2,151 (323) 1,829 1,829 1,829 (549) 1,280
FY12F 13,002 (8,989) 4,013 (1,495) 2,518 2,963 (384) (62) 2,518 (290) (13) 340 2,555 (383) 2,172 2,172 2,172 (652) 1,520
Despite the slowing China wind market, we believe CHST will be able to ramp up overseas revenue to deliver healthy growth in FY10F
30.2 38.2 28.5 1.4 132.4 5.1 32.8 42.3 28.8 20.5 15.9 20.1 9.4 39.6 32.5 7.7 20.3 10.0
19.6 24.8 19.5 1.7 na 4.2 15.5 18.0 33.0 27.4 23.6 17.1 17.2 34.0 28.5 8.3 23.7 15.4
15.3 19.3 14.4 2.1 8.7 2.6 10.3 12.2 31.4 24.4 20.6 17.3 17.0 30.0 16.0 4.8 23.5 15.4
11.4 14.4 10.8 2.8 10.3 2.2 8.5 10.1 31.0 24.5 20.8 17.9 15.0 30.0 12.5 3.8 22.3 16.2
9.6 12.2 9.1 3.3 9.0 1.9 7.2 8.5 30.9 22.8 19.4 16.7 15.0 30.0 8.3 2.8 22.3 16.2
Nomura
168
29 September 2010
Clarisse Pan
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 706 (1,752) 1,195 149 (1,119) (970) (558) (561) (323) 336 (945) (3,019) (88) 867 1,434 (29) 2,185 (835) 1,516 682 1,610
FY09 1,550 (778) (1,471) (699) (1,607) (2,305) 5 (0) (24) (233) 1,076 (1,482) (274) 1,208 437 (100) 1,271 (210) 682 471 3,466
FY10F 1,979 1,539 (1,211) 2,307 (1,296) 1,010 16 8 (177) 21 1,031 1,910 (329) 2,010 2,301 (1,369) (186) 2,428 4,337 471 4,808 61
FY11F 2,499 (1,747) 1,165 1,917 (1,274) 643 20 10 (149) 18 (1,308) (765) (420) 228 (249) (442) (1,207) 4,808 3,601 1,496
FY12F 2,963 (848) 68 2,184 (1,074) 1,110 26 13 (201) 24 (258) 713 (549) 1,404 (290) 565 1,279 3,601 4,880 1,621
We expect capex to ease as major expansion in wind capacity (involving construction of a new facility) was done in FY08 and FY 09
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 682 21 1,294 1,336 1,529 4,861 588 2,362 61 606 8,478 1,292 2,049 54 3,395 68 932 349 4,743 4 95 3,636 3,731 8,478
FY09 471 2,613 1,313 640 5,037 604 3,845 120 630 10,235 1,556 1,566 166 3,288 1,012 1,369 115 5,785 29 95 4,326 4,421 10,235
FY10F 4,808 2,668 1,831 884 10,191 587 4,869 172 807 16,627 2,678 2,655 1,433 6,766 2,191 137 9,094 29 105 7,399 7,504 16,627
FY11F 3,601 3,351 2,314 912 10,178 567 5,811 216 956 17,727 2,039 3,355 180 5,573 3,058 155 8,786 29 111 8,801 8,912 17,727
FY12F 4,880 4,275 2,955 1,155 13,264 541 6,501 276 1,157 21,738 2,600 4,285 209 7,094 3,900 179 11,173 29 111 10,425 10,536 21,738
1.43 19.0
1.53 13.4
1.51 9.0
1.83 8.5
1.87 8.7
2.28 43.2
2.24 78.4
0.03 0.8
0.60 16.8
0.55 15.4
Nomura
169
29 September 2010
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
ivan.lee@nomura.com
BUY
Action
We remain bullish on gas sector underpinned by 1) Beijings policy to double NG share of total energy consumption to 8% in 2015, 2) increasing gas supply and 3) low penetration (~30%). On top of the industry-wide strong organic growth, CR Gas, being an SOE, also has growth from asset injection/acquisition at favorable price. At 18x FY11P/E (vs 18x for peers), valuation looks reasonable on existing projects, but potential new acquisitions offer upside potential. BUY.
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (HK$mn) Difference from consensus
Source: Nomura
HK$10.86
HK$14.40
(set on 17 Mar 10)
Catalysts
More ZZG shares acquired at GO price would be EPS accretive The next round of asset injection due in 2011F is another catalyst. Anchor themes We like Chinas gas distribution sector, because of: 1) favourable government policies; 2) robust demand growth underpinned by the transition to clean and low-cost energy; 3) stable margins attributable to strong cost pass-through capability, and; 4) potential upside from the new energy initiatives.
Nomura vs consensus
We think the consensus is yet to be updated and thus is not relevant.
Feb10
Mar10
Apr10
Jul10
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) China Resource NATL Gartmore
Source: Company, Nomura estimates
Aug10 6m (5.1) (5.1) (6.6) 1,979 25.0 12.00/6.29 7.25 Easy 74.9 0.5
Jan10
Nomura
170
29 September 2010
Jun10
Nomura
171
29 September 2010
Financial statements
Income statement (HK$mn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (HK$) Norm EPS (HK$) Fully diluted norm EPS (HK$) Book value per share (HK$) DPS (HK$)
Source: Nomura es timates
FY08 3,367 (2,359) 1,008 (617) 391 701 (282) (28) 391 (31) 3 46 409 (65) 344 (47)
FY09 3,747 (2,586) 1,161 (641) 519 677 (130) (27) 519 (40) 7 141 627 (87) 540 (97)
FY10F 5,059 (3,575) 1,485 (650) 835 1,025 (163) (27) 835 (93) 98 150 990 (178) 812 (153)
FY11F 6,172 (4,390) 1,782 (744) 1,037 1,269 (204) (27) 1,037 (117) 223 181 1,325 (275) 1,049 (204)
FY12F 7,294 (5,211) 2,084 (879) 1,205 1,482 (249) (27) 1,205 (117) 268 196 1,552 (321) 1,231 (239)
17.5 23.2 17.5 0.4 3.4 6.9 20.1 35.9 29.9 20.8 11.6 8.8 16.0 19.1 10.2 1.2 10.3 6.7
34.6 45.9 34.6 0.6 17.1 14.9 25.8 33.5 31.0 18.1 13.9 11.8 13.9 19.1 16.0 4.6 27.2 11.1
23.3 30.9 23.3 0.9 12.6 9.9 15.4 18.6 29.3 20.3 16.5 13.0 18.0 20.0 15.8 4.9 50.9 14.0
18.2 24.1 18.2 1.1 11.1 6.9 11.5 13.6 28.9 20.6 16.8 13.7 20.8 20.0 16.2 4.9 44.5 16.9
15.5 20.5 15.5 1.3 10.6 5.1 9.7 11.5 28.6 20.3 16.5 13.6 20.7 20.0 13.0 3.8 37.7 17.3
Nomura
172
29 September 2010
Cashflow (HK$mn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura es timates
FY08 701 (334) 1,149 1,516 (344) 1,172 (3) (9) 127 (189) 79 1,177 (57) (1,909) 420 (1,545) (369) 1,715 1,347 (1,199)
FY09 677 449 (230) 896 (600) 296 (11) (2,121) (1,380) (130) 1,540 (1,806) (85) 2,584 187 2,686 880 1,347 2,227 2,257
FY10F 1,025 264 (69) 1,220 (800) 420 (98) 61 (24) 97 456 (132) 500 (37) 332 788 2,227 3,014 1,969
FY11F 1,269 270 (155) 1,384 (1,000) 384 (223) (1) 280 441 (169) (117) (286) 155 3,014 3,169 1,814
FY12F 1,482 162 (188) 1,456 (950) 506 (268) (0) 327 565 (198) (117) (315) 250 3,169 3,419 1,564
Balance sheet (HK$mn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura es timates
FY08 1,347 328 51 236 1,962 18 1,642 42 637 226 4,527 108 1,175 449 1,732 39 216 1,988 311 141 2,031 57 2,229 4,527
FY09 2,227 566 133 279 3,204 29 2,750 352 632 1,605 8,572 1,040 1,641 793 3,474 3,444 86 7,004 536 141 805 85 1,031 8,572
FY10F 3,014 534 127 279 3,955 127 3,387 352 590 1,545 9,955 1,040 1,849 813 3,702 3,944 62 7,708 689 141 1,285 132 1,558 9,955
FY11F 3,169 567 156 279 4,171 350 4,182 352 566 1,545 11,167 1,040 2,150 844 4,034 3,944 62 8,040 893 141 1,924 169 2,234 11,167
FY12F 3,419 670 186 279 4,554 617 4,883 352 542 1,546 12,495 1,040 2,409 880 4,328 3,944 62 8,334 1,133 141 2,688 198 3,027 12,495
1.13 12.5
0.92 13.0
1.07 9.0
1.03 8.9
1.05 10.3
3.33 218.8
1.92 126.3
1.43 81.2
1.06 51.7
Nomura
173
29 September 2010
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
Emma Liu
emma.liu@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (HK$mn) Difference from consensus
Source: Nomura
Action
We expect hog prices will trend up in 2H10F and 2011F. We are upbeat on Yuruns earnings growth on both volume and price growth in the mid-term. In our view, increasing hog prices (as long as the price hike is not too sharp over a short period) should be positive for Yuruns earnings, given its exposure to upstream and its strong pricing power in downstream. Reiterating BUY and PT of HK$34.
HK$29.05
HK$34.00
(set on 14 Jul 10)
Catalysts
Monthly or quarterly updates on strong slaughtering volume growth in 2H10F; the governments favourable policies towards the slaughtering industry. Anchor themes We are positive on consumption growth for F&B in China in the long run, given increasing personal income and urbanisation. Yet, given short-term risks such as inflation, we prefer market leaders with strong pricing power.
Nomura vs consensus
We are upbeat on Yuruns market share gains. Our above-consensus price target is mainly due to our aggressive earnings forecasts compared with the market.
27.6 31.8 25.6 22.4 17.0 13.6 21.4 15.4 11.8 4.2 3.5 2.9 1.1 1.5 1.9 22.7 23.2 24.2 cash net cash net cash 3,008 1.71 3,777 2.14
2,234 1.29
23 18 13 May10 Sep09 Oct09 Nov09 Dec09 Feb10 Jan10 Mar10 Jun10 Aug10 3m 16.0 16.1 13.0 Apr10 Jul10
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) ZHU Yicai
Source: Company, Nomura estimates
Nomura
174
29 September 2010
Emma Liu
Nomura
175
29 September 2010
Emma Liu
Financial statements
Income statement (HK$mn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (HK$) Norm EPS (HK$) Fully diluted norm EPS (HK$) Book value per share (HK$) DPS (HK$)
Source: Nomura estimates
FY08 13,024 (11,334) 1,690 (859) 831 940 (109) 831 (31) (1) 151 951 (101) 850 1
FY09 13,870 (11,710) 2,161 (830) 1,331 1,484 (153) 1,331 (64) (0) 505 1,772 (143) 1,629 (3)
FY10F 19,833 (16,697) 3,136 (1,166) 1,970 2,189 (219) 1,970 (29) 595 2,536 (302) 2,234 -
FY11F 28,182 (23,811) 4,371 (1,602) 2,769 3,044 (275) 2,769 (3) 675 3,441 (433) 3,008 -
FY12F 37,904 (32,165) 5,738 (2,158) 3,580 3,914 (334) 3,580 3 733 4,316 (540) 3,777 -
52.8 61.8 39.1 0.7 41.8 8.5 52.0 58.9 13.0 7.2 6.4 8.7 10.7 25.6 14.5 17.2 24.3 15.2
29.0 34.0 26.7 1.0 32.4 5.8 32.8 36.6 15.6 10.7 9.6 12.6 8.0 28.8 19.7 17.8 25.7 16.4
22.4 26.3 21.5 1.1 24.9 4.2 21.4 23.8 15.8 11.0 9.9 11.8 11.9 25.0 10.1 9.1 22.7 17.9
17.0 19.9 16.4 1.5 20.8 3.5 15.4 17.0 15.5 10.8 9.8 11.1 12.6 25.0 7.1 7.3 23.2 20.3
13.6 15.9 13.2 1.9 14.7 2.9 11.8 12.9 15.1 10.3 9.4 10.3 12.5 25.0 5.3 6.0 24.2 22.0
Nomura
176
29 September 2010
Emma Liu
Cashflow (HK$mn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 940 110 12 1,063 (1,883) (820) (85) 57 (848) (291) 31 835 85 660 (188) 1,996 1,808 299
FY09 1,484 (348) 300 1,436 (2,728) (1,292) (3) 76 (1,219) (374) 1,765 1,191 52 2,635 1,416 1,808 3,224 73
FY10F 2,189 (335) 162 2,016 (2,000) 16 16 (502) 2,115 (1,000) 122 736 751 3,224 3,975 (1,678)
FY11F 3,044 (714) 130 2,460 (2,000) 460 460 (584) 23 (561) (101) 3,975 3,874 (1,577)
FY12F 3,914 (511) 80 3,483 (2,000) 1,483 1,483 (779) 33 (746) 737 3,874 4,611 (2,313)
Balance sheet (HK$mn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 1,808 445 703 300 3,256 4,745 321 8,321 1,096 485 438 2,018 1,011 57 3,086 20 5,215 5,215 8,321
FY09 3,224 576 936 466 5,201 7,409 324 12,935 3,109 440 664 4,213 189 133 4,535 30 8,370 8,370 12,935
FY10F 3,975 884 1,402 516 6,777 9,190 324 16,292 2,109 879 714 3,702 189 133 4,024 30 10,485 1,752 12,237 16,292
FY11F 3,874 1,190 1,932 566 7,562 10,915 324 18,802 2,109 1,002 764 3,875 189 133 4,197 30 10,485 4,090 14,574 18,802
FY12F 4,611 1,600 2,571 616 9,397 12,581 324 22,303 2,109 1,539 814 4,462 189 133 4,784 30 10,485 7,004 17,488 22,303
1.61 27.2
1.23 20.7
1.83 67.2
1.95 902.8
2.11 na
0.32 5.7
0.05 0.9
Nomura
177
29 September 2010
Ctrip.Com International C T R P U S
C O N S U M E R R E L AT E D / G E N E R AL C O N S U M E R | C H I N A
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
Candy Huang
candy.huang@nomura.com
BUY
Closing price on 20 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
We think Ctrip is most geared to lifestyle upgrade in line with increased salaries and social benefits. Its cross-regional expansion should help sustain its long-term growth potential, in our view. It is also in the position to lead consolidation in the travel agent industry. 2Q10 GAAP profit increased by 48% y-y to RMB235mn, driven by higher ASP in hotel room rates and air tickets.
US$43.84
US$48.00
(s et on 13 Aug 10)
Catalysts
A better-than-expected recovery in hotel room rates and improvement in margins would accelerate its earnings growth. Anchor themes With our economics team projecting that Chinas GDP growth will accelerate to 10.5% y-y in 2010F, we are turning more positive on retailer and service stocks, owing to better earnings visibility in an accelerating macro environment, where stronger employment conditions prevail.
Nomura vs consensus
We build in higher volume assumption in hotel reservation.
41.5 32.7 29.1 42.4 31.2 24.2 36.7 25.5 18.5 10.4 8.1 6.3 0.7 1.0 1.2 28.6 29.4 29.5 cash net cash net cash 967 6.61 1,297 8.78 1,692 11.34
Valuation
Our PT of US$48 is based on 35.5x FY11F P/E, in line with its historical 12-month forward P/E since its listing in 2003. We assume US$-RMB at 6.5 by end-FY10F. Downside risks include lower-thanexpected volume sales in air ticketing and hotel reservation, further ASP corrections, a commission decline and rising competition.
Absolute (US$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (US$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Morgan Stanley Fidelity Management and Research
Source: Company, Nomura estimates
Nomura
178
29 September 2010
Ctrip.Com International
Candy Huang
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 1,482 (327) 1,155 (566) (129) 461 499 (38) 461 31 55 547 (103) 444 (0) 444 444 444
FY09 1,988 (451) 1,537 (720) (131) 687 741 (53) 687 17 61 765 (132) 634 (8) 33 659 659 (198) 461
FY10F 2,835 (636) 2,199 (923) (252) 1,023 1,076 (53) 1,023 25 72 1,120 (202) 918 (11) 60 967 967 (290) 677
FY11F 3,766 (855) 2,911 (1,236) (273) 1,403 1,464 (61) 1,403 31 79 1,512 (272) 1,240 (15) 72 1,297 1,297 (389) 908
FY12F 4,919 (1,136) 3,783 (1,634) (286) 1,862 1,932 (69) 1,862 36 84 1,982 (357) 1,625 (20) 86 1,692 1,692 (507) 1,184
95.8 104.9 95.8 72.0 20.4 89.3 96.7 78.0 33.7 31.1 30.0 18.8 7.8 3.0 25.7 35.0
62.6 68.6 62.6 0.5 40.2 13.8 56.4 60.8 77.3 37.3 34.6 33.1 17.2 30.0 8.9 3.3 26.7 32.0
42.4 46.4 42.4 0.7 29.3 10.4 36.7 38.6 77.6 38.0 36.1 34.1 18.0 30.0 2.8 1.5 28.6 32.5
31.2 34.2 31.2 1.0 23.4 8.1 25.5 26.6 77.3 38.9 37.2 34.4 18.0 30.0 2.1 1.3 29.4 37.2
24.2 26.5 24.2 1.2 19.2 6.3 18.5 19.2 76.9 39.3 37.9 34.4 18.0 30.0 1.6 1.2 29.5 44.1
Nomura
179
29 September 2010
Ctrip.Com International
Candy Huang
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 499 (124) 216 591 (115) 476 (238) (45) (1) (99) 92 (112)
FY09 741 234 53 1,028 (176) 852 (339) 5 (1) (251) 265 -
FY10F 1,076 167 159 1,402 (80) 1,322 (60) (559) 703 (198)
FY11F 1,464 143 121 1,728 (80) 1,648 (61) (61) 1,525 (290)
FY12F 1,932 145 56 2,132 (80) 2,052 (79) (49) 1,924 (389)
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 1,070 274 287 1,631 319 346 64 24 257 2,641 139 487 626
FY09 1,435 421 451 2,306 658 551 323 67 252 4,157 291 879 1,170
FY10F 1,940 630 511 3,080 658 506 893 67 312 5,516 417 1,188 1,605
FY11F 3,175 878 576 4,629 658 524 893 67 374 7,145 548 1,514 2,063
FY12F 4,709 1,205 657 6,571 658 535 893 67 453 9,177 722 1,893 2,614
1 627 3 3 2,009
1,170 62 3 2,922
1,605 73 3 3,835
2,063 88 3 4,992
2,012 2,641
2,925 4,157
3,838 5,516
4,994 7,145
6,455 9,177
2.61 na
1.97 na
1.92 na
2.24 na
2.51 na
Nomura
180
29 September 2010
Dongfeng Motor 4 8 9 H K
I N D U S TR I AL S / AU T O S & AU TO P AR T S | C H I N A
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
yankun.hou@nomura.com ming.xu@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
We believe Dongfeng will continue to deliver strong results in 2H10 and 1H11, due to: 1) high operating leverage at DF Nissan, 2) structural improvement in its CV business and 3) robust volume and mix upgrade at DF PSA. With capacity bottleneck at DF Nissan easing and continued new product launches at all three JVs, we are raising earnings estimates by 20% for the next two years, and expect FY11F EPS to reach RMB1.45. We raise our PT to HK$17 and reiterate BUY.
HK$14.44
HK$17.00
(from HK$14.00)
Catalysts
Strong monthly sales volume and 3Q results could serve as positive catalysts. Anchor themes The operating dynamics of JVs (high end) and domestic brands (low end) differ: JVs have limited capacity, healthy inventory and moderate price competition, while domestic brands face overcapacity, high inventory and severe price competition.
Nomura vs consensus
Our FY10 and FY11 EPS estimates are 21% and 23% higher than consensus, respectively, as we expect sustained margin expansion due to improving mix and high utilisation.
Jan10
Mar10
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Dongfeng Group Standard Chartered
Source: Company, Nomura estimates
Nomura
181
29 September 2010
Dongfeng Motor
Yankun Hou
Drilling down
Capacity optimisation and new products set the stage for further growth
According to management, DF Nissan has moved its entire production of Qashqai and X-Trail SUVs to Zhengzhou Nissan, another Nissan JV in China in which Dongfeng has a 35% indirect stake. We believe the move effectively increases DF Nissans capacity by 100,000 units, based on the two models sales record, which should ease DF Nissans potential capacity bottleneck in 2011. We estimate that the companys ASP rose by 5.5% y-y in 1H10, owing to the outperformance of SUVs and high-end sedans. We believe the company will be able to maintain its product mix in 2H10 despite the launch of new model March, which is priced lower, as Strong sales of SUVs and high-end sedans will continue, in our view. The companys sales target and production plan for March in 2011 is only 30,000 units, according to management. It will launch Murano, a 3.5L large SUV product in 2011, which will further boost its product mix. Apart from DF Nissans Murano, Dongfengs two other JVs will also launch new models in 2011. DF PSA will launch Peugeot 508, a large sedan based on the same technology platform as the C5. We expect this model to further enhance DF PSAs product mix and lift its margin. DF Honda will launch a self-branded product based on the Civic platform. Although no further details are available yet, we are relatively optimistic on its market outlook, given DF Hondas track record.
Source: PSA
Nomura
182
29 September 2010
Dongfeng Motor
Yankun Hou
DF Nissan 46%
DF Honda
DF Nissan
DF Honda Engine
Earnings estimates
We largely maintain our sales volume assumptions and only slightly lower sales of March in 2010 and 2011 following management guidance. The increase in earnings comes mainly from a sizable margin expansion, as already evident in its 1H10 results. We believe the high margin is sustainable due to benign operations across its business operations, as we discussed above.
2009 A 998,124 518,941 209,290 269,893 68,269 30,832 22,232 38,380 15,734 91,758 11,569 6,250 72.54 19.1 12.6
2010F Old 1,211,336 634,081 248,174 329,081 82,606 36,406 29,807 55,594 14,805 115,322 15,837 9,492 110.17 21.0 13.7 New 1,206,336 629,081 248,174 329,081 82,307 36,778 29,806 53,197 16,937 114,918 18,783 11,651 135.22 22.3 16.3
2011F Old 1,400,764 750,062 280,991 369,711 94,028 40,355 32,940 63,892 15,197 131,653 18,482 10,314 119.71 20.4 14.0 New 1,389,918 739,216 280,991 369,711 93,774 40,766 32,939 58,710 17,388 129,848 21,349 12,478 144.82 21.9 16.4
2012F Old 1,528,910 813,138 309,090 406,682 103,151 44,843 36,233 64,580 19,126 144,818 17,602 11,756 136.22 20.4 13.8 New 1,528,910 813,138 309,090 406,682 103,151 44,843 36,233 64,580 19,126 142,833 22,601 13,403 155.56 21.0 15.8
692,586 350,517 164,009 178,060 43,404 23,489 16,452 31,852 14,302 70,569 7,159 4,040 46.89 16.8 10.1
Nomura
183
29 September 2010
DF PSA
DF CV
Others
DF PSA 10%
1,000 0
Dongfeng Motor
Yankun Hou
Nomura
184
29 September 2010
Dongfeng Motor
Yankun Hou
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 70,569 (58,688) 11,881 (5,950) 5,931 8,208 (2,025) (252) 5,931 (393) 95 (741) 4,892 (647) 4,245 (205)
FY09 91,758 (74,274) 17,484 (7,435) 10,049 12,738 (2,322) (367) 10,049 (245) 195 (1,590) 8,409 (1,671) 6,738 (488)
FY10F 114,918 (89,313) 25,605 (8,614) 16,991 19,908 (2,521) (397) 16,991 (423) 250 (1,208) 15,610 (3,082) 12,528 (877)
FY11F 129,848 (101,408) 28,440 (9,158) 19,282 22,410 (2,732) (397) 19,282 (456) 300 (2,233) 16,893 (3,476) 13,417 (939)
FY12F 142,833 (112,838) 29,995 (9,749) 20,246 23,586 (2,943) (397) 20,246 (456) 300 (1,945) 18,146 (3,734) 14,412 (1,009)
27.2 32.1 27.2 0.4 14.2 5.1 12.8 17.6 16.8 11.6 8.4 5.7 13.2 9.6 6.2 2.2 20.7 13.4
17.2 20.3 17.2 0.7 5.2 3.9 6.9 8.8 19.1 13.9 11.0 6.8 19.9 12.4 3.9 1.6 25.7 19.8
8.9 10.5 8.9 1.7 10.7 2.7 3.9 4.6 22.3 17.3 14.8 10.1 19.7 15.0 2.6 1.2 35.6 29.7
8.2 9.6 8.2 2.4 6.4 2.1 2.9 3.3 21.9 17.3 14.8 9.6 20.6 20.0 2.3 1.1 28.7 31.5
7.6 9.0 7.6 2.6 5.8 1.7 2.1 2.5 21.0 16.5 14.2 9.4 20.6 20.0 2.1 1.0 24.7 31.2
Inexpensive valuation
Nomura
185
29 September 2010
Dongfeng Motor
Yankun Hou
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 8,208 1,491 (1,951) 7,748 (4,408) 3,340 (36) (954) 35 366 2,751 (388) 570 (59) 123 2,874 9,542 12,416 (3,716)
FY09 12,738 10,462 (2,686) 20,514 (3,624) 16,890 (1,257) (607) (45) (658) 14,323 (388) 2,941 87 2,640 16,963 12,416 29,379 (17,738)
FY10F 19,908 (4,803) (5,442) 9,662 (3,000) 6,662 1,142 7,804 (776) (2,000) (2,776) 5,028 29,379 34,407 (24,766)
FY11F 22,410 574 (7,055) 15,929 (3,000) 12,929 1,367 14,296 (1,748) (1,748) 12,548 34,407 46,955 (37,314)
FY12F 23,586 1,414 (7,299) 17,700 (3,000) 14,700 1,655 16,356 (2,496) (2,496) 13,860 46,955 60,816 (51,175)
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 12,416 6 12,087 9,356 2,083 35,948 924 18,189 483 1,627 2,594 59,765 6,919 25,651 893 33,463 1,781 319 35,563 2,837 8,616 12,361 388 21,365 59,765
FY09 29,379 1,127 17,001 8,741 3,997 60,245 1,060 18,703 479 2,001 3,201 85,689 7,217 41,869 1,350 50,436 4,424 274 55,134 3,271 8,616 17,892 776 27,284 85,689
FY10F 34,407 1,127 18,215 11,256 3,997 69,002 1,060 19,020 479 1,604 3,201 94,366 5,217 40,794 1,350 47,361 4,424 274 52,059 4,148 8,616 29,543
FY11F 46,955 1,127 20,581 13,614 3,997 86,275 1,060 19,111 479 1,208 3,201 111,334 5,217 46,092 1,350 52,659 4,424 274 57,357 5,087 8,616 40,273
FY12F 60,816 1,127 22,640 15,148 3,997 103,727 1,060 18,978 479 811 3,201 128,256 5,217 51,099 1,350 57,666 4,424 274 62,364 6,096 8,616 51,180
38,159 94,366
48,889 111,334
59,796 128,256
1.07 15.1
1.19 41.0
1.46 40.1
1.64 42.3
1.80 44.4
Nomura
186
29 September 2010
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
Candy Huang
candy.huang@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY10 net profit (RMBmn) Difference from consensus
Source: Nomura
Action
We think Gome is the most geared China consumer stock to a minimum salary increase in tier-2 and tier-3 cities. Store restructuring is almost done, and we expect growth momentum to resume on both the store expansion and margin increase front. With the upcoming special board meeting, we believe shareholders stand to benefit ie, either short-term benefits from the proposed asset injection by Mr Huang or long-term benefits through the management experience of Mr Chen.
HK$2.36
HK$4.10
(set on 7 Apr 10)
Catalysts
Better-than-expected results, accelerating SSS and more favourable macro policies stand as positive potential catalysts. Anchor themes With Nomuras economics team projecting Chinas GDP growth will accelerate to 10.5% in 2010F, we are positive on the growth outlook for retail and service stocks, owing to better earnings visibility and improving employment conditions.
Nomura vs consensus
On recurring net profit, we are above consensus, as we are more upbeat on Gomes growth outlook.
FY08
45,889 1,048 1,899 0.138
FY09
42,668 1,409 1,598 0.089
FY10
47,643 1,997 2,168 0.121
FY11
53,593 2,318 2,469 0.138
7.9 (35.2) 35.6 13.9 15.5 22.6 16.3 13.8 14.6 14.7 9.6 7.6 3.1 2.5 2.2 1.8 1.3 0.0 2.0 2.4 11.1 13.8 15.8 16.2 8.0 net cash net cash net cash 1,598 0.089 2,168 0.121 2,469 0.138
gross margin was up by 0.9 pp to 10.7%, with comprehensive gross margin up by 0.6 pp to 17.0%. Recurring net margin was up 1.4 pp to 4.7%. Margins increased due to closure of unprofitable stores and improved product mix. With the store closure program largely done, the listed company set out a five-year plan to open 700 stores by 2014, bringing the total number to 1,400.
Feb10
Apr10
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Huang Guangyu Morgan Stanley
Source: Company, Nomura estimates
1m 0.2 (3.8)
Aug10
Jan10
Mar10
Jun10
Jul10
6m (15.4) (15.4) (16.9) 4,577 64.1 3.04/1.97 44.22 Easy 33.4 7.4
Nomura
187
29 September 2010
Candy Huang
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY07 42,479 (38,383) 4,095 (2,293) 1,803 2,068 (265) 1,803 424
FY08 45,889 (41,381) 4,508 (2,564) 1,944 2,250 (306) 1,944 441
FY09 42,668 (38,408) 4,260 (2,563) 1,696 2,051 (355) 1,696 325
FY10 47,643 (42,696) 4,947 (2,598) 2,349 2,731 (382) 2,349 361 2,710 (542) 2,168 -
FY11 53,593 (47,868) 5,725 (3,023) 2,703 3,148 (445) 2,703 384 3,087 (617) 2,469 -
18.3 31.7 29.6 1.9 20.2 2.8 15.5 17.8 9.6 4.9 4.2 2.7 16.2 51.7 3.7 5.9 14.6 8.3
15.5 26.9 28.1 1.3 13.3 3.1 14.6 16.9 9.8 4.9 4.2 2.3 18.2 32.9 2.6 3.9 11.1 8.1
22.6 39.3 25.7 12.1 2.5 14.7 17.7 10.0 4.8 4.0 3.3 20.1 1.2 1.4 13.8 6.3
16.3 28.2 17.6 2.0 15.0 2.2 9.6 11.2 10.4 5.7 4.9 4.2 20.0 30.0 1.7 2.1 15.8 7.9
13.8 23.9 14.7 2.4 13.3 1.8 7.6 8.9 10.7 5.9 5.0 4.3 20.0 30.0 1.5 1.8 16.2 8.8
Nomura
188
29 September 2010
Candy Huang
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura es timates
FY07 2,068 (368) (46) 1,654 (1,578) 75 (1,520) (766) (173) 2,125 (258) (364) 1,432 (429) 4,528 (90) 5,077 4,818 1,452 6,270 (2,786)
FY08 2,250 (267) 238 2,220 (1,180) 1,041 (3,350) (927) (2) 2,979 (259) (661) (2,068) (130) (101) (2,960) (3,219) 6,270 3,051 688
FY09 2,051 1,363 (412) 3,002 (500) 2,502 (3,163) 25 (423) (1,059) 1,245 180 (641) 3,253 4,037 2,978 3,051 6,029 (324)
FY10F 2,731 1,777 (2,157) 2,351 (800) 1,551 1,814 3,364 (300) (300) 3,065 6,029 9,094 (3,389)
FY11F 3,148 (189) (392) 2,566 (800) 1,766 (0) 17 1,783 (647) (647) 1,136 9,094 10,230 (4,525)
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura es timates
FY07 6,270 98 5,383 10,587 22,338 3,144 3,343 144 869 29,837 300 13,557 2,324 16,180 3,184 80 19,445 90 344 9,959
FY08 3,051 45 5,473 9,913 18,483 3,720 3,363 134 1,795 27,495 170 12,918 2,059 15,147 3,570 78 18,795 140 332 8,228
FY09 6,029 54 6,532 10,657 23,273 3,392 4,015 125 4,958 35,763 2,530 15,815 2,337 20,682 3,175 103 23,961 382 11,420
FY10F 9,094 62 7,407 9,394 25,957 3,810 4,015 116 4,958 38,856 2,530 16,862 2,686 22,078 3,175 103 25,357 382 13,117
FY11F 10,230 72 8,470 9,990 28,762 4,165 4,015 107 4,958 42,007 2,530 18,034 2,994 23,558 3,175 103 26,837 382 14,788
10,303 29,837
8,560 27,495
11,802 35,763
13,500 38,856
15,171 42,007
1.38 na
1.22 na
1.13 na
1.18 na
1.22 na
0.31 8.0
Nomura
189
29 September 2010
Jiangsu Expressway 1 7 7 H K
TR AN S P O R T/ L O G I S TI C S | C H I N A
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
jim.wong@nomura.com shirley.lam@nomura.com
BUY
Cl osing pri ce on 21 Sep Price target Upside/downside Di fference from consensus FY11F net profi t (RMBmn) Di fference from consensus
Source: Nom ura
Action
Jiangsu Expressway is Chinas largest toll-road operator by market capitalisation and earnings. In view of this and its strong historical EPS and DPS growth, we believe it deserves to trade at a premium to peers. We expect it to maintain a high dividend payout given its significant free operational cashflow. With the overhang of rail competition in the past, we reaffirm BUY with a raised PT of HK$11.95.
HK$8.04
HK$11.95
(f rom HK$10.90)
Catalysts
A flight to quality and the potential for stronger-than-expected 2H10 results (negative impacts from rail competition is likely to be less severe than expected) could be positive share price catalysts. Anchor themes Expressways remain high-quality investments, providing sustainable earnings and dividend growth. Past and current data confirm growth in expressway traffic volumes is largely independent of growth in other modes of transport.
Nomura vs consensus
Our estimates are higher than consensus because we expect less of a negative impact from new rail openings. We also believe Jiangsu should trade at a premium to peers.
6.4 5.9 May10 Oct09 Mar10 Jan10 Apr10 Jun10 Nov09 Dec09 Sep09 Aug10 3m 11.5 11.7 8.6 Feb10 Jul10
Absolute (HK$) Absolute (US$) Relative to Index Market c ap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Jiangsu Communication Holding Co Hujian Transportation Ec onomic Dev Centre
Source: Company, Nomura estimates
6m 12.8 12.7 11.3 5,218 27.2 8.04/6.13 3.75 Easy 55.2 11.9
Nomura
190
29 September 2010
Jiangsu Expressway
Jim Wong
Outlook
Exhibit 197. Jiangsu Exp: Attributable toll revenue trend (y-y chg %)
2Q08 SN XC GJ NS Class 2 Ninglian Jiangyin bridge Sujiahang Total
Source: Company data
849 86 47 45 12 52 58 1,150
Exhibit 199. Jiangsu Expressway (177 HK): toll revenue trend on the Shanghai-Nanjing Expressway a) Long-term trend
(RMBmn/day 14 12 10 8 6 4 2 0 Jan-00 Daily toll revenue (LHS) Growth rate (RHS) (% 270 220 170 120 70 20 (30) (80) (130) Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
b) Short-term trend
(RMBmn/day) 14 12 10 8 10 6 4 2 0 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10
Source: Company data
(%) 40 30 20
0 (10) (20)
Nomura
191
29 September 2010
Jiangsu Expressway
Jim Wong
The companys double-digit growth rates in July and August were especially impressive in our view because beyond the opening of the new high-speed railway 2H09 was a high base for comparison (recall that Jiangsu Exps toll revenues benefited from a rate increase effective July 2009). On such strong sustained growth combined with a better-than-expected 1H10 result (1H10 profit up 31.5%), we raise our FY10 and FY11 profit estimates by 18.9% and 28.3%, respectively. Additional potential positive catalysts for the group include a possible toll rate hike on passenger vehicles (an application for an increase of 11% to RMB0.50/km from RMB0.45/km has already been made but approval is still pending) and the successful development and sales of its slowly expanding property business (albeit no contribution is expected until beyond 2011F).
Forward earnings estimates revised up with additional upside possible
Although some may be concerned about the groups diversification into properties, we note that Jiangsu Expressway has been very cautious in this new business, having only invested RMB1.6bn (or less than one year of profit) in land investment to date. While the groups developable land currently covers an area of 534,696 square metres (with lots in the core business district of Huaqiao, Kunshan, on Xinshi Road, Canglang District, Suzhou, and in Hongyan Community, Baohua Town, Jurong City), most are still in the planning and design stage.
Nomura
192
29 September 2010
Jiangsu Expressway
Jim Wong
Zhejiang Exp (RMBmn) 296 404 570 647 760 890 1,009 1,226 1,431 1,653 2,416 1,893 1,795 1,839 2,080 2,233
Sichuan Exp (RMBmn) 159 181 169 166 175 210 208 216 248 293 488 544 827 1,132 1,422 1,415
Hopewell Highway* (HK$mn) 519 601 532 533 733 901 1,128 1,349 1,997 1,059 956 1,054 1,016
Shenzhen Exp (RMBmn) 212 307 338 363 421 360 899 419 553 579 674 503 540 646 778 946
Anhui Exp (RMBmn) 140 165 206 227 270 309 349 487 686 931 471 671 667 730 791 912
335 566 629 688 841 854 1,006 997 668 1,174 1,642 1,592 2,052 2,561 2,863 3,254
Nomura
193
29 September 2010
Jiangsu Expressway
Jim Wong
Nomura
194
29 September 2010
Jiangsu Expressway
Jim Wong
1H10 results
In its most recent set of results, Jiangsu Exp reported 1H2010 net profit of RMB1,296mn (EPS of RMB0.257/shr), up 31.5% y-y, slightly ahead of our initial expectation for 1H10 net profit of RMB1,162mn.
Stronger-than-expected 1H10 results
1H09 1,636 66 98 177 17 685 (71) 2,608 (785) (370) (48) (1,204) 0 14 1,419 (197) 91 1,312 (301) (26) 985 0.196 0.000
Chg (%) 23.2 (8.5) 15.6 13.7 41.4 24.7 20.5 22.0 23.7 7.7 (4.5) 17.7 129.3 26.8 (6.3) 23.6 31.6 32.9 17.2 31.5 31.5
1H10 2,015 61 113 202 24 854 (86) 3,183 (971) (399) (46) (1,416) 0 32 1,799 (185) 112 1,726 (401) (30) 1,296 0.257 0.000
2H09 1,917 67 108 197 24 750 (83) 2,979 (971) (389) (73) (1,433) (15) 23 1,553 (195) 83 1,441 (349) (25) 1,067 0.212 0.310
1H09 1,636 66 98 177 17 685 (71) 2,608 (785) (370) (48) (1,204) 0 14 1,419 (197) 91 1,312 (301) (26) 985 0.196 0.000
2H08 1,590 87 96 168 19 720 (109) 2,571 (961) (391) (65) (1,417) (1) 24 1,176 (282) 79 974 (224) (22) 728 0.144 0.270
2,015 61 113 202 24 854 (86) 3,183 (971) (399) (46) (1,416) 0 32 1,799 (185) 112 1,726 (401) (30) 1,296 0.257 0.000
The better-than-expected 1H10 results were due to lower-than-expected costs (up 17.7% y-y compared to revenue growth of 22.0% y-y) with administrative expenses actually declining 4.5% y-y. Toll revenue of 21.1% y-y (boosted by the implementation of the toll rate hike in trucks effective 2H2009) was what drove the groups solid 1H10 results.
Nomura
195
29 September 2010
Jiangsu Expressway
Jim Wong
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura es timates
FY08 5,095 (2,607) 2,488 2,488 3,299 (811) 2,488 (543) 151 43 2,140 (502) 1,638 (45) 1,592 1,592 (1,360) 232
FY09 5,587 (2,652) 2,934 2,934 3,694 (760) 2,934 (386) 174 31 2,753 (650) 2,103 (50) 2,052 2,052 (1,562) 490
FY10F 6,459 (2,966) 3,493 3,493 4,320 (827) 3,493 (345) 229 34 3,410 (795) 2,615 (54) 2,561 2,561 (1,949) 612
FY11F 7,033 (3,207) 3,826 3,826 4,692 (866) 3,826 (312) 258 37 3,810 (888) 2,922 (59) 2,863 2,863 (2,178) 684
FY12F 7,779 (3,499) 4,280 4,280 5,187 (907) 4,280 (281) 289 40 4,329 (1,010) 3,319 (64) 3,254 3,254 (2,477) 778
Toll revenue increased significantly in FY10 partly driven by the toll rate hike for trucks in July 2009
23.0 34.2 23.0 3.7 15.2 2.4 12.8 16.7 48.8 64.7 48.8 31.2 23.5 85.4 16.7 1.1 11.0 11.4
17.3 25.7 17.3 4.4 23.8 2.3 11.0 13.7 52.5 66.1 52.5 36.7 23.6 76.1 4.7 0.3 13.6 13.3
13.7 20.3 13.7 5.6 10.7 2.1 8.7 10.7 54.1 66.9 54.1 39.6 23.3 76.1 2.3 0.2 16.0 16.2
11.7 17.5 11.7 6.5 9.3 1.7 7.5 9.0 54.4 66.7 54.4 40.7 23.3 76.1 2.1 0.2 16.9 17.8
9.8 14.6 9.8 7.8 7.9 1.4 6.1 7.3 55.0 66.7 55.0 41.8 23.3 76.1 1.9 0.2 18.2 18.9
Nomura
196
29 September 2010
Jiangsu Expressway
Jim Wong
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura es timates
FY08 3,299 (768) (115) 2,416 (853) 1,563 (6) (159) (201) (0) 207 1,404 (1,383) (689) (2,072) (668) 1,129 461 7,103
FY09 3,694 (1,492) (711) 1,491 (260) 1,232 (239) 4 19 3 202 1,220 (1,385) 222 (1,163) 57 461 518 7,274
FY10F 4,320 145 (1,193) 3,272 (150) 3,122 127 42 (169) 3,122 (1,562) (172) (1,733) 1,388 518 1,906 4,651
FY11F 4,692 92 (1,168) 3,617 (150) 3,467 42 (42) 3,467 (1,949) (1,553) (3,501) (34) 1,906 1,872 3,204
FY12F 5,187 122 (1,274) 4,035 (150) 3,885 42 (42) 3,885 (2,178) (264) (2,443) 1,442 1,872 3,314 1,550
Capex cycle completed, enabling a sustainable high level of subsequent dividend payout
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura es timates
FY08 461 40 240 741 14 19,716 2,971 23,442 2,852 279 524 3,655 4,712 1 8,368 439 5,038 232 1,360 8,005 14,635 23,442
FY09 518 127 1,422 2,067 165 19,019 2,952 24,204 3,278 129 365 3,771 4,514 4 8,289 450 5,038 692 1,562 8,173 15,464 24,204
FY10F 1,906 1,422 3,329 165 17,710 2,910 24,114 3,482 129 510 4,121 3,075 4 7,200 450 5,038 999 1,949 8,478 16,463 24,114
FY11F 1,872 1,422 3,294 165 17,311 1,965 2,867 25,603 2,212 129 602 2,943 2,864 4 5,810 450 1,965 5,038 914 2,178 9,247 19,343 25,603
FY12F 3,314 1,422 4,737 165 16,897 3,432 2,825 28,057 2,159 129 724 3,012 2,705 4 5,721 450 3,432 5,038 1,076 2,477 9,863 21,886 28,057
0.20 4.6
0.55 7.6
0.81 10.1
1.12 12.3
1.57 15.3
2.15 48.5
1.97 47.0
1.08 28.3
0.68 16.6
0.30 7.1
85.5 (85.5)
28.1 (28.1)
15.9 (15.9)
14.7 (14.7)
13.5 (13.5)
Nomura
197
29 September 2010
Initiation
NOMURA INTERNATIONAL (HK) LIMITED
leping.huang@nomura.com danny.chu@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (HK$mn) Difference from consensus
Source: Nomura
Action
We initiate coverage of O-Net Communications (O-Net) with a BUY rating and PT of HK$7.50. We like the companys position as a pure play in the optical network supply chain. We believe it can capitalise on business opportunities arising from the governments new network convergence policy by leveraging its leadership in manufacturing, technology and customer relations.
HK$5.18
HK$7.50
44.8% 39.7% 266.7 19.8%
Catalysts
Positive catalysts include new fibre optical network construction projects announced by operators. Anchor themes Network convergence will form an important part of Chinas 12 FYP, in our view. The convergence of telecom, TV and Internet will not only improve the quality of existing broadband and television services, but will also generate lots of innovative next generation IT services in the future.
Nomura vs consensus
We are more confident on the sustainability of O-Nets high gross margin and revenue growth given a strong new product pipeline.
A bright future
Pure player in fibre optical network supply chain
O-Net Communications is a China-based passive optical component vendor. It designs, manufactures and sells optical network components to optical network system vendors such as Huawei, Alcatel-Lucent and ZTE. The company ranked as the fifth largest passive optical component vendor globally and the second largest in China by revenue in 1H10.
53.7 34.5 26.0 26.1 net cash net cash net cash net cash na na na na na na na na na
1m Absolute (HK$) 10.2 10.4 6.0 Absolute (US$) Relative to Index Market c ap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Kaifa Technology (Hong Kong) O-Net Holdings (BVI)
Source: Company, Nomura estimates
Nomura
198
29 September 2010
Financial statements
Income statement (HK$mn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (HK$) Norm EPS (HK$) Fully diluted norm EPS (HK$) Book value per share (HK$) DPS (HK$)
Source: Nomura es timates
FY10F 659 (327) 332 (119) 213 245 (32) 213 (4) 209 (22) 187 -
FY11F 858 (421) 438 (140) 298 363 (65) 298 0 298 (32) 267 -
FY12F 1,111 (556) 556 (167) 389 438 (49) 389 0 389 (41) 348 -
23 23 23
79 79 79
Gross margin around 50% owing to strong technology leadership and efficient manufacturing process
130.6 189.1 130.6 433.0 28.2 93.7 126.3 37.5 15.0 11.1 8.1 7.5 4.5 1.2 24.9 14.5
37.9 54.9 37.9 85.5 15.9 39.9 44.4 45.3 29.4 26.5 23.4 10.6 1.8 0.6 53.7 35.9
20.1 29.1 20.1 28.5 4.5 13.9 16.0 50.4 37.1 32.3 28.3 10.6 13.3 2.7 34.5 56.4
15.0 21.7 15.0 15.5 3.4 9.3 11.3 51.0 42.3 34.7 31.1 10.6 26.5 3.5 26.0 51.5
11.5 16.7 11.5 13.1 2.7 7.2 8.1 50.0 39.4 35.0 31.3 10.6 6.3 1.4 26.1 51.6
Nomura
199
29 September 2010
Cashflow (HK$mn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura es timates
Balance sheet (HK$mn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura es timates
FY10F 590 234 100 924 96 28 1 1,050 90 65 155 155 894 894 1,050
FY11F 621 281 130 1,032 259 28 1 1,320 94 65 159 159 1,161 1,161 1,320
FY12F 856 332 168 1,356 279 28 1 1,665 91 65 156 156 1,509 1,509 1,665
1.32 4.6
1.88 85.3
5.95 53.8
6.49 na
8.69 na
Nomura
200
29 September 2010
PetroChina 8 5 7 H K
O I L & G AS / C H E M I C AL S | C H I N A
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
cheng.khoo@nomura.com gordon.wai@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
PetroChina is our long-term top sector pick. We believe it will likely be the major beneficiary of the governments plans to increase the usage of natural gas based on the 12th Five Year Plan. We reiterate BUY and our PT of HK$13.7, based on an average FY10-11F ROACE/WACC (13%/8%), implying potential upside of 58%.
HK$8.67
HK$13.70
(set on 5 May 10)
Catalysts
As the refining sector has been a drag on the companys earnings, the next catalyst should materialise when the government improves the oil product pricing mechanism, which we believe is likely towards end-2010F. Anchor themes Tightening fundamentals over the next two years, a weak US dollar, lax CFTC trading rules, abundant money supply and potentially higher inflation expectations could fuel higher oil prices. We believe prices could cross the US$100/bbl level next year.
Nomura vs consensus
Our FY11F earnings estimates are above consensus owing to our high crude oil price forecast of US$95/bbl for 2010F.
FY09
FY10F
FY11F
FY12F
1,019,275 1,281,203 1,397,673 1,582,816 103,387 141,562 174,135 205,324 103,387 0.56 (9.7) 13.8 6.6 1.7 3.3 12.6 17.4 141,562 0.77 36.9 9.9 5.0 1.5 4.6 15.9 21.2 141,562 0.77 174,135 0.95 23.0 8.0 4.6 1.3 5.6 17.7 27.2 174,135 0.95 205,324 1.12 17.9 6.8 4.1 1.2 6.6 18.7 29.6 205,324 1.12
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (% ) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) China National Petroleum Corporation
Source: Company, Nomura estimates
1m 0.2 (3.8)
Nomura
201
29 September 2010
PetroChina
Cheng Khoo
Sinopec, 9% CNOOC, 6%
Nomura
202
29 September 2010
PetroChina
Cheng Khoo
CNOOCs valuation: our price target of HK$16.50 is derived from FY10-11F ROACE/WACC (28.6%/10%). Risks to our view include 1) rising operating costs; 2) lower-than-budgeted production; and 3) acquisition risks.
Exhibit 208. China energy consumption, 2009 (2.2bn tonnes of oil equivalent)
Renewable energy, 6.4% Nuclear, 0.7% Gas , 3.7%
Exhibit 209. China energy consumption, 2015 (2.6bn tonnes of oil equivalent)
Hydropower, 8.6% Nuclear, 1.9% Oil , 17.2%
Oil , 18.6%
Gas , 8.0%
Coal, 64.4%
Coal, 70.6%
bcm
Production CAGR: 10% 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
Nomura
203
29 September 2010
PetroChina
Cheng Khoo
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 1,072,604 (853,416) 219,188 (59,617) 159,571 254,330 (94,759) 159,571 (1,848) 4,290 162,013 (35,211) 126,802 (12,349)
FY09
FY10F
FY11F
FY12F
1,019,275 1,281,203 1,397,673 1,582,816 (810,408) (1,002,221) (1,072,290) (1,202,925) 208,867 278,982 325,383 379,891 (65,423) (80,908) (86,564) (97,110) 143,444 235,703 (92,259) 143,444 (4,596) 1,184 140,032 (33,473) 106,559 (3,172) 198,074 312,169 (114,096) 198,074 (7,132) 4,734 195,676 (44,582) 151,094 (9,532) 238,819 360,891 (122,072) 238,819 (7,154) 5,855 237,519 (51,594) 185,925 (11,790) 282,781 419,725 (136,944) 282,781 (9,278) 7,124 280,626 (60,958) 219,668 (14,344)
13.7 21.6 13.7 3.3 9.1 2.0 6.4 10.1 20.4 23.7 14.9 10.7 21.7 45.0 20.1 2.3 15.0 15.2
13.8 21.8 13.8 3.3 5.4 1.7 6.6 10.9 20.5 23.1 14.1 10.1 23.9 45.0 25.3 2.8 12.6 11.4
9.9 15.6 9.9 4.6 4.9 1.5 5.0 7.9 21.8 24.4 15.5 11.0 22.8 45.0 22.1 2.5 15.9 14.1
8.0 12.7 8.0 5.6 5.0 1.3 4.6 6.9 23.3 25.8 17.1 12.5 21.7 45.0 21.1 2.4 17.7 15.1
6.8 10.8 6.8 6.6 4.0 1.2 4.1 6.0 24.0 26.5 17.9 13.0 21.7 45.0 20.5 2.4 18.7 15.8
Compelling valuations
Nomura
204
29 September 2010
PetroChina
Cheng Khoo
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 254,330 (21,206) (60,659) 172,465 (215,610) (43,145) (1,966) (14,421) (2,846) 3,222 19,877 (39,279) (52,835) 59,249 (2,637) 3,777 (35,502) 68,652 33,150 93,372
FY09 235,703 52,059 (25,790) 261,972 (257,562) 4,410 318 (22,087) (3,956) 18,671 3,342 698 (50,092) 104,297 (1,128) 53,077 53,775 33,150 86,925 147,397
FY10F 312,169 15,397 (40,746) 286,821 (282,527) 4,294 (4,734) 1,512 3,222 4,294 (54,915) 46,864 (8,051) (3,757) 86,925 83,168 198,018
FY11F 360,891 (31,410) (47,819) 281,662 (294,667) (13,005) (5,855) 1,436 4,419 (13,005) (70,863) 84,356 13,493 488 83,168 83,656 281,886
FY12F 419,725 (12,574) (58,795) 348,356 (324,328) 24,028 (7,124) 1,364 5,759 24,028 (85,216) 65,798 (19,419) 4,609 83,656 88,265 343,075
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 33,150 21,129 90,685 79,982 224,946 30,884 900,424 13,701 26,280 1,196,235 93,670 156,780 15,201 265,651 32,852 49,892 348,395 56,930 183,021 378,473 52,835 176,581 790,910 1,196,235
FY09 86,925 33,053 114,781 59,624 294,383 30,566 1,075,467 19,636 30,236 1,450,288 148,851 204,739 34,963 388,553 85,471 68,563 542,587 60,478 183,021 424,067 50,092 190,043 847,223 1,450,288
FY10F 83,168 32,650 105,784 63,864 285,465 35,300 1,232,931 21,148 28,724 1,603,568 178,621 214,976 34,963 428,560 102,565 68,563 599,688 70,010 183,021 510,713 54,915 185,220 933,869 1,603,568
FY11F 83,656 39,026 139,107 66,324 328,112 41,155 1,394,596 22,584 27,288 1,813,736 232,208 225,725 34,963 492,895 133,335 68,563 694,793 81,800 183,021 613,986 70,863 169,272 1,037,142 1,813,736
FY12F 88,265 42,144 152,101 74,071 356,582 48,279 1,570,539 23,948 25,924 2,025,271 274,005 237,011 34,963 545,979 157,335 68,563 771,877 96,144 183,021 734,094 85,216 154,919 1,157,250 2,025,271
0.37 11.8
0.63 17.4
0.63 21.2
0.78 27.2
0.82 29.6
Nomura
205
29 September 2010
SJM Holdings 8 8 0 H K
G AM I N G , H O T E L S & L E I S U R E | C H I N A
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
Charlene Liu
charlene.liu@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (HK$mn) Difference from consensus
Source: Nomura
Action
Over 40 years of experience, a long-standing brand and strategically located casinos in Macau have helped SJM increase its high-margin mass market exposure, a business segment that can better benefit from the enhanced internal consumption growth and infrastructure development supported by 12 FYP, in our view. Trading at 9x FY10F EBITDA with 3% yield, SJMs inexpensive valuation and net cash position make it one of the most defensive names in the sector in case of a downturn.
HK$8.35
HK$9.00
(set on 10 Aug 10)
Catalysts
Strong monthly gaming revenue, good 3Q results and a potential turnaround of its mass market focused property, Oceanus, are some near-term catalysts. Anchor themes We favour mass market focused plays, which we think would benefit proportionally more from enhanced internal consumption power and infrastructure upgrades. Our top pick has inexpensive valuation and resilient qualities in a downturn.
Nomura vs consensus
Our estimates are almost in line with the street.
37.7 15.1 12.0 9.7 18.0 8.8 6.9 5.3 4.9 3.6 3.0 2.6 1.1 3.2 4.2 5.1 11.5 27.4 27.4 28.6 net cash net cash net cash net cash 2,872 0.55 3,735 0.70 4,620 0.86
May10
Feb10
Mar10
Jun10
Jan10
Apr10
Jul10
Trading at 9x FY10F EBITDA, versus its peers 12-14x, we believe valuation remains attractive. As we believe its earnings performance will continue to deliver in subsequent quarters this year, we think this valuation gap could narrow further. We reiterate BUY with a price target of HK$9.
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) STDM Stanley Ho
Source: Company, Nomura estim ates
Aug10 6m 82.7 82.7 80.8 5,605 25.0 8.38/3.65 13.11 Hard 61.0 8.0
Nomura
206
29 September 2010
SJM Holdings
Charlene Liu
Valuation
Our 12-month price target of HK$9 is based on a sum-of-the parts valuation. The valuation consists of: 1) Grand Lisboa valued at 12x FY11F EBITDA, 2) Legacy casinos and Old Lisboa continue to be valued at 5x FY11F EBITDA; 3) Oceanus is valued at 12x FY11F EBITDA; and 4) hotel rooms at 12x FY11 EBITDA.
Valuation methodology 12x FY11F EBITDA 5x FY11F EBITDA 12x FY11F EBITDA
Nomura
207
29 September 2010
SJM Holdings
Charlene Liu
Financial statements
Incom e statement (HK$mn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (% ) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (HK$) Norm EPS (HK$) Fully diluted norm EPS (HK$) Book value per share (HK$) DPS (HK$)
Source: Nomura estimates
FY08 28,211 28,211 (27,398) 814 1,600 (769) (18) 814 (75) 5 2 745 (17) 729 141
FY09 34,408 34,408 (33,245) 1,163 2,318 (1,109) (46) 1,163 (147) (8) 4 1,012 (18) 995 112
FY10F 55,458 55,458 (52,475) 2,983 4,286 (1,289) (13) 2,983 (71) 0 2,912 (20) 2,892 (20)
FY11F 62,681 62,681 (58,956) 3,724 5,047 (1,310) (13) 3,724 51 0 3,775 (20) 3,755 (20)
FY12F 71,744 71,744 (67,263) 4,481 5,814 (1,322) (12) 4,481 180 0 4,660 (20) 4,640 (20)
41.6 44.8 45.4 9.1 58.0 5.7 27.3 53.6 100.0 5.7 2.9 2.8 2.2 477.7 7.0 2.6 11.7 6.7
37.7 40.7 46.1 1.1 10.3 4.9 18.0 36.0 100.0 6.7 3.4 2.6 1.7 49.7 3.9 1.2 11.5 8.4
15.1 16.3 15.1 3.2 12.9 3.6 8.8 12.6 100.0 7.7 5.4 5.2 0.7 50.0 1.1 0.5 27.4 21.1
12.0 12.9 12.0 4.2 9.7 3.0 6.9 9.3 100.0 8.1 5.9 5.9 0.5 50.0 0.2 0.1 27.4 27.9
9.7 10.5 9.7 5.1 8.1 2.6 5.3 6.9 100.0 8.1 6.2 6.4 0.4 50.0 0.2 0.1 28.6 36.5
Nomura
208
29 September 2010
SJM Holdings
Charlene Liu
Cashflow (HK$mn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 1,600 (1,542) 564 623 (1,978) (1,355) (11) (207) 265 (226) (1,534) (3,500) 3,850 936 (442) 844 (690) 6,538 5,847 362
FY09 2,318 1,458 286 4,063 (1,344) 2,719 (8) 80 184 (2,773) 201 (300) (702) 3,891 2,889 3,090 5,847 8,937 (1,878)
FY10F 4,286 (806) (115) 3,365 (600) 2,765 (7) (31) 40 (2) 2,765 (450) (940) (1,390) 1,375 8,937 10,312 (5,797)
FY11F 5,047 (418) 8 4,637 (120) 4,517 (7) (33) 42 (3) 4,517 (1,431) (840) (2,271) 2,246 10,312 12,558 (8,899)
FY12F 5,814 (408) 137 5,543 (120) 5,423 (7) (34) 45 (3) 5,423 (1,863) (1,350) (3,213) 2,211 12,558 14,769 (12,474)
SJM has the strongest balance sheet among all six gaming operators in Macau
Balance sheet (HK$mn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 5,847 930 525 7,302 127 10,422 52 1,017 18,921 1,020 4,583 69 5,671 5,189 624 11,484 149 5,000
FY09 8,937 1,233 1,092 11,263 135 10,985 46 938 23,367 1,040 6,895 85 8,020 6,019 807 14,847 65 5,000
FY10F 10,312 1,295 1,134 12,740 142 10,287 41 969 24,179 1,040 6,206 72 7,318 3,475 848 11,640 85 5,374
FY11F 12,558 1,360 1,177 15,094 149 9,089 36 1,002 25,370 1,550 5,895 72 7,517 2,109 890 10,516 105 5,374
FY12F 14,769 1,428 1,223 17,419 156 7,879 32 1,036 26,522 537 5,600 72 6,210 1,757 935 8,901 125 5,374
1.29 10.8
1.40 7.9
1.74 41.8
2.01 na
2.81 na
0.23 5.0
11.2 na na na
11.5 na na na
8.3 na na na
7.7 na na na
7.1 na na na
Nomura
209
29 September 2010
Tencent Holdings 7 0 0 H K
M E D I A & I N TE R N E T/ I N TE R N E T & N E W M E D I A | C H I N A
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
Jin Yoon
jinkyu.yoon@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Sourc e: Nomura
Action
Tencent set to remain the key Chinese Internet consumption story in the foreseeable future due to the stickiness of its platform. Its broad reach and largest user base in China allow the company to be a key competitor in every segment. Driven by continued growth in advertising and gaming, our price target remains HK$200, equivalent to an FY11F PEG valuation of 0.75. Reaffirm BUY.
HK$159.8
HK$200.0
(set on 11 Nov 09)
Catalysts
Momentum in online advertising owing to increased spending in fast-moving consumer goods, coupled with continued strength in gaming, should drive growth. Anchor themes Shielded from the slowing global economy (minimal revenue from outside China) and with low Internet penetration, Chinese online gaming stocks offer defensive and growth components for a China portfolio, given their countercyclical business model and high cashflow generation.
Nomura vs consensus
We remain bullish on the stock, as we believe Tencent continues to generate significant traction, not only in gaming but also in advertising.
59.7 57.0 49.5 41.9 net cash net cash net cash net cash 8,925 4.80 12,548 6.75 16,091 8.66
N o v0 9
M a r1 0
O c t0 9
M ay 10
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Naspers Huateng Ma
Source: Company, Nomura estimates
A u g1 0
De c0 9
Ja n 1 0
Fe b 1 0
J un 1 0
A pr 10
J u l1 0
90
6m 2.4 2.4 0.6 38,265 50.7 175.4/122.3 84.9 Easy 34.5 10.9
Nomura
210
29 September 2010
Tencent Holdings
Jin Yoon
NTES 19%
SNDA 18%
Source: Nomura Estimates
PWRD 9%
Nomura
211
29 September 2010
Tencent Holdings
Jin Yoon
Valuations
On the valuation front, Tencent shares are trading at a premium to most Internet portals on P/E terms, but we believe the companys strong EPS growth prospects and relatively low exposure to the slowing global economy support such a premium. For FY10-12F, we pencil in a non-GAAP (i.e., excluding share-based compensation) EPS CAGR of 34.3% for Tencent, second only to our estimate of a 45.7% CAGR for Baidu. For FY09-11F, the non-GAAP CAGR of Tencent is 50.8% per our estimates, while for Baidu it is 86.4%. The premium P/E valuation relative to its domestic peers also reflects Tencents high traffic volumes and continued monetisation of its user base, which are evident in its continuously refreshed slate of gaming products. We consider Baidu as Tencents only direct comparable, given its: 1) market leadership in its respective segments; 2) superior growth compared with peers, and; 3) size and economy of scale. Both companies, in our view, have comparable growth prospects, yet Tencent is trading at a marked discount unjustified in our view to Baidu. Tencent is trading on an FY11F PEG of 0.60, while Baidu is trading at 0.86. Given that the two have similar growth and profitability rates over the next two years on our reading, we consider the variance in PEG unjustified. Furthermore, Tencent is trading at an FY11F P/E of 20.6x versus Baidus 39.4x. Does Tencent merit a discount because it is a gaming company? While gaming companies tend to trade at a discount to media companies, we do not believe the company should be penalised for being good at what it does. Moreover, we do not view Tencent as a gaming company, but rather as one benefiting from games and doing so better than its peers. When it comes to the Internet in China, companies typically monetise their involvement in two ways: through online gaming or online advertising. In this context and in view of the companies similar growth profiles, we believe Tencent is still undervalued.
Nomura
212
29 September 2010
Tencent Holdings
Jin Yoon
Valuation methodology. We maintain our PT for Tencent at HK$200, equivalent to an FY11F PEG of 0.75, largely in line with the peer group average of 0.79. We believe this is justified compared with Baidus PEG, considering the similarities between the two companies. Our price target for Tencent represents 25.2% potential upside. Our PT for Baidu is US$90, equal to an FY11F PEG of 0.85 versus the current FY11F PEG of 0.86.
Tencent 10.5 62.2 59.3 40.7 33.7 53.3 52.9 52.0 43.6 45.0 45.0 34.3
Baidu 48.0 74.4 81.2 70.3 52.3 51.9 47.1 45.4 44.9 41.6 39.9 45.7
Note: All metrics are non-GAAP based, excluding share-based compensation expenses.
Risks. Downside risks to our call on Tencent include: 1) a faster-than-expected slowdown in online advertising; 2) rapid migration of SNS/gaming users to competing sites, and; 3) renegotiations with mobile operators. For Baidu, downside risks to our price target include: 1) slower-than-expected economic growth that would slow search market growth; 2) weaker-than-expected operational leverage may lead to lower margins, and; 3) new entrants or smaller players in the search market that attract customers and constitute competition.
Nomura
213
29 September 2010
Tencent Holdings
Jin Yoon
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 7,155 (2,170) 4,984 (1,578) 3,406 3,767 (360) 3,406 (141) (0) 3,265 (289) 2,976 (31)
FY09 12,440 (3,889) 8,550 (2,209) 6,342 6,880 (538) 6,342 (2) 22 6,362 (819) 5,543 (66)
FY10F 19,815 (6,318) 13,497 (3,021) 10,476 11,407 (931) 10,476 (10) 47 10,513 (1,554) 8,959 (34)
FY11F 27,877 (9,115) 18,762 (4,265) 14,497 15,505 (1,007) 14,497 (12) 21 14,507 (1,958) 12,548 -
FY12F 35,410 (10,692) 24,718 (6,338) 18,380 19,555 (1,175) 18,380 (12) 21 18,389 (2,299) 16,091 -
87.9 110.1 83.4 0.1 61.1 35.5 68.2 75.5 69.7 52.6 47.6 43.4 8.9 8.3 18.6 3.7 50.3 83.1
47.1 59.0 44.5 0.2 21.3 20.5 36.2 39.2 68.7 55.3 51.0 46.6 12.9 9.6 6.3 1.5 59.7 114.5
29.0 36.3 27.6 0.3 17.8 12.3 20.9 22.7 68.1 57.6 52.9 47.4 14.8 6.9 4.8 1.0 57.0 155.2
20.6 25.8 19.9 0.4 14.0 7.9 14.5 15.5 67.3 55.6 52.0 46.7 13.5 8.4 4.8 1.3 49.5 169.2
16.1 20.1 15.7 0.6 12.0 5.4 10.7 11.4 69.8 55.2 51.9 46.5 12.5 9.3 4.8 1.5 41.9 172.3
Nomura
214
29 September 2010
Tencent Holdings
Jin Yoon
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 3,767 (49) 523 4,240 (1,333) 2,907 (229) (17) 26 604 (1,565) 1,725 (258) (298) (292)
FY09 6,880 2,432 2,831 12,142 (789) 11,353 (516) (0) 10 (1) (3,729) 7,117 (555) 59 202
FY10F 11,407 1,635 1,471 14,513 (960) 13,553 (249) (317) 382 (3,038) 10,330 (649) -
FY11F 15,505 1,787 1,148 18,440 (1,351) 17,089 (243) (347) 417 (3,168) 13,749 (1,089) -
FY12F 19,555 1,670 284 21,509 (1,716) 19,793 (228) (324) 390 (2,663) 16,968 (1,531) -
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 4,730 983 5 776 6,496 303 2,142 370 545 9,856 245 1,847 2,092
FY09 11,554 1,229 374 13,157 819 2,726 269 535 17,506 202 697 3,664 4,563
FY10F 21,235 1,958 595 23,788 1,068 2,856 219 852 28,783 202 1,109 5,837 7,149
FY11F 33,895 2,755 837 37,488 1,311 3,285 203 1,198 43,486 202 1,561 8,211 9,974
FY12F 49,332 3,500 1,064 53,895 1,539 3,910 209 1,522 61,076 202 1,983 10,430 12,615
645 2,736
644 5,207
1,026 8,174
1,443 11,418
1,833 14,448
3.11 24.2
2.88 3,247.2
3.33 999.1
3.76 1,217.8
4.27 1,544.0
Nomura
215
29 September 2010
Maintained
NOMURA INTERNATIONAL (HK) LIMITED
yankun.hou@nomura.com paul.gong@nomura.com
BUY
Closing price on 21 Sep Price target Upside/downside Difference from consensus FY11F net profit (RMBmn) Difference from consensus
Source: Nomura
Action
With railway vehicle investments likely to stay high for longer than expected and increasing traction for the companys power semi business, Zhuzhou CSR should see solid revenue growth over the next few years, in our view. Export opportunities set to be a mid- to long-term positive. Zhuzhou CSR is our top pick in the China railway and rolling stock universe. We reiterate our BUY call and PT of HK$25.40.
HK$21.60
HK$25.40
(s et on 11 Aug 10)
Catalysts
Potential upward revision of the companys gross margin guidance. Anchor themes We expect the railway and metro subway rolling stock market in China to grow rapidly over the next few years. Zhuzhou CSR is likely to be a major beneficiary.
Nomura vs consensus
We believe the IGBT business has great potential and may become a future earnings growth driver.
14.8 21.5 23.9 25.8 net cash net cas h net c as h net cash 879 0.81 1,149 1.06 1,475 1.36
190 170 150 130 110 90 J ul10 May10 Aug10 3m 28.0 28.1 25.0
Mar10
Feb10
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (% ) 52-week range (HK$) 3-mth av g daily turnover (US$mn) Stock borrowability Major shareholders (%) Mirae Asset Global JP Morgan Chase
Source: Company, Nomura estimates
J un10
Apr10
Nomura
216
29 September 2010
Yankun Hou
Drilling down
2010E
H1A 2,652 101.8% 1,563 1,089 477 602 142.4% 3 11 610 148% 92 2 516 149% 47.6 0 100.8 1,084 n.a 49 121 41.1% 22.7% 23.0% 15.0% 19.4% H2E 2,316 15.1% 1,666 650 287 438 19.0% 9 4 433 15% 65 5 363 12% 34 24.3 100.2 1,084 n.a 67 128 28.1% 18.9% 18.7% 15.0% 15.7% 2008A 2,119 37.4% 1,332 787 412 489 47.0% 1 9 497 44.1% 74 1 422 21% 38.9 15.5 73.5 1,084 700 60 127 37.1% 23.1% 23.5% 14.9% 19.9% 2009A 3,326 56.9% 2,118 1,207 667 617 26.1% 8 16 624 25.6% 90 4 531 26% 49.0 19.5 105.0 1,084 797 77 175 36.3% 18.5% 18.8% 14.4% 16.0% 2010E 4,968 49.4% 3,229 1,739 764 1,040 68.7% 12 15 1,043 67.0% 156 7 879 66% 81.1 24.3 100.2 1,084 1,139 116 248 35.0% 20.9% 21.0% 15.0% 17.7% 2011E 6,672 34.3% 4,390 2,282 981 1,361 30.8% 14 17 1,363 30.7% 204 9 1,149 31% 106.0 31.8 114.4 1,084 1,086 152 334 34.2% 20.4% 20.4% 15.0% 17.2% 2012E 8,547 28.1% 5,598 2,949 1,256 1,747 28.4% 17 18 1,748 28.3% 262 11 1,475 28% 136.1 40.8 144.3 1,084 1,240 188 427 34.5% 20.4% 20.5% 15.0% 17.3% 2010E Variance 5,099 53.3% 2.6%
Consensus 2011E Variance 6,800 33.4% 1.9% 2012E Variance 8,647 27.2% 1.2%
882 43.0%
-15.2%
1,128 27.9%
-17.1%
1,348 19.5%
-22.8%
919 47.2%
-11.9%
1,203 30.9%
-11.7%
1,516 26.0%
-13.3%
Nomura
217
29 September 2010
Yankun Hou
Financial statements
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
Source: Nomura estimates
FY08 2,119 (1,332) 787 (412) (5) 370 435 (60) (5) 370 (1) 9 119 497 (74) 423 (1) 422 422 (168) 254
FY09 3,326 (2,118) 1,207 (667) (12) 528 617 (77) (13) 528 (8) 16 89 624 (90) 534 (4) 531 531 (211) 320
FY10F 4,968 (3,229) 1,739 (764) (20) 955 1,089 (116) (18) 955 (12) 15 85 1,043 (156) 886 (7) 879 879 (264) 615
FY11F 6,672 (4,390) 2,282 (981) (20) 1,281 1,451 (152) (18) 1,281 (14) 17 80 1,363 (204) 1,158 (9) 1,149 1,149 (345) 804
FY12F 8,547 (5,598) 2,949 (1,256) (20) 1,672 1,877 (188) (17) 1,672 (17) 18 75 1,748 (262) 1,486 (11) 1,475 1,475 (443) 1,033
48.4 56.9 48.4 0.8 80.0 6.0 44.2 51.8 37.1 20.5 17.5 19.9 14.9 39.8 33.0 11.7 12.9 13.8
36.7 43.2 36.7 1.1 43.2 5.2 29.2 34.0 36.3 18.6 15.9 16.0 14.4 39.8 16.5 7.2 14.8 14.2
22.2 26.1 22.2 1.4 99.6 4.4 16.8 19.1 35.0 21.9 19.2 17.7 15.0 30.0 9.1 3.9 21.5 20.6
17.0 20.0 17.0 1.8 40.7 3.8 12.6 14.2 34.2 21.7 19.2 17.2 15.0 30.0 6.7 3.0 23.9 22.7
13.2 15.6 13.2 2.3 26.3 3.1 9.6 10.7 34.5 22.0 19.6 17.3 15.0 30.0 5.3 2.4 25.8 24.3
Nomura
218
29 September 2010
Yankun Hou
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Nomura estimates
FY08 435 (456) 276 255 (700) (445) (98) (26) 36 713 179 (168)
FY09 617 125 (290) 452 (550) (98) 72 (25) 12 388 348 (211)
FY10F 1,089 (688) (205) 196 (450) (254) 2 (15) 472 204 (264)
FY11F 1,451 (677) (294) 479 (450) 29 2 (17) 472 486 (345)
FY12F 1,877 (741) (395) 741 (450) 291 2 (18) 476 750 (443)
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates
FY08 797 100 712 523 782 2,914 74 933 48 88 113 4,170 21 610 71 702 4 36 742 19 1,084 2,157 168 3,409 4,170
FY09 1,139 742 889 930 3,700 102 1,313 53 95 138 5,401 121 1,203 146 1,471 3 48 1,522 98 1,084 2,485 211 3,780 5,401
FY10F 1,086 1,089 1,048 1,295 4,518 101 1,313 53 88 153 6,226 140 1,371 161 1,673 4 48 1,725 105 1,084 3,048 264 4,396 6,226
FY11F 1,240 1,462 1,408 1,729 5,839 99 1,313 53 82 170 7,555 166 1,841 181 2,188 5 48 2,241 115 1,085 3,770 345 5,200 7,555
FY12F 1,564 1,873 1,803 2,206 7,447 97 1,313 53 77 188 9,175 198 2,359 206 2,763 5 48 2,816 126 1,085 4,705 443 6,233 9,175
4.15 370.0
2.52 65.9
2.70 76.9
2.67 88.9
2.70 98.3
Nomura
219
29 September 2010
Strategy | China
Further reading
For more on China, please see the following reports.
Global Weekly Economic Monitor Chinas development juggernaut, 20 August, 2010 China Consumption outlook: Surprises from consumers, 20 May, 2009
China Strategy: New dawn for Central and Western China, 14 April, 2010
China Banks: If it catches mice, it's a good cat! (30 July, 2010)
China Foods and Beverage: Two sides to the cost story, 14 July, 2010
Nomura
220
29 September 2010
Strategy | China
Nomura
221
29 September 2010
Strategy | China
Nomura
222
29 September 2010
Strategy | China
Nomura
223
29 September 2010
Strategy | China
Nomura
224
29 September 2010
Strategy | China
Any Authors named on this report are Research Analysts unless otherwise indicated ANALYST CERTIFICATIONS
Each research analyst identified on the cover page hereof certifies that all of the views expressed in this report by such analyst accurately reflect his or her personal views about the subject securities and issuers. In addition, each research analyst identified on the cover page hereof hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Conflict-of-interest disclosures
On August 2, 2010, Hyflux Ltd. (Hyflux) and Mitsui & Co., Ltd. (Mitsui) announced the signing of a joint venture agreement to develop water projects in China. A newly formed 50:50 joint venture company, Galaxy NewSpring Pte. Ltd. (JV Company) will serve as the partners vehicle for investing, developing, and managing projects in Chinas water sector. The JV Company will acquire four water treatment plants from Hyfluxs subsidiary Spring China Utility Ltd. for US$53.1 million. The JV Company has also submitted a delisting proposal for Hyflux Water Trust (HWT) and intends to make an exit offer to acquire all of the HWT units not controlled by the JV Company, Hyflux, Mitsui, Hyflux Asset Management Pte. Ltd., Hyflux Water Projects Ltd or the trustee-manager of HWT (collectively the JV Parties) for S$0.78/unit. The Offer is subject to 1) the approval of a delisting resolution by HWTs unitholders, and 2) the JV Company receiving valid acceptances in respect of such number of units that, when taken together with the units owned, controlled or agreed to be acquired by the JV Parties, will comprise not less than 75% of the total voting rights of HWT at the close of the exit offer. Nomura acted as financial adviser to Mitsui in connection with the joint venture and for both Hyflux and Mitsui in connection with the delisting proposal and exit offer. Important disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx . If you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877865-5752) or email grpsupport@nomura.com for assistance.
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities.
Industry Specialists identified in some Nomura research reports are senior employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research report in which their names appear.
Distribution of ratings
Nomura Global Equity Research has 1842 companies under coverage. 50% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*. 36% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 47% of companies with this rating are investment banking clients of the Nomura Group*. 13% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 3% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 June 2010. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Nomura
225
29 September 2010
Strategy | China
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc.
STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'RS-Rating Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (exAsia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target - Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'RS' or 'Rating Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008)
STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein.
SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.
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STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008
Price targets
Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estima.
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