Portfolio Strategy Index target China
We expect the H-share index to " " The Goldman Sachs Group, Inc. Olympics 12000 odyssey. extend the current bull-run and reach 8000 by end-2006, and 12000 May 15, 2006 by end-2008, driven by stronger-than-expected macro and micro
Related research: fundamentals, undemanding valuations, and further currency Asia-Pacific Strategy: China and India: How much is priced in?, appreciation. We would regard any near-term pullbacks as buying April 28, 2006 opportunities. Buy GS China top-ten picks, China CATs. China Strategy: 2006 outlook: Riding the bulldog, January 4, 2006 China Strategy: The case for Chinese equities, November 17, 2004 Macro and earnings are pointing to the bright side We believe China’s under-appreciated macro and corporate earnings growth could further Why read this report surprise the market on the upside. We expect around 11% EPS growth for next few years with • New H-share index target risks on the upside. • Investment implications Valuations remain undemanding, P/E multiples could expand Inexpensive valuations should cushion the downside while improving corporate fundamentals could change market perception and lead to gradual multiple expansion, in our view. Currency could be a big driver History suggests that currency appreciation could offer eye-catching gains for long-term focused investors for both fundamental and tactical reasons. We expect H-share index to reach 8000 and 12000 by end-2006 and end-2008, respectively
(Index level) HYPOTHETICAL PATH 13000 China Strategy Team 12000 12000 @ 12000 Thomas Deng, CFA 11% Goldman Sachs (Asia) L.L.C. 11000 @ 10820 63% potential [email protected] 14% 10000 gains/ 21% CAGR 8000 @ 9450 Hong Kong: 852-2978-1062 in 2.5 years 9000 Kinger Lau 29% 8000 Goldman Sachs (Asia) L.L.C. We are here @ 7362 [email protected] 7000 Hong Kong: 852-2978-1224 EPS growth + currency + multiple expansion 6000 EPS growth + currency Regional Strategy Team 5000 EPS growth only Timothy Moe, CFA 4000 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 Christopher Eoyang Source: DataStream, Goldman Sachs Strategy Research. Kenneth Kok, CFA The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its Percy Wong, CFA research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only Stephanie Leung a single factor in making their investment decision.
Customers of The Goldman Sachs Group, Inc. in the United States can receive independent, third- Analysts employed by non-US party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at affiliates are not required to take http://www.independentresearch.gs.com or can call 1-866-727-7000 to request a copy of this research. the NASD/NYSE analyst exam. For Reg AC certification, see page 48. For other important disclosures, see page 75, go to Global Strategy Research http://www.gs.com/research/hedge.html, or contact your investment representative.
Portfolio Strategy China
Table of contents
1 Olympics 12000 odyssey
3 Implementation: Two ways to play
6 How do we derive our bullish targets?
8 Macro: Sweet spot of growth
12 Earnings: Around 11% growth p.a. in the next few years
19 Valuations: Undemanding
27 P/E multiples: Potential expansion
34 Liquidity: Favorable demand/supply
39 Rmb appreciation: A big driver of investment returns
43 Risks: Near-term correction possible but likely modest
Appendices
51 Appendix 1: Earnings for H-share index (HSCEI)
53 Appendix 2: Extrapolating earnings growth
55 Appendix 3: Sector-neutral valuation comparison
58 Appendix 4: Are Chinese companies creating value?
61 Appendix 5: Sector scorecard
64 Appendix 7: China in a regional context
65 Appendix 8: Index/sector valuation update
66 Goldman Sachs and Gao Hua China coverage (101 in total, 17 domestically- listed companies)
72 Recent China Strategy ideas and associated publications
73 Disclosures
The prices in this report are based on the market close of May 10, 2006
Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Olympics 12000 odyssey
China will host the 29th Olympic Games in Beijing in 2008, which will showcase its social and economic achievements, by which time we expect the H-share index to reach 12000, based on both positive macro and micro factors.
Though the H-shares index (HSCEI) has reached a ten-year high, we believe the still- favorable risk/reward tradeoff continues to support our positive stance on Chinese equities. As China enters the sweet spot of growth in the next few years, we expect Chinese stocks to further ride on the current uptrend.
Specifically, extending our bullish view on the Chinese equity market for the past two years, we expect the H-share index to reach 8000 in end-2006, representing another 9% potential return from the current level, despite the 38% ytd gains. In a longer-time horizon, we see the index further march towards 12000 by the end of 2008, offering approximately 63% potential price return (21% CAGR in a 2.5 year time horizon).
While we believe the road could be bumpy and short-term technical pullbacks might be possible given the strong year-to-date market performance, we would take any consolidation as a buying opportunity.
We remain structurally positive on Chinese stocks for the following reasons:
Macro is at the sweet spot of growth • Our economics team expects China’s economy to grow at 9.6% and 9.1% in 2006 and 2007, respectively, with risks biased to the upside as China may have entered the sweet spot of growth. • We observe that the market has been consistently underestimating China’s GDP growth potential, leading to more upward GDP forecast revisions. • The 17% upward revision to 2004 GDP in the end of 2005 has simply changed the market’s perception on China’s growth model, suggesting that China’s growth has been more balanced and sustainable than the market previously thought. • External macro backdrop remains benign.
Earnings growth continues to surprise market on the upside • Amid the supportive macro backdrop, Chinese corporates could deliver sustainable earnings growth of around 11% in the next few years, in our view. • We expect the market to further upward adjust its earnings forecast on the back stronger-than-expected macro outlook and conservative earnings estimates. • Corporate income tax (EIT) reform appears structurally positive to Chinese companies and emerges as a bonus to the aggregate market.
Undemanding valuations • Strong price performance has been backed by fundamental earnings revisions.
Goldman Sachs Global Strategy Research - May 15, 2006 1 Portfolio Strategy China
• Valuations appear undemanding in a regional context based on different fundamental-based valuation metrics.
Gradual multiple expansions • Less volatile macro cycle could translate into more stable earnings growth. • Increasing corporate profitability that is comparable to major developed markets. • Improving corporate governance and better management quality.
Favorable balance of equity supply and demand • China remains structurally underweight from a global equity market perspective and more newly-establish funds are waiting to invest in Chinese stocks • Implementation of QDII scheme would represent additional demand for overseas- listed Chinese equities. • Concerns over potential liquidity drain due to mega-IPOs in 2006 appear overdone. • China may experience a shortage of mega-IPOs in the foreseeable future.
Potential currency appreciation • Potential further renminbi appreciation is both structurally and tactically positive to Chinese stocks. • Our currency analysts reaffirm their dollar-bearish view and expect renminbi to appreciate against USD to 7.34 CNY/USD in a twelve-month horizon, representing over 9% potential currency gains.
What could go wrong? We are aware that there could be some near-term correction given that the market has gained 38% year-to-date, particularly given that 2Q has traditionally been a bad quarter for Chinese equities in the past three years. We identify four main risks to our bullish view:
• Further domestic monetary tightening
• Administrative measures to slowdown economic growth
• Intensified Sino-US trade tension
• A severe global recession
However, we believe none of these risks could pose a serious threat to the market, and we think a potential correction, if any, would represent strategically attractive entry points for long-term focused investors.
What to buy? • Long-term view: GS China top-ten picks
• Domestic demand: China CATs
2 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Implementation: Two ways to play
Building on our bullish view on, we highlight the Chinese stocks with good business fundamentals and potential to outperform the market for the next few years. For investors who prefer thematic investment ideas, we would continue to highlight our GS “Go West” CAT (GSSZCNGW), which has risen 71% since inception, as we believe the basket constituents are still favorably exposed to the strong momentum of domestic demand.
Furthermore, please see China External Consumption CAT (GSSZCNEX) and China Internal Consumption CAT (GSSZCNIN) for more investment ideas that could benefit from strong domestic demand in China. Please also refer to our sector scorecard in Appendix 5 (pg 61/62) for our sector allocation ideas in 18 different industries.
GS China top-ten picks Exhibit 1: Stocks with good fundamentals and potential to outperform the market in the next few years GS top-ten picks Price Valuation GS Quoted May 10 Mkt cap P/E (X) Div. yield ROE (%) EPS growth (%) Ticker Company name rating currency (quoted) (US$mn) CY06 CY07 CY06 CY07 CY06 CY07 CY06 CY07 857 HK PetroChina OP HKD 9.4 215943 11.3 11.8 4.0 3.8 23.9 20.2 16.7 (3.7) 3328 HK Bank of Communications IL HKD 5.2 30432 18.9 14.9 2.1 2.7 N/A N/A 40.7 26.5 388 HK Hong Kong Exchanges & Clearing OP HKD 58.9 8080 29.8 25.0 3.0 3.6 0.4 0.5 57.1 19.5 700 HK Tencent Holdings OP HKD 15.9 3598 40.8 29.6 1.8 3.5 19.5 22.9 51.8 37.7 000002 CH China Vanke (A) OP CNY 6.7 3222 14.2 10.3 2.8 3.9 17.2 19.7 46.5 38.7 694 HK Beijing Capital International Airport OP HKD 5.0 2419 19.3 16.3 1.8 2.2 11.5 12.6 16.8 19.0 297 hk Sinochem Hong Kong Holdings OP HKD 3.0 2192 15.7 11.5 1.0 1.3 23.3 24.6 39.5 35.9 200869 CH Yantai Changyu Pioneer Wine IL HKD 26.4 1785 28.9 23.9 2.9 3.5 19.3 21.8 26.5 21.1 2337 HK Shanghai Forte Land IL HKD 3.7 1207 11.1 8.3 3.6 4.8 16.2 18.3 56.2 36.5 1070 HK TCL Multimedia Technology OP HKD 1.2 599 14.5 9.1 0.7 1.1 7.8 11.0 NM 58.5 Average 20.4 16.1 2.4 3.0 15.5 16.8 39.1 29.0 Note: China Vanke (A) and Shanghai Forte Land are covered by Yi Wang of Gao Hua Securities: [email protected] +86 (10) 6535 3002; Yantai Changyu Pioneer Wine is covered by Yifan Deng of Gao Hua Securities: [email protected] +86 (10) 6535 3036; TCL Multimedia Technology is covered by Cheryl Tang of Gao Hua Securities: [email protected] +86 (10) 6535 3007; Beijing Capita International is covered by Bingchao Cao of Gao Hua Securities: [email protected] +86 (10) 6535 3023. Note: Please see the company snapshots on page 4 and 5 for more details
Source: Bloomberg, Goldman Sachs Strategy Research, Gao Hua Securities Research estimates.
GS “Go West” CAT (GSSZCNGW) Exhibit 2: Stocks that we believe could benefit from strong growth in the inland regions GS “Go West” CAT Price Valuation Quoted Weight 6M ADVT Ticker Stock name May 10 P/E (X) Div. yield ROE (%) EPS growth (%) currency (%) (USD mn) (quoted) CY06 CY07 CY06 CY07 CY06 CY07 CY06 CY07 995 HK Anhui Expressway Co. Ltd. 5.95 HKD 4.80 1.0 13.9 11.9 4.4 5.2 12.2 13.1 9.0 16.6 2628 HK China Life Insurance Co. Ltd. (China) 11.75 HKD 14.22 75.8 25.9 21.4 0.6 0.8 13.8 14.2 37.4 20.7 2319 HK China Mengniu Dairy Co. Ltd. 9.70 HKD 15.65 3.6 23.4 19.8 1.0 1.2 20.8 20.4 17.9 18.4 906 HK China Netcom Group Corp. (Hong Kong) Ltd. 15.45 HKD 11.08 14.3 9.5 9.1 3.5 3.7 15.3 14.1 (18.5) 3.7 1088 HK China Shenhua Energy Co. Ltd. 15.85 HKD 11.49 23.8 15.9 14.4 2.0 2.2 26.8 24.6 21.2 11.0 1044 HK Hengan International Group Co. Ltd. 13.95 HKD 13.76 1.7 26.3 21.5 2.3 2.8 22.7 24.7 27.4 22.2 358 HK Jiangxi Copper Co. Ltd. 9.15 HKD 9.16 20.7 8.3 9.3 3.0 3.2 31.1 22.2 79.8 (11.0) 2331 HK Li Ning Co. Ltd. 8.55 HKD 8.69 1.6 36.9 27.6 0.9 1.3 18.9 21.5 34.1 33.6 107 HK Sichuan Expressway Co. Ltd. 1.27 HKD 1.97 0.8 10.7 9.5 3.7 4.0 5.9 6.2 29.1 12.3 322 HK Tingyi (Cayman Islands) Holding Corp. 5.20 HKD 9.17 1.6 24.9 22.5 2.2 2.4 16.9 16.9 21.6 10.4 Average 19.6 16.7 2.4 2.7 18.4 17.8 25.9 13.8 Note: Please see China Strategy: Play the “Go West” theme, September 12, 2005, for more details
Source: Bloomberg, Goldman Sachs Strategy Research.
Goldman Sachs Global Strategy Research - May 15, 2006 3
4 Strategy Portfolio Exhibit 3: Goldman Sachs China top-ten picks (1)
PetroChina 857 HK 1-year performance Valuations appear attractive Why we are positive on this stock Rating OP/N Market cap (US$mn) 215943 10 11/5/2006 closing price (HKD) 9.4 1. Favorable risk/reward balance with base-case estimates of an average WTI oil price of US$68/bbl for 2006 and 2007 Target Price (HKD) 8.7 52-week high 9.60 8 2. Attractive valuations with relatively high dividend yields Potential valuation +/(-) (%) (7.0) 52-week low 4.68 6 Valuations P/E (X) Div. yield (%) ROCE (%) Key risks 4 CY05E 12.8 3.5 24.5 1. Sharply lower oil prices May-05 Sep-05 Jan-06 May-06 CY06E 11.3 4.0 23.9 2. Poor use of cash Analyst: Kelvin Koh, CFA 3. Unfavorable government actions. 12-month target price basis: P/E.
Bank of Communications 3328 HK 1-year performance Leveraging its connection with HSBC Why we are positive on this stock Rating IL/A Market cap (US$mn) 30432 6 11/5/2006 closing price (HKD) 5.1 1. We expect the gradual rise of money market/bond rates will benefit liquid banks such as BoCom
Target Price (HKD) 5.2 52-week high 5.40 2. HSBC’s option to increase its stake in BoCom could be long-term positive 4 Potential valuation +/(-) (%) 2.4 52-week low 2.50 3. Better earnings growth prospects than its peers Valuations P/E (X) Div. yield (%) ROCE (%) 2 CY05E 24.6 1.6 NA May-05 Sep-05 Jan-06 May-06 Key risks CY06E 18.9 2.1 NA 1. Macro hard landing Analyst: Ning Ma 2. Property bubbles in the Shanghai region. 12-month target price basis: P/B.
Hong Kong Exchanges & Clearing 388 HK 1-year performance The best/safest play on China's march to market Why we are positive on this stock Rating Cil-OP Market cap (US$mn) 8697 11/5/2006 closing price (HKD) 63.4 55 1. Our analyst sees a slew of catalysts pointing to structurally higher stock/derivatives turnover prospects in HK. 2. HKEx stock is trading in line with global peers at 30X/25X 2006/07 P/E, but we believe HKEx's supercharged growth Target Price (HKD) 80.0 52-week high 65.80 30 Potential valuation +/(-) (%) 26.2 52-week low 18.70 and superior profitability should justify a premium valuation and our 34X fair P/E assumption. Valuations P/E (X) Div. yield (%) ROCE (%) 5 CY05E 50.2 0.0 0.3 May-05 Sep-05 Jan-06 May-06 Key risks CY06E 32.1 2.8 0.4 1. Draconian tightening measures in China Analyst: Darwin Lam 2. Policy-induced China slowdown and sharp liquidity pullback
12-month target price basis: P/E.
Tencent Holdings 700 HK 1-year performance Penguin continues to attack Why we are positive on this stock Rating OP/N Market cap (US$mn) 3598 16 1. Market leader with over 70% of market share in Instant messaging (IM) 11/5/2006 closing price (HKD) 16.1 12 2. We expect Tencent to continue seeding new products into its self-reinforcing instant messaging network, and see Target Price (HKD) 14.5 52-week high 16.95 virtual pets, home pages, and advertising further propelling 2006 earnings growth. Potential valuation +/(-) (%) (9.9) 52-week low 5.20 8 4 3. Domestic demand proxy Valuations P/E (X) Div. yield (%) ROCE (%) 4
CY05E 62.0 0.5 15.7 May-05 Sep-05 Jan-06 May-06 oda ah lblSrtg eerh-May 15, 2006 Goldman Sachs Global Strategy Research - CY06E 40.8 1.8 17.2 Key risks Analyst: James Mitchell, CFA 1. Mobile services revenue volatility. 12-month target price basis: P/E.
China Vanke (A) 000002 CH 1-year performance Play on second-tier cities Rating CIL-OP/N Market cap (US$mn) 3222 Why we are positive on this stock 8 11/5/2006 closing price (CNY) 6.3 1. The Gao Hua Property analyst remains optimistic on the domestic property developer and believes the company’s 6 Target Price (CNY) 9.5 52-week high 7.17 earnings growth is more secure than that of other listed players due to its higher exposure to strong end-user Potential valuation +/(-) (%) 51.6 52-week low 2.81 4 demand in second-tier cities. Valuations P/E (X) Div. yield (%) ROCE (%) 2 2. She expects the company to deliver 43% 2005E-2008E EPS CAGR. CY05E 16.4 2.5 15.7 May-05 Sep-05 Jan-06 May-06 3. Valuations also appear attractive relative to peers. CY06E 14.2 2.8 17.2 Key risks Analyst: Yi Wang, CFA 1. Policy risk and unexpected price movement in Shenzhen. 12-month target price basis: NAV based.
Source: Bloomberg, Goldman Sachs Research estimates, Gao Hua Research estimates. China China
Goldman Sachs Global Strategy Research -May 15, 2006 China Exhibit 4: Goldman Sachs China top-ten picks (2)
Beijing Capital International Airport 694 HK 1-year performance Olympic Games could be a long-term theme Rating OP/N Market cap (US$mn) 2419 Why we are positive on this stock 6 11/5/2006 closing price (HKD) 5.4 1. The company seems less exposed to competition and regulatory uncertainties. Target Price (HKD) 5.2 52-week high 5.65 4 2. The Gao Hua analyst expects the company to post a strong earnings CAGR of 21% in 2005-2007. Potential valuation +/(-) (%) (3.7) 52-week low 2.65 3. 2008 Olympic Games to be held in Beijing could be a catalyst Valuations P/E (X) Div. yield (%) ROCE (%) 2 Key risks CY05E 21.3 1.7 10.7 May-05 Sep-05 Jan-06 May-06 CY06E 19.3 1.8 11.5 1. Regulatory uncertainties. Analyst: Bingchao Cao 12-month target price basis: DCF.
Sinochem Hong Kong Holdings 297 HK 1-year performance Leveraged to China's growing fertilizer demand and at a sweet spot of growth Why we are positive on this stock Rating OP/C Market cap (US$mn) 2192 1. China has 22% of the world's population but only 7% of its farmland. To ensure food security and raise farmers' 11/5/2006 closing price (HKD) 3.1 3 Target Price (HKD) 3.8 52-week high 3.60 income, China will need to increase agricultural productivity by using more fertilizers, and this will remain a trend for 2 Potential valuation +/(-) (%) 22.6 52-week low 1.21 years to come, supported by favorable policies. Valuations P/E (X) Div. yield (%) ROCE (%) 1 2. Sinochem has stated targets of sustaining a sales volume CAGR of 20% and doubling its market share to 30% in 3 CY05E 21.8 0.7 16.6 May-05 Sep-05 Jan-06 May-06 years, supported by a doubling of outlets to 2,000 by 2008. We consider this within reach given management's solid CY06E 15.7 1.0 19.5 track record. Analyst: Kelvin Koh, CFA 3. We estimate 37% 2005-2007E earnings CAGR. Our target price of HK$3.8 is based on 15X 2007 EPS, justified for
its high growth as well as focus in distribution (versus production). Key risks 1. Weakening of global fertilizer prices 2. Execution risks 12-month target price basis: P/E.
Yantai Changyu Pioneer Wine 200869 CH 1-year performance Still tasting sweet Rating IL/N Market cap (US$mn) 1785 Why we are positive on this stock 28 11/5/2006 closing price (HKD) 28.5 1. Fast growth in high-end sales to drive up average selling prices Target Price (HKD) 25.7 52-week high 30.10 18 2. Improvement in product mix could lead to higher unit profit Potential valuation +/(-) (%) (9.8) 52-week low 9.45 Key risks Valuations P/E (X) Div. yield (%) ROCE (%) 8 1. Slowdown in top-line growth. CY05E 35.9 2.5 16.4 May-05 Sep-05 Jan-06 May-06 CY06E 28.9 2.9 19.3 2. Further rise in grape costs. Analyst: Yifan Deng 12-month target price basis: P/E.
Shanghai Forte Land 2337 HK 1-year performance Waiting for property prices in Shanghai to rebound Rating IL/N Market cap (US$mn) 1207 Why we are positive on this stock 5 11/5/2006 closing price (HKD) 3.4 1. Valuations appear attractive relative to listed peers. 4 Target Price (HKD) 4.4 52-week high 4.45 2. We remain positive on this stock in a longer-term horizon as Shanghai property prices could rebound in 2H2006. 3 Potential valuation +/(-) (%) 30.0 52-week low 1.86 Key risks Valuations P/E (X) Div. yield (%) ROCE (%) 2 1. Unexpected price movement in Shanghai. CY05E 15.9 2.5 15.7 May-05 Sep-05 Jan-06 May-06 CY06E 11.1 2.8 17.2 12-month target price basis: NAV. Analyst: Yi Wang, CFA
TCL Multimedia Technology 1070 HK 1-year performance An attractive turnaround story Rating OP/N Market cap (US$mn) 599 Why we are positive on this stock 11/5/2006 closing price (HKD) 1.2 1.6 1. The Gao Hua China Consumer analyst forecasts the company's commitment to cost-cutting and higher ASPs could Target Price (HKD) 1.6 52-week high 1.56 1.3 lift the gross margin in 2006. Potential valuation +/(-) (%) 37.8 52-week low 1.02 2. The analyst believes the below-market-consensus 1Q2006 results could trigger short-term selling pressure, but, at Valuations P/E (X) Div. yield (%) ROCE (%) 1 the same time, create a good buying opportunity. CY05E 0.0 -9.5 May-05 Sep-05 Jan-06 May-06 Key risks CY06E 14.5 0.7 7.8 1. Execution on the planned cost-cutting initiatives. Analyst: Cheryl Wang, CFA 2. Weaker-than-expected LCD TV demand. 12-month target price basis: DCF.
Note: China Vanke (A) and Shanghai Forte Land are covered by Yi Wang of Gao Hua Securities: [email protected] +86 (10) 65353002. Note: Yantai Changyu Pioneer Wine is covered by Yifan Deng of Gao Hua Securities: [email protected] +86 (10) 65353036. Strategy Portfolio Note: TCL Multimedia Technology is covered by Cheryl Tang of Gao Hua Securities: [email protected] +86 (10) 65353007. Note: Beijing Capita International is covered by Bingchao Cao of Gao Hua Securities: [email protected] +86 (10) 65353023. Source: Bloomberg, Goldman Sachs Research estimates, Gao Hua Research estimates.
5
Portfolio Strategy China
How do we derive our bullish targets?
With most of the key fundamentals pointing to the bright side, we believe the H- share index could further ride on its recent uptrend in the coming few years. Specifically, we forecast H-share index to reach 8000 and 12000 by the end of 2006 and 2008, respectively, offering potential returns of 9% and 63%, respectively. We layout our key assumptions in this section and will thoroughly discuss each of the fundamental price drivers in the later part of this report.
Exhibit 5: Underlying assumptions behind our bullish call H-share index target
(%) Multiple expansion (Index level) HYPOTHETICAL PATH 14000 25 Currency appreciation EPS growth + currency + multiple expansion EPS growth EPS growth + currency 12000 20 12000 4 5 EPS growth only Incremental 10000 15 growth 55 We are here 8000 10 8000 2 5 3 11 11 6000 4 0 4000 2006 2007 2008 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08
Accumulative Drivers 2006 2007 2008 returns EPS growth (%) 4 11 11 29.1 Currency appreciation (%) 3 5 5 13.6 Multiple expansion (%) 2 4 5 11.4 Total (%) 9.3 21.6 22.8 63.2
H-share index forecast 8047 9789 12023 Potential upside from current (%) 9.3 32.9 63.2
Source: DataStream, Goldman Sachs Strategy Research estimates.
Breakdown of the 21% potential annualized returns in a 2.5 year time-horizon 1. Earnings growth (we forecast 4% incremental growth for 2006, 11% per annum [p.a.] for 2007 and 2008, total 29% potential accumulative returns).
• Rest of 2006: Market consensus is forecasting 13.1% EPS growth for 2006. However, given the industrial profits data (compiled by National Bureau of Statistics) for 1Q2006 came in at 21% and the historically high correlation of earnings growth between industrial companies and aggregate offshore-listed companies, we believe the market could further revise up the 2006 earnings estimates by around 4% (see Exhibit 6).
• 2007 and 2008: Using both backward- and forward-looking approaches, we forecast that EPS growth for Chinese stocks, in aggregate, could reach mid to high teens in the next two years amid a still-robust macro backdrop. We, nevertheless, elect to employ a more conservative earnings growth assumption of 11% in our base-case, to
6 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
offset a potential growth deceleration in the energy sector, which currently makes up 35% of the H-share index weight (see Exhibit 7). Please also refer to Appendix 1 for more bottom-up H-share index earnings analysis.
Exhibit 6: Earnings growth for 2006 could be higher Exhibit 7: Energy occupies a significant part of H-share than current market expectation index Earnings growth, industrial companies vs. aggregate China H-share index weighting distribution, by GICS industry offshore group
Automobiles & (%) NBS sample Offshore aggregate Utilities, 3.5 Components, 1.3 50 Transportation, 7.2 Correlation = 0.96 1Q06 industrial Telecommunication profits growth: 21% Banks, 21.8 45 Services, 4.6 Market 40 consensus for Technology Hardware 2006E EPS & Equipment, 0.5 35 growth: 13.1% Capital Goods, 1.4 Materials, 9.7 30
25
20
15
Insurance, 14.3 10 Consumer Durables & Apparel, 0.4 5
0 Food Beverage & Tobacco, 0.4 Energy, 34.9 2001 2002 2003 2004 2005 2006
Source: CEIC, NBS, FactSet, Worldscope, I/B/E/S, Goldman Sachs Source: Bloomberg, MSCI, Goldman Sachs Strategy Research. Strategy Research.
2. Currency appreciation (we forecast 4% further appreciation by end of 2006, 5% p.a. thereafter until 2008, total 14% potential accumulative returns): Our economists’ forecast renminbi to appreciate against USD to 7.67 and 7.34 in a six- month and 12-month horizon, respectively, from the current level of 8.00 CNY/USD. Echoing their bullish view on renminbi, we assume 3% further appreciation by the end of 2006 and 5% incremental appreciation for 2007 and 2008.
3. Price multiple expansions (we forecast 3% further expansion by end of 2006, 4% and 5% in 2007 and 2008, total 11% potential accumulative returns). We argue that the high risk levels embedded in the stock prices seem no longer justifiable given improving, yet underappreciated, corporate fundamentals. We expect P/E bands to gradually trend upward as equity risk premiums decline and the fair P/E multiple could reach 16.5X by 2008. Our bullish view and fair target multiple is consistent with our regional strategy team’s findings that Chinese stocks would appear richly valued when P/Es go beyond 18X-20X. (please see Asia-Pacific Strategy: China and India: How much is priced in?, April 28, for more details).
Why H-share? We understand that the H-share index is one of the most recognized benchmark indexes among investors and is the only Chinese equity index that is linked with derivative products. However, due to its narrow-based inclusion in terms of sector representation and index constituents, we choose to focus on the MSCI China index and the aggregate offshore universe for the purpose of our analysis in the following sections as we believe, in general, they could better reflect the fundamentals for broad-based Chinese companies.
Goldman Sachs Global Strategy Research - May 15, 2006 7 Portfolio Strategy China
Macro: Sweet spot of growth
Amid stronger internal macro fundamentals and a still-benign external backdrop, we believe China could continue to deliver rapid, yet robust, economic growth in the next few years as it enters the sweet spot of growth, according to our China economics team’s forecasts. We observe that the market has consistently been underestimating China’s economic growth potential, and the 17% upward revision to 2004 GDP could structurally change the market’s perception on China’s future growth path and lead to further positive macro reassessment.
(1) China has entered the sweet spot of growth China could deliver 8% to 9% in real GDP growth p.a. over the next five years. As highlighted by our China economics team in its recent research paper, China may have entered the sweet spot of growth and is likely to maintain its current rapid growth over the next five years, driven by increasing productivity as a result of its commitments to domestic reforms, and deepening industrialization and integration with the world (please see our report China’s Ascent: Can the Middle Kingdom Meet Its Dreams?, November 11, 2005, for more details).
Our economists’ medium-term bullish view has led to an above-consensus call on China’s GDP growth, which they forecast to be at around 9.6% and 9.1% in 2006 and 2007, respectively (see Exhibit 8).
Exhibit 8: According to our China economics team, China could continue to deliver rapid, yet more stable, economic growth in 2006 and 2007, with risks on the upside Real GDP yoy growth, 1990-2007E
yoy growth (%) Real GDP Forecasts 15 14.2 14 13 13.1
11 10.9 10.1 9.6 10 10 9.9 9.2 9.3 9 8.4 9.1 9.1 7.8 8.3
7 7.6
5
3.8 3
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: CEIC, Goldman Sachs Economics Research estimates.
8 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Though our economists foresee China to continue its eye-catching growth track, the drivers could nevertheless change and become more balanced. With household disposable income picking up underpinned by favorable government policies, we believe domestic demand will carry the flag in terms of growth contribution while marginal growth dependence on trade (exports + imports) and fixed assets investments (FAI) are expected to lessen (see Exhibits 9 and 10). The increasing reliance on domestic demand, and less on external trade, could extend China’s growth cycle and cushion any dramatic dislocation in external demand, in our view.
Exhibit 9: With household disposable income on an Exhibit 10: …China is likely to rely more on domestic uptrend … demand as the key growth driver Disposable income (indexed), 1992-2005 Contribution to GDP growth
(Index level) Relative index (right scale) Disposable income (Relative index) pp contribution to GDP growth Government consumption Private consumption 20 600 290 CPI inflation Fixed investment Net exports 270 500 15 250
230 400 10 210
300 190 5 170 200 150 0 130 100 110 -5 0 90 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 ]
Source: CEIC, Goldman Sachs Economic Research estimates.
(2) Changing perception on China’s growth model Market has been underestimating China’s growth potential. Contrary to our persistent fundamentally bullish macro view for China in recent years, we note that the market has always been overly conservative on China’s growth prospects.
Exhibit 11 shows average market consensus forecasts on real GDP growth since 1995. For the past five years, we observe that market expectations, on average, were 1.7pp lower than the actual, after 2004 upward adjusted GDP growth rates, representing an underestimation of 18% (0.9pp underestimation, 11% below actual GDP growth on prior- adjusted basis). Given the size of the economy, the underestimation would look much more significant in nominal terms (US$310bn, almost equivalent to the total nominal GDP in US$ terms of Taiwan in 2005).
Given the persistent consensus underestimation on China’s growth outlook, we believe the 2006 growth could, again, surprise the market on the upside, particularly when first quarter GDP yoy growth came in at 10.2% versus the average market expectation of 9.1%.
Goldman Sachs Global Strategy Research - May 15, 2006 9 Portfolio Strategy China
Exhibit 11: Market has been underestimating China’s economic growth since 1999 Market consensus versus actual GDP growth
(%) Consensus forecasts (pp) Actual GDP growth (prior 2004 adjustment) 11.0 Actual GDP growth (after 2004 adjustment) 6.0 Underestimation (right scale) Average of 1.7pp 10.5 under-estimation 5.0
10.0 4.0
9.5 3.0
9.0 2.0
8.5 1.0
8.0 -
7.5 (1.0)
7.0 (2.0) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: CEIC, Goldman Sachs Strategy Research.
Significant GDP upward revision for 2004 has simply changed the market’s perception on China’s growth model. The National Bureau of Statistics (NBS) officially revised up the nominal GDP level for 2004 by US$280 bn, representing 17% upward revision, on December 20, 2005. We believe this restatement not only is fundamentally positive for Chinese equities, though it lacks any real economic impact, but also changes the market’s previous cautious stance on China’s macro picture.
Specifically, China is now the fourth largest economy in the world, measured by 2005 nominal GDP in USD terms, and this upward revision has reasserted China’s importance in the context of the global economy. In addition, all GDP-based ratios would appear less of a concern after the denominator has been grossed up by 17% post the revision. Healthier-than-expected macro fundamentals could possibly reduce the equity risk premium gradually, in our view.
Please see our note: China Strategy: GDP upward revision – Positive for Chinese equities; may create trading opportunities, December 22, 2005, for more details
(3) Benign external macro backdrop Global macro-economic environment remains benign. Given the increasing integration with the global economic platform, China is heavily dependent on, as well as a major influence for, the global macroeconomic trend. For this, we look at the global economic forecasts and study the global macro setup from China’s perspective.
10 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Although our global economics team forecasts a moderate slowdown in global GDP growth in 2007, mainly led by the United States, the overall trend remains benign given the strong growth momentum in Asia. In particular, the potential slowdown in consumer expenditure in the United States starting 2H2006 seems well-cushioned by the acceleration of domestic demand in Asia (see Exhibit 12).
Exhibit 12: We expect potential slowdown in US to be cushioned by benign growth in Asia Actual and forecast real GDP and consumer expenditure growth
REAL GDP Consumer Expenditures 2004 2005 2006 (f) 2007 (f) 2004 2005 2006 (f) 2007 (f) USA 4.2 3.5 3.5 2.6 3.9 3.5 3.1 2.2 Japan 2.3 2.7 3.2 2.9 1.9 2.2 2.4 2.2 Euroland 1.81.42.41.71.41.41.51.5 UK 3.11.82.62.63.51.71.92.0 Asia ex Japan 8.6 8.2 7.9 7.5 4.2 4.2 4.4 4.6 NIE 5.84.65.14.72.23.24.24.8 ASEAN 5.9 5.2 4.6 4.5 6.1 5.1 4.6 4.5 Advanced Economies 3.22.73.12.52.82.62.62.3 Emerging Markets 8.07.16.96.5N/AN/AN/AN/A World 4.84.24.43.93.43.12.92.6
Source: Erwin, Goldman Sachs Economic Research estimates.
From an industrial production perspective, we do not see any signs of major downturns in the global growth cycle, as suggested by our proprietary Goldman Sachs Global leading indicators (see Exhibit 11).
Exhibit 13: GS GLI remains resilient, showing no signs of potential major slowdown in a global context GS Global Leading Indicator (GLI)
(%) GLI yoy GLI mom,sa (right scale) (%) 7 0.6
6 0.5 5 0.4 4 0.3 3 0.2 2 0.1 1 0.0 0
(1) (0.1)
(2) (0.2) Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Source: Erwin, Goldman Sachs Economic Research estimates.
Goldman Sachs Global Strategy Research - May 15, 2006 11 Portfolio Strategy China
Earnings: Around 11% growth p.a. in the next few years
Given the index composition for the H-share index, we assume a conservative earnings growth of 11% in our forecast though our study shows that the aggregate market could deliver sustainable mid-to-high teens growth in the next few years on the back of a constructive macro backdrop. Incremental benefits from the potential income tax reform could emerge as a bonus to corporate earnings.
Exhibit 14: Conclusion from our earnings growth analysis—We expect the aggregate market could grow by around 11% in the next few years, with risks on the upside
(%) Upper range Mean Lower range 23
21
19 Average of upper range = 17.5%
17
15
13
11 Average of mean = 12.6%
9 Average of lower range = 9.7% 7
5 Top-down GDP Historical EPS growth Sustainable growth
Source: FactSet, I/B/E/S, CEIC, Wind, Goldman Sachs Strategy Research.
Approach #1: Looking into history Corporate earnings have grown by an average of 13% in the past ten years. Despite significant changes in the listed equity universe over the last decade due to rapid capital market development, we believe historical corporate earnings growth could nevertheless provide us a comfort range of what growth rate Chinese companies are likely to deliver in the near future, given both macro and corporate fundamentals are expected to remain benign and stable, in our view.
Looking at the aggregate market EPS growth in the past ten years, we note that Chinese companies have generated a simple-average EPS growth of 13.1%. From a time-weighted perspective, where we assign higher weightings to EPS growth recorded in more recent years, Chinese companies have achieved even higher growth of 22% (see Exhibit 15).
12 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 15: Chinese stocks could achieve mid-to-high teens earnings growth based on historical pattern Aggregate China offshore EPS growth, 1995A-2008E
(%) Ten-years CAGR = 10.0% EPS growth 81.3 Simple average 80 Time-weighted average
60
40 34.4 36.9 21.9% 15.2 15.5 10.8 21.2 20 13.1 8.1 10.8 8.7
- 13.1% (11.2) (20) (15.5) Below-mean growth (40)
(60) (52.2)
1995A 1996A 1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004A 2005P 2006E 2007E 2008E
Source: FactSet, Worldscope, I/B/E/S, Goldman Sachs Strategy Research.
Approach #2: Extrapolating the proximity between GDP and EPS growth Though many analysts have been concerned about a disconnect between macro health and corporate profitability, our study shows the contrary. Looking at the growth trajectories for both economic activity and industrial profits for the past 30 years, we find that the two growth rates are well-aligned on a normalized basis (see Exhibit 16), suggesting that these two variables should grow at similar pace from for a longer-time horizon.
Goldman Sachs Global Strategy Research - May 15, 2006 13 Portfolio Strategy China
Exhibit 16: We observe GDP and corporate earnings are growing at a similar normalized pace
Nominal GDP growth at 30-year CAGR Corporate earnings growth at 30-year CAGR (right scale) 1600 18000 1400 16000 30-year GDP CAGR = 15% 14000 30-year earnings growth CAGR = 12% 1200
12000 1000
10000 800 8000
GDP in Rmb bn 600 6000
400 Corporate earnings in Rmb bn 4000
2000 200
0 0
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Source: CEIC, National Bureau of Statistics (NBS), Goldman Sachs Strategy Research.
Recent five years make more sense? Since long-term historical earnings may not represent the current macro-corporate dynamics given the rapid changes in fundamental macro and structural factors, such as GDP composition, inflation and company mix, we elect to focus our correlation study between macro and corporate earnings growth in the past five years. The key takeaways are highlighted as follows:
• Growth in past five years: Nominal GDP has expanded by 66% over the past five years, corresponding to 200%, 260% and 235% earnings growth for industrial companies, aggregate offshore-listed companies, and domestically-listed companies, respectively.
• Correlation: Consistent with what we observe from a longer-term timeframe, earnings growth from our three sample groups demonstrates significantly high directional correlation, in a range of 88% to 98%, with the real GDP growth (see Exhibit 17).
• Our forecast: Based on our assumption that China could be at the sweet spot of growth, corporate earnings growth could follow suit given their historically high correlation, in both longer and near-term perspectives. Please refer to appendix 2 for our earnings extrapolation analysis.
• Risks are on the upside. As consensus forecasts tend to underestimate economic growth for China, we believe corporate earnings could, again, surprise the market on the upside (see Exhibit 18).
14 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 17: Significant directional correlation between GDP growth and earnings growth
(%) Industrial profits growth Offshore earnings growth (%) Domestic earnings growth Real GDP yoy growth (right scale) 60 Correlation with GDP: 50 Industrial profit growth: 98% Offshore earnings growth: 88% 10 Domestic earnings growth: 96% 40
30 9.5
20
10 9
0
-10 8.5
-20
-30 8 2001 2002 2003 2004 2005
Source: CEIC, National Bureau of Statistics (NBS), Bloomberg, Wind, Goldman Sachs Strategy Research.
Exhibit 18: We believe earnings risks are on the upside given the cautious consensus estimates on corporate earnings Evolution of 12-month forward earnings revisions for MSCI China, 2005-2007E
EPS growth (%) 2003-2005 2004-2006 2005-2007 20
2006 estimates 15 2005 estimates
2005 EPS growth had been revised up by almost 10 10pp since 2003
5
Again, market started with conservative estimates for 2007 0 2007 estimates
Market started with conservative -5 estimates on 2006 growth assumptions
Year 0 Year 1 Year 2 (2 years before actual) (1 year before actual) (actual year) -10 Apr Apr Apr Oct Oct Oct Jun Jun Jun Feb Feb Feb Dec Dec Dec Aug Aug Aug
Source: I/B/E/S, MSCI, DataStream, Goldman Sachs Strategy Research.
Goldman Sachs Global Strategy Research - May 15, 2006 15 Portfolio Strategy China
Approach #3: Sustainable EPS growth from reinvested capital Reinvested capital could generate 7% to 12% sustainable earnings growth. Simply put, we estimate long-term sustainable earnings growth by multiplying long-term sustainable return on equity (ROE) and reinvested capital after adjusting for dividends paid to the shareholders (net income minus dividends paid).
Following this simple, yet subtle logic, we believe Chinese stocks are likely to achieve high-single digit to low-teen sustainable earnings growth in a longer-term horizon (see Exhibit 19).
In addition, we also observe that sustainable earnings growth, a function of ROE and dividend payout ratio, has been trending up as we chronologically move forward our study periods. We attribute that phenomenon to an increasing number of well-managed and profitable companies going public and being included in the listed equity universe, which is likely to uplift the aggregate sustainable ROE and deliver higher long-term sustainable earnings growth.
Exhibit 19: Chinese stocks could probably deliver 7% to 12% sustainable earnings growth Aggregate China offshore sustainable earnings growth, 1995A-2008E
Sustainable earnings growth = ROE * (1- payout ratio) 1995 - 2008 2000 - 2008 2005 - 2008 Suggested Suggested Suggested Average sustainable Average sustainable Average sustainable Average payout earnings Average payout earnings Average payout earnings GICS Sector ROE (%) ratio (%) growth (%) ROE (%) ratio (%) growth (%) ROE (%) ratio (%) growth (%) Consumer Discretionary 7.7 69.4 2.4 9.4 74.9 2.4 12.1 32.4 8.1 Consumer Staples 13.1 51.7 6.3 15.3 44.5 8.5 16.6 34.5 10.9 Energy 15.7 30.5 10.9 20.1 37.1 12.6 22.8 30.2 15.9 Financials 7.0 19.2 5.6 8.1 21.6 6.4 13.5 14.2 11.5 Health Care 11.0 35.4 7.1 12.1 34.7 7.9 15.5 31.5 10.6 Industrials 8.7 43.7 4.9 9.9 41.9 5.8 12.8 31.2 8.8 Information Technology 7.6 8.8 6.9 9.4 2.5 9.1 14.6 36.8 9.2 Materials 7.9 47.3 4.2 11.0 60.8 4.3 16.3 35.5 10.5 Telecommunication Services 12.5 16.6 10.4 15.9 25.5 11.9 16.2 35.0 10.5 Utilities 8.3 29.9 5.8 10.9 50.8 5.4 13.2 35.1 8.6 Aggregate 10.9 34.7 7.1 13.5 31.7 9.2 16.3 28.2 11.7
Source: FactSet, Worldscope, I/B/E/S, Goldman Sachs Strategy Research.
Tax reform appears a forgotten bonus to corporate earnings The potential EIT reform could boost earnings by around 6%. We believe the long- discussed enterprise income tax (EIT) unification is most likely to take place in 2008 as government officials have recently indicated the draft policy had been passed to National People’s Congress (NPC) for review. There is also a slight possibility that it could be implemented in FY2007, at the earliest, if it is approved by the NPC in March 2007 and is applied retrospectively.
As for impact on corporate earnings, assuming the effective tax rate (ETR) for both domestic enterprise (DE) and foreign-invested enterprise (FIE) converges to 25%, we estimate that aggregate earnings and net margins for Chinese stocks under Goldman Sachs/Gao Hua coverage universe (FY2007) could be boosted by 6.4% and 1 pp, respectively, due to a structural reduction in the statutory income tax rate (see Exhibits 20 to 21).
16 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 20: Aggregate market earnings could rise by Exhibit 21: Aggregate market net margins could rise by about 6.4% if we assume a 25% effective tax rate for about 1pp if we assume a 25% effective tax rate for companies that are expected to pay above 25% in 2007 companies that are expected to pay above 25% in 2007 Sensitivity analysis—2007E aggregate earnings vs. Sensitivity analysis—2007E net margins vs. effective tax effective tax rate (ETR), based on GS/GH China coverage rate (ETR), excluding financials, based on GS/GH China universes coverage universes
110 19
18 Net margins could increase by 100 Aggregate after-tax earnings could around 1 pp due to the increase by as much as 6.4% due 17 potentially lower tax rate to the potential EIT reform
90 16
15 Current assumed 80 Current assumed ETR at 28.6% ETR at 28.6% 14 Net margin (%) 70 13
12 Aggregate after-tax(USD incomebn) 60 11
10 50 0 5 10 15 20 25 30 35 40 45 50 0 5 10 15 20 25 30 35 40 45 50 Effective tax rate (%) Effective tax rate (%)
Source: Goldman Sachs Research estimates, Gao Hua Securities Research.
Has the market priced in this positive news? We believe the market has not factored this potential structural earnings enhancement in the current share prices. By segregating the tax effect from the market consensus earnings forecasts (dividing net income by the earnings before tax), we note that aggregate after-tax earnings are still implying around 30% of ETR in both 2007 and 2008 (see Exhibit 22). We think the potential benefits of the tax unification, once realized by the market, could uplift 2007 or 2008 earnings to at least mid-teen levels given that the market is now forecasting only 11% and 9% for 2007 and 2008, respectively.
Please see our report: China Strategy/Taxation: Revisiting EIT reform, March 17, 2006 for a detailed analysis and investment implications regarding the potential corporate income tax reform.
Goldman Sachs Global Strategy Research - May 15, 2006 17 Portfolio Strategy China
Exhibit 22: Market still has not factored in the potential benefit of the lower corporate tax rate Tax burden (net income/earnings before tax), 1995A-2008E
(%) 80 78.5
78 77.0 Our base case: 76.4 25% ETR 76 75.6 74.7 73.8 73.9 74 72.1 72 71.6 70.6 70.2 69.8 70
67.8 68 66.4 66
64
1995A 1996A 1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004A 2005P 2006E 2007E 2008E
Source: I/B/E/S, MSCI, DataStream, Goldman Sachs Strategy Research.
18 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Valuations: Undemanding
We compare each of the major fundamental-based valuation multiples of Chinese companies with the regional aggregates and conclude that offshore-listed Chinese companies are still comfortably valued, despite the recent strong performance. Given our argument that the market has been underestimating the earnings growth for Chinese stocks, valuations should be more attractive than what market consensus suggests.
Valuations still undemanding, after 56% rise in stock prices since mid-October? Market uptrend has mainly been driven by EPS revisions, less so by multiple expansions. After a 56% rally since the mid-October 2005 low and 38% gains ytd, we observe that many investors had begun wondering if the market has become irrational, moving without fundamental support.
In order to address this question, we breakdown the price performance drivers into two components—price multiple expansion and EPS revisions—and investigate how much each driver has contributed to the total price returns in two different time periods. Exhibit 23 shows the influence of the two price performance drivers, and on a twelve-month- forward basis, we note that:
• From May 2003, which was the all-time low for MSCI China, to present, MSCI China index has gone up 1.6 times, driven by 85% forward EPS growth and 38% P/E multiple expansion. It is apparent that earnings revision has been the main driver for price performance along the market uptrend since the trough.
• P/E multiple expansion has taken over the driver seat in delivering market returns in the past few months. Year-to-date, during which the index has gained over 38%, market has revised up earnings by 6% while P/E multiple has surged by 15%.
Goldman Sachs Global Strategy Research - May 15, 2006 19 Portfolio Strategy China
Exhibit 23: Upward earnings revision has been the primary performance driver along the market since mid-2003 MSCI China index price performance, 12-month forward P/E and 12-month forward EPS revisions
(Index level) 12M foward EPS index (X) 180 Price index 40 12M forward P/E (right scale) 160 35
140 30 120 25 100 20 80 15 60 10 40
20 5
0 0 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05
(%) P/E expansions (X) 40 16 EPS revisions 15 30 Monthly price returns
12-month forward P/E (right scale) 14 20 13 10 12 0 11 -10 10
-20 9
-30 8 Jul-03 Jul-04 Jul-05 Oct-03 Oct-04 Oct-05 Apr-04 Apr-05 Jun-03 Jan-04 Jun-04 Jan-05 Jun-05 Jan-06 Mar-04 Mar-05 Mar-06 Feb-04 Feb-05 Feb-06 Aug-03 Sep-03 Nov-03 Dec-03 Aug-04 Sep-04 Nov-04 Dec-04 Aug-05 Sep-05 Nov-05 Dec-05 May-03 May-04 May-05
Source: I/B/E/S, MSCI, DataStream, Goldman Sachs Strategy Research.
Three dimensions of valuation comparisons We examine eight most frequently used valuation metrics to gauge where China stands in terms of valuations relative to its regional peers. Exhibit 24 summarizes these valuations metrics and it appears that, in general, Chinese stocks are still comfortably valued in a regional context. We group all valuations metrics into three groups—cash based, earnings/growth based, and book-value based—and analyze each of them in detail in the following sections.
20 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 24: China seems attractively valued compared with the regional market based on different valuation metrics Valuations for aggregate offshore China universe and MSCI regional countries
Valuation summary Cash based Earnings/growth based Book-value based
2006E 2006E 2006E 2006E 2006E L/T sustainable 2006E PEG 2006E 2006E Country EV/EBITDA (X) P/C (X) P/S (X) D/Y (%) P/E (X) growth (%) (X) P/B (X) ROE (%) Australia 10.1 11.6 2.2 3.9 15.7 6.8 2.3 2.8 19.8 China 4.9 7.8 1.6 2.4 14.9 10.4 1.4 2.5 17.2 Hong Kong 12.8 15.5 3.4 3.1 16.3 5.2 3.1 1.7 11.4 India 12.3 15.1 2.3 1.4 19.7 16.0 1.2 3.8 21.2 Indonesia 6.4 8.1 2.0 3.0 13.4 16.2 0.8 3.2 25.4 Korea 8.4 7.3 1.0 1.9 11.4 12.8 0.9 1.6 14.0 Malaysia 8.4 9.5 1.8 3.8 14.9 5.7 2.6 1.9 13.0 New Zealand 8.3 9.4 1.7 5.4 15.4 4.6 3.4 3.4 27.2 Pakistan 7.0 9.5 2.7 4.6 12.2 N/A N/A 3.3 30.4 Philippines 7.8 7.8 1.6 2.7 14.7 8.3 1.8 1.9 13.4 Singapore Free 11.6 11.1 2.2 3.2 16.1 5.9 2.7 1.9 13.1 Taiwan 8.7 10.5 1.3 3.4 13.5 7.1 1.9 2.1 15.5 Thailand 6.8 7.4 1.4 3.8 11.0 13.1 0.8 2.2 21.3 Regional 9.2 10.1 1.7 3.1 14.3 8.8 1.6 2.1 16.2 Regional ex-China 9.9 10.9 1.9 3.1 14.7 8.6 1.7 2.3 16.9
Comparison China 4.9 7.8 1.6 2.4 14.9 10.4 1.4 2.5 17.2 Regional ex-China 9.9 10.9 1.9 3.1 14.7 8.6 1.7 2.3 16.9
Difference % (China over -50.4 -28.5 -15.7 -24.0 1.5 19.8 -15.3 6.3 1.7 regional ex-China) Favorable? √√√хх√ √х√
Note (1): We adopt aggregate offshore listed-companies valuations for China and that of the MSCI universe for other regional markets Note (2): Regional = MSCI Asia Pacific ex-Japan Note (3): We estimate long-term sustainable growth using average ROE and dividend payout in the past 4 years for all markets.
Source: MSCI, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
Cash based: China is an undervalued cash cow. While many investors focus on accrual earnings in assessing relative investment attractiveness, we believe the cash-based valuation metrics, such as EV/EBITDA, price-to-cashflow, price-to-sales, and dividend yields, could reduce accounting distortions and provide less-biased proxies in a cross-country comparison.
• EV/EBITDA multiple: Chinese stocks are trading at lowest EV/EBITDA multiples (see Exhibit 25) in the region and we believe it suggests one or a combination of the following factors:
1. Chinese companies have employed a conservative capital structure, where they are only modestly levered or even in a net cash position. We believe the market is penalizing Chinese stocks and awarding them with low valuations (EV/EBITDA) for not raising debt in the current low interest rate environment to optimize the capital structure. However, the market seems to overlook the fact that a conservative capital structure should usually be associated with lower equity risk premium, for which Chinese stocks are not being rewarded at the moment.
Goldman Sachs Global Strategy Research - May 15, 2006 21 Portfolio Strategy China
2. Taxation burden is heavier than the other markets and government gets a bigger pie of corporate earnings at the shareholders’ expenses. We note that the statutory corporate tax rate for China in 2006 is one of the highest among the Asia-Pacific countries, according to a survey conducted by KPMG (see Exhibit 26). Even after taking into account the tax effect, we still do not think China’s low multiple is justified given countries with higher corporate tax rate than China, such as Philippines, India, and New Zealand, are all trading at a higher EV/EBITDA ratio.
3. Chinese corporates adopt more aggressive depreciation or amortization accounting policies. China has one of the highest depreciation-as-a-%-of-sales ratios among its regional peers, which implies that Chinese companies tend to employ more conservative accounting policies for reporting purposes (see Exhibit 27). This could mean Chinese companies’ operating profits could be better than shown via accrual earnings.
Exhibit 25: China has the lowest EV/EBITDA multiple among the regional markets 2006E EV/EBITDA
2006E EV/EBITDA Hong Kong 12.8 India 12.3 Singapore Free 11.6 Australia 10.1 Regional 9.2 Taiwan 8.7 Korea 8.4 Malaysia 8.4 New Zealand 8.3 Philippines 7.8 Thailand 6.8 Indonesia 6.4 China 4.9
(X) 4.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5 12.5 13.5
Source: I/B/E/S, MSCI, DataStream, Goldman Sachs Strategy Research estimates.
22 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 26: We are not convinced that China’s lowest Exhibit 27: Chinese companies seem to employ one of EV/EBITDA ratio is justified even taking its high the most aggressive depreciation methods in the region corporate tax rate into account 2004A depreciation as % of sales Corporate tax rate for 2006
(%) 2006E Coporate tax rate Regional average (%) 2004A Depreciation as a% of sales 13 12.5 45 40.69 12 40 11 35 35 33.66 35 32.5 33 33 10 9.8 9.7 31 30 30 30 30 30 30 28 28 9 27.5 8.2 8.1 25 8 25 6.7 20 7 6.7 6.5 20 17.5 6 5.3 5.1 15 5.0 5
Fiji 4.1
India 4 China Korea Japan Taiwan Vietnam Pakistan Thailand Australia Malaysia Sri Lanka Indonesia Singapore Philippines Hong Kong Bangladesh China Korea Japan New Zealand Taiwan MXAPJ Thailand Australia Malaysia Singapore Philippines Hong Kong New Zealand Papua New Guinea
Source: KPMG's Corporate Tax Rates Survey 2006, MSCI, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
• Price-to-sales (P/S) ratio. Chinese companies also appear undervalued due to the unfavorable perception of their capabilities to generate profit from revenue. Theoretically speaking, the market should assign higher values to revenue (P/S) if a market/company is able to transform a significant part of its sales into earnings (EBIT margin). However, with market consensus estimating an healthy EBIT margin of 17% in 2006, China is still only trading at the second-lowest level on P/S ratio (2.4X) (see Exhibit 28).
• Dividend yield. Although Chinese stocks have not been employing generous dividend policies relative to many regional countries, they repay shareholders through more aggressive capital expenditure, which subsequently leads to more efficient operations and higher ROE (see Exhibit 29). This is also consistent with our long-term sustainable growth analysis, in which a higher dividend payout should link with lower earnings growth, in a longer time horizon.
Goldman Sachs Global Strategy Research - May 15, 2006 23 Portfolio Strategy China
Exhibit 28: Market seems to overlook China’s ability to Exhibit 29: Chinese companies tend to reinvest a high convert its sales to earnings portion of their earnings, which lead to higher P/S and EBIT margin, aggregate China offshore and MSCI operational efficiency and ROE regional markets Capex/sales, ROE, dividend payout, and asset turnover, 1995A-2005P
(%) EBIT margin (%) 2006E P/S (X) (right scale) (X) (%) Capex as a % of sales ROE % (X) 60 0.8 25 6 Dividend payout Asset turnover (X) (right scale)
23 0.7 5 50 21 0.6 19 4 40 17 0.5 3 15 30 0.4 13 2
11 0.3 1 20 9 0.2
7 0 10 0.1 India China Korea Taiwan Free Thailand Australia Malaysia Regional - - Indonesia Singapore Philippines Hong Kong 1995A 1996A 1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004A 2005P New Zealand
Source: MSCI, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
Earnings/growth based: Valuation/growth tradeoff for Chinese stocks appears favorable. Looking at the aggregate price-to-earnings multiple of Chinese stocks on a stand-alone basis, Chinese companies might seem richly valued (14.9X 2006E P/E) relative to the regional market (14.7X 2006E P/E). However, putting long-term sustainable earnings growth, which we estimate based on the amount of capital being reinvested, into perspective, we believe valuations of Chinese stocks still look attractive.
Specifically, using price-earnings-growth multiple (PEG) as our primary tool to assess the valuation/growth tradeoff, we observe that Chinese companies are residing at the low- range of the spectrum, ranking fifth in terms of lowest PEG ratio. This suggests that Chinese equities still look attractive at current valuations and expected growth prospects relative to other regional markets (see Exhibit 30).
24 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 30: Favorable valuations/growth tradeoff for Chinese stocks compared to other regional markets 2006E PEG ratio (2006E P/E divided by long-term sustainable growth)
(X) 2006E PEG (2006E P/E divided by long-term sustainable growth) 3.5
3
2.5 Asia Pacific PEG 2
1.5 PEG = 1 1
0.5 India China Korea Japan Taiwan Thailand Australia Malaysia Indonesia Philippines Hong Kong Hong New Zealand AC Asia Pacific Asia AC Singapore Free Singapore
AC Asia Pacific ex Japan Asia Pacific ex Japan AC
Note: We estimate long-term sustainable growth using average ROE and dividend payout in the past 4 years for all markets.
Source: MSCI, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
Book value based: Chinese stocks appear fairly valued from a “shareholder’s-return” standpoint based on market consensus estimates. To analyze how much shareholders have to pay for expected returns in each market, we study the relationship between the potential returns to common shareholders (return-on-equity) and the market value of shareholders’ equity (price-to-book ratio).
In Exhibit 31, where we plot different markets’ expected ROE and P/B based on market consensus, we see China positioned relatively close to the regional regression line, implying that China is reasonably, although not attractively, valued from a shareholders’ value creation perspective. However, as we pointed out in previous sections that consensus estimates tend to underestimate the profitability of Chinese companies in recent years, we believe China’s actual 2006 ROE should be higher than what we currently observe from consensus forecasts, leading to a more favorable balance in the metric.
Goldman Sachs Global Strategy Research - May 15, 2006 25 Portfolio Strategy China
Exhibit 31: China appears fairly valued from a shareholder value perspective based on consensus estimates 2006E P/B versus 2006E ROE
28 2 New Zealand R = 0.70 26
Indonesia 24 India 22 Thailand
20
18
06E ROE (%) Taiwan 16 Korea 14 China Asia Pacific
12 Hong Japan Kong 10 1.522.533.54 06E P/B (X)
Source: MSCI, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
For investors who prefer cross country comparison on a sector-neutral basis, please refer to Appendix 3 on page 55.
26 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
P/E multiples: Potential expansion
We argue that less volatile macro and corporate growth, increasing profitability, and improving corporate fundamentals should lead to a steady downtrend in equity risk premium. Although our sensitivity analysis indicates that a mean reversion of IERP to regional averages could lead to more than 60% potential gains in index returns, to stay conservative, we expect 5% of multiple expansion p.a. in our base case.
Why should equity risk premium be lower? #1: Lower macro and earnings volatility Market-oriented economic policy should reduce systematic market risks and enhance corporate earnings stability. With data-points from first quarter GDP and loan growth coming in at above market expectation and showing signs of potential economic overheating, the market has, once again, become concerned about whether China’s growth, as well as the corporate earnings growth, are subject to external disruption from potential non-market-based administrative measures.
While the macro backdrop of policy challenges is now similar to what the Chinese government encountered in 2004, our China economists believe that, this time around, the government will score higher in the following three key areas:
• Timing: The government will adjust polices earlier in the cycle, and have more confidence in their capability to manage the economy.
• Preference of growth model: Policymakers this time will try to preserve the strength of domestic demand, as they now see more risks associated with external demand.
• Mechanism: Policy adjustments this time will be more market friendly, with more reliance on market-based mechanisms, and better signaling to the market.
Please refer to Asia-Pacific Economics Flash: China: How Similar are the Macro Issues Now Compared with 2004?, April 25, 2006 for more details
Regarding the impact of a less volatile macro environment on corporate earnings, we examine the evolution patterns of both economic growth and corporate earnings growth (see Exhibit 32). We note that not only do economic and earnings growth demonstrate a high directional correlation, which we detailed in the market earnings analysis, but they also show a positive correlation in terms of growth volatility. Specifically, we divide the growth path in the past ten years into two five-year periods—1996 to 2000 and 2001 to 2005—and observe that relatively high levels of macro growth volatility seem to result in more volatile corporate earnings growth and vice versa.
Given that our economists believe China could still grow at a rapid, yet more stable, pace in the next few years, we think corporate earnings growth could follow suit, as it did in the past ten years, and grow in a more robust and predictable manner.
Goldman Sachs Global Strategy Research - May 15, 2006 27 Portfolio Strategy China
Exhibit 32: More stable economic growth seems to translate into less volatile corporate earnings growth Real GDP and corporate earnings growth
(%) Real GDP yoy growth Mean +1 SD -1 SD Top down 10.5 10 10.1 influence 10 10 9.9
9.6 9.5 9.3 9.1 9.1 9
8.4 8.5 8.3 GS forecast 8 7.8
7.5 7.6
7 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(%) 80 EPS growth Mean -1 SD +1 SD 56.4% 60 35.3% 40 ? 20
- 12.2% (20)
(40) -41.6% (60)
1996A 1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004A 2005P 2006E 2007E
Source: CEIC, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
Why equity risk premium should be lower? #2: Solid yet underappreciated profitability Solid corporate profitability should reward Chinese stocks with a lower risk premium. Concurring with our regional strategy team’s findings, we believe the market has been under-appreciating the magnitude, as well as the consistency, of Chinese corporates’ profitability.
In contrast to many investors’ perception that Chinese companies generally have been delivering mediocre shareholders’ returns, we note that Chinese corporates’ ROE has actually been reasonably solid and is riding on an uptrend. More importantly, we note that aggregate market ROE for Chinese companies is, in fact, comparable to other developed markets.
In Exhibit 33, we show that China’ ROE has reached a ten-year high of 15.9% in 2005, outperforming Japan by almost 5pp and not far behind US and Europe, from a shareholders’ returns perspective. Consistent with our economists’ argument, Chinese corporates’ strong profitability is driven mainly by high asset turnover (i.e. higher productivity and operational efficiency), with which ROE demonstrates a significant correlation of 96% (see Exhibit 34). Please see Appendix 4 for more details.
28 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 33: Chinese companies’ ROE is comparable to major developed markets ROE for aggregate offshore China, US, Europe and Japan, 1995A-2006E
(%) Japan US Europe ex-UK China offshore aggregate 20
18
16
14
12
10
8
6
4
2
0
-2
1995A 1996A 1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004A 2005P 2006E Note: Japanese universe based on 1,147 TSE 1 non-financial firms with consolidated data available since March 2000. For periods prior to March 2000, calculations are based on available data. US universe is S&P500. European universe composed of companies under Goldman Sachs coverage excluding financials.
Source: FactSet, I/B/E/S, Worldscope, Company data, Goldman Sachs Research estimates, Goldman Sachs Strategy Research.
Exhibit 34: Asset turnover has been the main driver for improving corporates’ ROE Dupont analysis, 1995A-2008E
EBIT/Sales Sales/Asset Asset/Equity EBT/EBIT NI/EBT A B C D E =A*B*C*D*E
EBIT margin Asset Financial Interest Tax burden (%) turnover (X) leverage (X) burden (X) (X) ROE (%) 1995A 15.0 0.4 2.1 0.8 0.7 6.7 1996A 13.2 0.5 2.1 0.7 0.8 7.4 1997A 17.8 0.4 1.9 0.8 0.8 7.6 1998A 12.8 0.4 1.9 0.6 0.8 3.9 1999A 12.1 0.4 1.8 0.7 0.7 4.5 2000A 17.4 0.5 1.8 0.8 0.7 8.3 2001A 16.9 0.5 1.8 0.9 0.7 9.5 2002A 16.6 0.5 1.8 0.9 0.7 10.1 2003A 16.3 0.6 1.9 0.9 0.7 11.4 2004A 16.7 0.6 1.9 0.9 0.8 13.8 2005P 17.2 0.7 1.9 0.9 0.7 15.9 2006E 16.9 0.8 1.8 0.9 0.7 16.4 2007E 16.5 0.8 1.8 0.9 0.7 16.2 2008E 17.5 0.8 1.6 0.9 0.7 16.3
Correlation (1995A - 2008E) 0.67 0.96 (0.43) 0.88 (0.24)
Source: FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
Goldman Sachs Global Strategy Research - May 15, 2006 29 Portfolio Strategy China
Why equity risk premium should be lower? #3: Improving corporate governance Our proprietary research shows that corporate governance and management quality for Chinese companies have been improving. Corporate governance has historically been one of the major concerns deterring investors from investing in Chinese stocks. However, evaluating corporate governance and management quality based on several key attributes, we believe the concerns should be less worrisome than the market perceives.
According to our proprietary study, in which we filter the 61 companies that were listed prior to 2004 and are under Goldman Sachs/Gao Hua China coverage universe, we examine two aspects of corporate fundamentals as follows:
Corporate governance: In spite of its abstract nature, we have tried to gauge the level of corporate governance (see Exhibit 35) at the time when the companies were listed (at IPO) and now, based on the following elements:
• Audit committee: The formation of an audit committee is one of the strongest indicators companies can show to the market and shareholders that management oversight over financial statements is taken to the highest level and subsequently codified within the structure of the firm. Our study indicates an almost doubling of firms with audit committees, increasing credibility and transparency for market participants.
• Independent directors: Independent directorship is a key indicator of transparency and a signal to investors that board decisions factor in a balanced picture of both company and shareholder interests. There has been an almost doubling of firms reporting at least one independent director, signaling a shift towards more stringent governance policies post-IPO.
• Remuneration committee: With the presence of at least one independent director, the committee provides another control and check mechanism within the executive structure. We see a marked increase in public firms setting up and creating such committees, as public companies in Hong Kong are initiating and forging their own corporate governance structures in the wake of SOX regulations in the US.
• Stock option plan: Performance-based compensation, such as stock option plans, gives incentives and provides focus for management, while serving as a litmus test for investors to gauge the company’s performance goals. Stock options align both management and shareholder financial interests and are key for public companies where earnings growth and quality drive stock prices.
30 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 35: Corporate governance appears more stringent and management’s interests are more aligned with shareholders’
# of Firms At IPO Now 70
60
50
40
30
20
10
0 Audit Committee Independent Remuneration Stock Option Plan Directors Committee
Source: Thompson Financials, HKEx, Goldman Sachs Strategy Research
Management quality: Investors can gauge management quality based on many different factors. Educational qualification and age convey the key attributes of knowledge and experience, a combination that could serve as an indication of management effectiveness and performance:
• Educational qualification: Educational qualification (see Exhibit 36) is seen as a sign of overall management quality. We found that post-IPO, firms boosted their high-level management’s educational levels by replacing or repositioning executives. The boost in educational levels for the two most senior positions shows a desire to improve a firm’s core qualities and its image to the market. Our study shows a majority of post-IPO firms have a Chief Executive Officer with at least a post- graduate degree at the helm.
• Age: While age (see Exhibit 37) cannot convey all the information necessary in making judgments on management quality, it is a factor which may reveal a more mature and broad-experienced management team that may be able to more effectively tackle challenges and steer the company in the tough post-IPO environment.
Goldman Sachs Global Strategy Research - May 15, 2006 31 Portfolio Strategy China
Exhibit 36: Educational qualification of the top two key Exhibit 37: Age could be an indicator of more mature executives increased and improved, respectively. and experienced management Average educational attainment for top executives, at IPO Average age for top executives, at IPO and now and now
Educational Level 52 1-3 (BS - PHD) At IPO Now Pre IPO Post IPO 1.70 51 1.65
1.60 50 1.55
1.50 49 Age
1.45 48 1.40
1.35 47
1.30 46 1.25 Most senior management Second-most senior Third-most senior Top three most senior management management management
Note: Comprises 3 most senior executives as mentioned in company financial statements.
Source: Thompson Financials, HKEx, Goldman Sachs Strategy Research.
What if risk premium reverts to regional averages? At both macro and corporate levels, improving fundamentals seem to support a gradual reduction of equity risk premium (ERP) for Chinese stocks; the next question is how far it can recede and what level of gains it could potentially reward investors with who have faith in such structural changes.
68% potential gains if China’s implied equity risk premium (IERP) converges to regional standards. We conduct a sensitivity analysis to give us a rough estimate on the price impact if IERP converges to the regional averages. Taking MSCI China index constituents as our study sample, we estimate that the index could rise over 60%, if the IERP for Chinese stocks mean-revert to the regional levels, according to our dividends- discounted-model (DDM).
Although we think all key fundamental factors point to the positive side and should usher in a reduction in equity risk premium, the evolving process is likely to be gradual as it takes time for the market to fully appreciate the strong fundamentals of Chinese companies and adjust for its risk perception accordingly. Having said that, we would employ a rather conservative, yet somewhat arbitrary, assumption of 5% multiple expansion pa in our base-case to offset the potential market inertia.
32 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 38: MSCI China could trade above 60 if IERP converges to regional levels, offering 68% potential return Implied equity risk premium (IERP) sensitivity analysis for MSCI China
70 Consensus growth 5pp higher than consensus estimates in FY1 and FY2 65 5pp lower than consensus estimates in FY1 and FY2
60 68% potential price returns 55 if China's IERP converges to regional standard 50
45 Current IERP for
Index level Index MSCI China = 7.6% 40
35
30 Current IERP for regional market = 5.8% 25
20 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 IERP (%)
Source: Thompson Financials, HKEx, Goldman Sachs Strategy Research.
Goldman Sachs Global Strategy Research - May 15, 2006 33 Portfolio Strategy China
Liquidity: Favorable demand/supply
From the demand side, structural under-representation of Chinese equities in a global context, and the potential implementation of QDII scheme could be upside catalysts to Chinese equities. On the supply side, we think market concerns over a potential liquidity drain due to the expected arrival of several mega-IPOs seem overdone when dividend payments were taken into account. Rather, looking forward two years beyond 2006, we argue China could experience a shortage of large-scale fund-raising activities.
Demand-side analysis (1): Structural under-representation We discuss the equity weighting representation in the following two dimensions:
Equity weighting relative to global economic influence: We note that Chinese equities remain under-represented in the global equity universe relative to their global influence. We compare China’s global GDP shares (5.7% as of 2005 in dollar terms and fourth largest economy globally) versus its weighting in the MSCI World index (0.7%) with G7 countries and other BRIC countries.
We consent that one should not purely allocate portfolio weighting based on a country’s economic size, but given China's increasing influence on the global economy, the meaningful gap between its GDP weight and index weight, “the mark to market” effect should nevertheless attract more international liquidity to non-benchmark indexes, such as H-share and the domestic A-share market, as China continues to develop its equity market, in our view.
Exhibit 39: Chinese stocks appear underweight Exhibit 40: …as well as to the other BRIC countries compared with other major economies globally… Global GDP weight vs MSCI World index weight, BRIC Global GDP weight vs MSCI World index weight, G7 and countries China
GDP as % of global aggregate Index weight as % of MSCI World (%) (pp) (%) (pp) GDP as % of global aggregate Index weight as % of MSCI World 10 5 50 Under-representation (right scale) 10 Under-representation (right scale) 45 9 4.5 Under-represented 5 Under-represented 40 8 4 35 0 7 3.5 30 6 3 25 -5 Over-represented 5 Over-represented 2.5 20 -10 15 4 2 10 3 1.5 -15 5 2 1 0 -20 1 0.5 Italy China
Japan 0 0 France United Canada Kingdom Germany India Brazil China United States Russia
Source: MSCI, FactSet, IMF, World Economic Outlook Database, CEIC, Goldman Sachs Strategy Research.
Relative to benchmark allocation weighting: We observe that many traditional long- only emerging market funds and Asia ex-Japan focused funds have been gradually increasing their portfolio weights on Chinese stocks since the beginning of 2005, and
34 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
have moved to “slightly overweight” from previously “significantly underweight” China (see Exhibit 41).
We expect this trend to continue as we are aware that many newly established China- focused funds, as well as funds that are still underweight China, have already set aside large sums of money and intend to invest in Chinese stocks, according to our discussions with many investors and industry practitioners.
Together with potential further renminbi appreciation, increasing fund inflows from both existing long-only funds and newly formed China-dedicated funds should lead to further liquidity for Chinese stocks in the longer term, supporting our long-argued view that liquidity risks could be biased towards the upside.
Exhibit 41: Asia and emerging market funds are starting to increase their exposure in China and we expect this trend to continue Spread between benchmark weight and actual weight
(bp) Emerging market funds versus MXEM Asia ex Japan funds verus MXASJ 300 Asia funds have just started to 200 overweight China
100
0
(100) Red chips' inclusion (200) in MSCI universe
(300)
(400) Emerging market funds (500) are catching up
(600) Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05
Source: eMergingPortfolio.com, MSCI, FactSet, Goldman Sachs Strategy Research.
Demand side analysis (2): QDII—the vanguard for Chinese money The recently announced forex liberalization program from PBOC and SAFE could usher in the long-awaited QDII scheme, which, once implemented, could create additional demand for Chinese equities, although the initial impact would likely be gradual, yet long-lasting, given China’s huge foreign reserve of US$870bn. We believe there are three major sources of money potentially channeling through QDII:
• National Social Security Fund (NSSF). NSSF spokesmen have previously confirmed the national pension fund’s interests in investing 5%-10% of its total
Goldman Sachs Global Strategy Research - May 15, 2006 35 Portfolio Strategy China
assets, which could add up to US$1-US$2 bn, into Hong Kong listed Chinese stocks (Exhibit 42).
• Insurance money. Insurance companies’ AUM has already exceeded Rmb1.5 tn (~US$180 bn) and our China insurance analyst expects this to grow at 15%-20% p.a. for the next five years. Of that, we estimate 10%-15% could be invested in the equity market and a portion of that could be invested overseas through QDII.
• Commercial banks and asset management firms. According to the National Bureau of Statistics (NBS), foreign-currency-denominated deposits by domestic corporates and individuals currently stand at US$159 bn. We expect a meaningful portion of that could gradually come out from the domestic banking system to be invested overseas through QDII. We foresee massive potential of capital supply from retail deposits, which currently aggregate to Rmb16 tn (US$2 tn).
Exhibit 42: We estimate NSSF could potentially invest Exhibit 43: Insurers could invest their forex reserves— around US$2.6 bn through QDII in the initial phase US$6.3 bn at end 2005—in the overseas markets Total NSSF assets, 2001-2005 Total forex reserves, by company, 2005
Rmb bn Total assets US$bn Enterprise forex savings Household forex savings 250 160 Possible initial amount to be invested through QDII: US$2.6bn 140
200 120
100 150 80
60 100
40
50 20
0 0 Jun-02 Jun-03 Jun-04 Jun-05
2001 2002 2003 2004 2005 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Sep-02 Dec-02 Sep-03 Dec-03 Sep-04 Dec-04 Sep-05 Dec-05
Source: NSSF, Xinhuanet, Goldman Sachs Strategy Research. Source: Company data, Goldman Sachs Research estimates.
Supply-side analysis (1): US$36bn pipeline should not be a cause for worry An estimated amount of US$36bn of equity pipeline for Chinese stocks has raised much concern over a potential liquidity drain that could potentially impede market performance in the second half of 2006. The absolute amount of prospective equity issuance, which could amount to over US$36bn (see Exhibit 44), may seem daunting at first but its overall impact on liquidity movement would seem less worrisome when dividends paid by Chinese companies are brought into perspective. Our logic is as follows:
• The potential equity issuance pipeline, under current market estimates, could aggregate to US$36bn for 2006 (see Exhibit 44)
• It is estimated by market that aggregate China offshore companies could pay out around US$9.4bn of dividends
• Assuming the full amount of dividends paid by Chinese companies are to be reinvested in the new equity issue, we estimate that the new equity issuance will only
36 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
command fresh capital of around US$26.6bn, representing less than 5.3% of aggregate offshore Chinese companies’ listed market cap as of end-2005.
• The 5.3% spread, which we define as total fund-raised as a percentage of previous year market cap minus dividend yield, is not high from historical standards (see Exhibit 45).
• Moreover, we observe no significant correlation between amount of fund-raised and performance during that year (see Exhibit 46), reinforcing our view that corporate fundamentals and valuation levels are still the most important factors in driving price performance
Exhibit 44: Heavy equity issuance pipeline could amount to US$ 36bn in 2006 Prospective equity issuance in 2006
Amount (US$ Market Issuer Sector mn) Type of issue China Industrial & Commercial Bank of China Financials 10,000 IPO China China Merchants Bank Financials 1,290 IPO China Beijing Capital Group Conglomerate 1,000 IPO China China Coal Energy And Power 1,000 IPO China Aluminum Corp of China (Chalco) Materials 992 IPO Follow-on (legal person China Hainan Airlines Transportation 930 shares) China Shanghai Automotive Industry Materials 900 IPO China Shanghai International Port Group Infrastructure 800 IPO China Guangshen Railway Infrastructure 774 A-share IPO China Shui On Land Real Estate 750 IPO China Sinotrans (spin-off) Industrials 550 IPO China Changan Motor Industrials 500 IPO China China Guodian Energy And Power 500 IPO China China Harbour Engineering Materials 500 IPO China Jianlong Iron & Steel Materials 500 IPO China Shanghai Fosun High Technology (Group) Conglomerate 450 IPO China Shanghai International Airport Infrastructure 434 CB China Shanghai Port Container Infrastructure 434 Follow-on China Shenzhen Energy Group Energy And Power 400 IPO China Datang International Power Generation Energy And Power 397 IPO China Ningbo Port Group Infrastructure 375 IPO China China Blue Star Industrials 350 IPO China Guangzhou Baiyun International Airport Infrastructure 347 CB China BOE Technology Technology 323 IPO China North China Lines Transportation 300 IPO
Source: International Financial Review—Asian Equities Pipelines, Issue 1615, DataStream.
Goldman Sachs Global Strategy Research - May 15, 2006 37 Portfolio Strategy China
Exhibit 45: Potential funds to be raised do not seem Exhibit 46: We find no consistent pattern between worrisome based on the size of and dividend paid by amount of funds raised and equity performance Chinese stocks MSCI China index performance vs. funds raised during that Total NSSF assets, 2001-2005 year, 1996 -2005
(%) Spread ( Funds raised as % of starting year market cap - dividend yield) (US$bn) 100 50 Total funds raised (right-scale) 50 80 45 45 R2 = 0.02 40 US$36bn 40 60
35 35 40 30 30 20 25 25
20 20 0
15 15 -20 10 10 Listing of PetroChina Price returns for MSCIindex ChinaPrice (%) returns -40 and China Unicom 5 5 (total: US$8.7bn) Listing of China Mobile (US$4.2bn) 0 0 -60 0 1020304050
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Funds raised during the year as a % of starting-year market cap 2006E
Source: Datastream, I/B/E/S, MSCI, HKEx, Goldman Sachs Strategy Research.
Supply-side analysis (2): Could China be short of mega-IPOs from 2007 onwards? While the market is still concerned about the potential large-scale fund-raising activities in 2006, we take a step back and look forward two years beyond 2006. We did not attempt to forecast the equity issuance pipeline, given the issuer, size and timing are naturally unpredictable.
Nevertheless, looking across all major sectors, we argue that China could experience shortages of mega-IPOs for some time after 2006, given that the Chinese government has put most of its major, heavy-weight sectors into privatization. Having said that, we think the next wave of IPOs could be smaller in size, although the number could be high.
38 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Rmb appreciation: A big driver of investment returns
Our global currency analysts remain bearish on the US dollar (USD), and expect the Rmb to appreciate against the USD to Rmb7.34/US$1 over the next 12 months, representing over 9% of potential foreign exchange gains from current levels. We re-emphasize our view that further potential Rmb appreciation could be both structurally and tactically positive to Chinese equities and could provide significant returns to foreign investors.
Further Rmb appreciation seems inevitable Our global currency analysts believe that market expectations of lower policy rates in the US and monetary policy normalization in Euroland and Japan could trigger a structural USD decline in the near term.
In addition, our China economists believe the structurally undervalued Rmb will be subject to inevitable further appreciation pressure in the next few years, given it is the root cause of the potential aggravation of economy imbalances. The team forecasts Rmb appreciation against the USD as well as other major international currencies of 2%-28% (see Exhibit 47). Specifically, the team forecasts forex rates of Rmb7.85/US$1 (on a three-month horizon), Rmb7.67/US$1 (six months), and Rmb7.34/US$1 (12 months). This implies significant potential forex gains if investors choose to park their foreign currency in Rmb-denominated assets.
We accordingly forecast a conservative 3%-5% appreciation of the Rmb vs. the USD over the next 12 months, and the same amount of potential returns for Chinese equities.
Goldman Sachs Global Strategy Research - May 15, 2006 39 Portfolio Strategy China
Exhibit 47: Our Economics team expects the Rmb will strengthen against the USD, as well as most other major currencies, which would be positive for Chinese Appreication Appreication Currency Current 3-month 6-month 12-month Expected against USD match spot forecast forecast forecast appreciation $/¥ 112.3 110.0 102.0 95.0 18.2 $/CNY 8.0 7.9 7.7 7.3 9.1 $/PHP 51.5 51.0 49.0 48.0 7.3 $/MYR 3.8 3.7 3.6 3.6 5.6 $/SGD 1.6 1.6 1.5 1.5 4.7 $/TWD 31.6 32.0 31.3 30.5 3.6 $/RUB 27.1 27.4 26.7 26.3 3.0 EUR/$ 1.3 1.3 1.3 1.3 2.3 $/THB 37.7 38.5 37.5 37.0 1.9 $/KRW 940.0 975.0 950.0 925.0 1.6 $/HKD 7.8 7.8 7.8 7.8 (0.6) Depreication $/C$ 1.1 1.2 1.2 1.1 (0.9) against USD A$/$ 0.8 0.7 0.8 0.8 (1.3) $/MXN 11.0 10.8 11.0 11.3 (2.6) £/$ 1.9 1.8 1.8 1.8 (2.8) $/BRL 2.1 2.1 2.0 2.2 (6.8) NZ$/$ 0.6 0.6 0.6 0.6 (10.3) $/IDR 8,785.0 9,700.0 10,000.0 10,300.0 (14.7)
The table above shows currency acronyms in line with market conventions: $; US Dollar: ¥; Japanese Yen: EUR: Euro; £: British Pound: A$: Australian Dollar; BRL: Brazilian Real; C$: Canadian Dollar; CHF: Swiss Franc; CNY: Chinese Renminbi; HKD: Hong Kong Dollar; IDR: Indonesian Rupiah; ILS: New Israeli Shekel; INR: Indian Rupee; KRW: Korean Won; MXN: Mexican Peso; MYR: Malaysian Ringgit; NZ$: New Zealand Dollar; PHP: Philippine Peso; RUB: Russian Ruble; Singapore Dollar; TWD: Taiwan Dollar; THB: Thai Baht.
Source: Erwin, Goldman Sachs Economics Research.
Rmb appreciation: Fundamentally and tactically positive for Chinese equities Fundamentally, we think a further Rmb appreciation could benefit Chinese equities by: (1) lowering China’s equity risk premium; (2) increasing book values; and (3) boosting selected companies’ bottom lines (see Exhibit 48; refer to FocusChina: Rmb reval—Look beyond the surface, May 13, 2005, for more details).
Tactically, we observe that market expectations of further revaluation have largely been associated with favorable price reactions, depicted by the high correlation between the movements of the 12-month Rmb/USD non-deliverable (NDF) contract and H- share/MSCI China index performance (see Exhibit 49). We ascribe that phenomenon to:
• A price reflection of the incremental benefits that Chinese equities could realize from underlying currency appreciation
• Liquidity chasing assets with higher expected returns (expected currency gains) in a global context
40 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 48: Revisiting our framework: Potential Rmb revaluation could be positive for Chinese equities in three ways
Potential renminbi appreciation
Impact on company Impact on market
Balance Income statement sheet impact impact
One-time translation Revenue Costs gains / losses
Operating Investing Operating Financing First-order impact Increased Lower equity risk book values premium / re-rating
Margin Volume Second-order impact Market Price Industry Company Market Market leader / setter / structure position share size laggard? price taker?
Profitability
Positive to Chinese equities
Source: Goldman Sachs Strategy Research.
Exhibit 49: Equity performance and expectations for currency movements are highly correlated H-share index and MSCI China vs. 12-month Rmb NDF for past two years
7500 7.6 43 7.6 H-share index 12-month Rmb/US$ NDF MSCI China 12-month Rmb/US$ NDF 7000 7.7 7.7 38 6500 7.8 7.8 6000 33
5500 7.9 7.9 (Index level) (Index
(Index level) 28 5000 8 8 Rmb/US$ (Inverted scale) (Inverted Rmb/US$ 4500 scale) (Inverted Rmb/US$ Correlation = 0.78 23 Correlation = 0.82 8.1 8.1 4000
3500 8.2 18 8.2 Jul-04 Jul-04 Jul-05 Jul-05 Jan-05 Jan-05 Jan-06 Jan-06 Mar-05 Mar-05 Mar-06 Mar-06 Sep-04 Nov-04 Sep-04 Nov-04 Sep-05 Nov-05 Sep-05 Nov-05 May-04 May-04 May-05 May-05 May-06 May-06 Source: Bloomberg, Goldman Sachs Strategy Research.
Drawing on Japan and Korea’s experience Currency matters for long-term investors. In its inaugural BRICs report (Global Economics Paper: 03/99: Dreaming With BRICs: The Path to 2050, October 2, 2003), our global economists provided their long-term exchange rate projections. The team
Goldman Sachs Global Strategy Research - May 15, 2006 41 Portfolio Strategy China
projected that the real exchange rate for the Rmb could appreciate by close to 300% by 2050, averaging 2.5% increase p.a. Given that projection, we believe the long-term currency trend and the related investment gains in that Japan has experienced could provide useful guidance for the development of the Chinese equity market in the future.
In Japan, foreign currency gains have constituted a significant part of investment returns, making up almost 70% of the total USD-denominated returns for Japanese equities in the past 30 years, a phenomenon that we believe may be replicated in China (see Exhibit 50).
Please refer to China Strategy – Rmb reval: Look beyond the surface for more analysis for more details.
Exhibit 50: Drawing on Japan’s experience, we expect potential further renminbi appreciation to contribute a significant part of investment returns
2500 50 JPYLOC JPYUSD JPY/USDXrate (right scale)
Appreciation 100 2000
OverDepreciation-represented 150 1500
200
1000 250
500 300
Over 70% of total gains 0 350
Jan-73 Jan-75 Jan-77 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05
Source: DataStream, Goldman Sachs Strategy Research.
42 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Risks: Near-term correction possible but likely modest
We are aware of the possibility of a near-term correction, given that the market has gained 38% ytd, particularly as 2Q has been a bad quarter for Chinese equities in the past three years. We see four main risks to our bullish stock market outlook: (1) further domestic monetary tightening; (2) administrative measures to slow economic growth; (3) intensified Sino-US trade tension; and (4) a severe global recession. However, we believe none of these risks would pose a serious threat to the market. We believe a potential correction, if any, would be modest and would represent a good entry point, in line with the pattern of the past few years.
Several recent examples support our belief that the market is resilient:
• The H-share index closed down only 0.2% after opening down 3.5% on April 28 following the PBOC’s announcement that it was raising the benchmark lending rate by 27 bp to cool down economic growth.
• The market reclaimed all its lost ground and reached higher levels after dropping to 6,600 at the end of April amid concerns about further monetary tightening.
Market appears to have cushion against further domestic monetary tightening With the Chinese economy growing 10.2% in 1Q2006, investors are naturally concerned that there could be further interest rate hikes following the April 27 increase. While we do not rule out this possibility should economic growth remain strong, we believe it would not derail the bull trend for the equity market because:
• Corporate earnings growth should continue to be robust as any further interest rate hikes will only happen against the background of stronger-than-expected macro- economic growth.
• We believe the market has built in a cushion for up to 200 bp in potential further interest rate hikes given China still boasts the highest implied cost of equity at 12.6%, which we calculate using a 5% risk-free rate (against 3.1% from the current 10-year Rmb bond yield, see Exhibit 51). Although one might argue that the domestic bond yield may not be the appropriate risk-free proxy for offshore Chinese stocks investors, the gradual capital outflows from the domestic market to offshore markets, through the potential QDII scheme and retail domestic money, could support the case for adopting the Rmb 10-year bond yield as the risk-free rate.
For more details, see our note, China strategy: Interest rate hike could overshadow market performance in the short term but also lead to interesting buying opportunities, April 29, 2006.
Goldman Sachs Global Strategy Research - May 15, 2006 43 Portfolio Strategy China
Exhibit 51: The Chinese government’s bond yield is much lower than that of the US Yield curve, 3M-10Y
(%) US strip China sovereign 5.5
5
4.5
4
3.5
3
2.5
2
1.5
1 3 M6 M1 Y2 Y3 Y4 Y5 Y7 Y8 Y9 Y10 Y
Source: Bloomberg, Goldman Sachs Strategy Research.
Administrative measures to slow economic growth could be introduced We think fundamentals matter. Aside from monetary tightening, there are concerns that the government could introduce some administrative measures, as it did in May 2005, to specifically control investment in certain rapidly growing industries. The NDRC recently singled out the risk of overinvestment in industries such as aluminum, cement, and steel, and the Shenzhen municipal government has introduced regulations to tighten the local property market.
We do not dismiss the possibility of further administrative measures, particularly from some ministries and local governments, to further tighten the growth rate, but we believe such measures are not necessarily useful as the effects tend to be temporary and usually have some unintended consequences.
As Chinese economic dynamics have been increasingly driven by market forces, the merits of adopting a market-based approach to manage the economic cycle has been gaining currency among policy makers. Market-based policies tend to disrupt the allocation of resources less, and normally face lower resistance from targeted industries or local governments. More importantly, the associated social cost is much lower.
Past experience also shows that the effect of administrative measure tends to be temporary and/or curtailed, with targeted industries normally rebounding quickly driven by market forces, leading to price recovery or even outperformance for associated stocks. Property is a classic example, with the index advancing 2.5X since the government introduced severe sector-specific tightening measures on May 8, 2005 (see Exhibit 52).
44 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 52: Effects of administrative measures tend to be temporary, as exemplified by property stock prices MSCI China real estate index
350 PBOC raises MSCI real estate index benchmark rates 300
250
Driven by strong 200 housing demand
Property tightening 150 measures
Price index (index = 100 on 1/1/05) =index 100 Price (index 100
50 Jul-05 Apr-05 Apr-06 Oct-05 Jan-05 Jun-05 Jan-06 Feb-05 Mar-05 Feb-06 Mar-06 Aug-05 Sep-05 Nov-05 Dec-05 May-05 May-06
Source: MSCI, DataStream, Goldman Sachs Strategy Research.
Aggravated Sino-US trade tension is another market concern The intensification of the Sino-US trade dispute has been under the spotlight, given China’s rapidly growing trade surplus with the US (see Exhibit 53). The Shumer and Graham bill, which suggests imposing a 27.5% penalty tariff on Chinese imports if China does not allow the Rmb to appreciate significantly, also adds further macro uncertainty. However, we believe the mutual desire for the benefits of a healthy bilateral trade relationship should prevail over any calls for unilateral, value-destructive, protectionist measures.
Goldman Sachs Global Strategy Research - May 15, 2006 45 Portfolio Strategy China
Exhibit 53: Trade surplus with US has been rising steadily, underpinned by the fundamentally undervalued Rmb, in our view China’s trade surplus with US
US$mn Trade Surplus yoy growth (right-scale) (%) 14000 140
120 12000 100 10000 80
8000 60
6000 40
20 4000 0 2000 -20
0 -40 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 May-00 May-01 May-02 May-03 May-04 May-05
Source: CEIC, Goldman Sachs Strategy Research.
A severe global recession would be a risk to our bullish view Deepening inter-regional trade links and gradual decoupling from the US consumer could mitigate the magnitude of any external shock. We believe the Chinese economy will maintain its healthy growth, even if there is a consumption-led growth deceleration in the US economy due to the potential cooling of the US housing market, given that:
• Inter-regional trade linkages have deepened significantly over the past decade and could cushion any dramatic change in external demand (see Exhibit 54). The direct impact would be even less severe for Chinese-listed companies, as they generate most of their revenue from the domestic market (see Exhibit 55).
• China’s trade reliance on the US has declined gradually in recent years, as suggested by decreasing aggregate exports to the US from China (including re-exports through Hong Kong) (see Exhibit 56).
• China’s exported goods are generally highly price-competitive and could be less sensitive to changes in consumer demand in foreign countries, in particular the US.
46 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 54: Asia was China’s single-largest trading Exhibit 55: We estimate that a high proportion of sales partner in 2005 from listed Chinese companies is generated from the China’s foreign trade composition on a regional basis domestic market Offshore listed companies’ sales (by geography)
Oceania Korea 2% Europe North America 5% 24% 3.1% Taiwan 2% Japan Japan 1.3% 11% Singapore 2% Others, 4.0 Asia Malaysia 48% India1% China 1% 83.5% Americas Hong Kong 4.7% 16% Indonesia Asia Others 1% 3.5% Latin America Africa 6% 3% 2% Europe Thailand 22% 1% United Arab Emirates 1%
Note: Includes only companies with available geographical segment data in the Worldscope database for FY2004. Broad regional mappings are defined by Goldman Sachs Strategy Research based on Worldscope data.
Source: CEIC, Goldman Sachs Strategy Research. Source: FactSet, MSCI, Worldscope, Goldman Sachs Strategy Research estimates.
Exhibit 56: US’s share of aggregate China exports has been gradually declining China’s direct and indirect (Hong Kong re-exported) exported goods to the US
(%) HK's re-exported goods from China as % of total exports (including China's direct exports to US)
30 China's direct exports to US as % of total exports (including those re-exported from HK)
25
12.0 11.8 20 15.5 10.4 8.0 4.3 14.2 9.1 6.0 4.8 13.1 12.1 12.8
15
17.7 16.2 16.6 17.1 10 14.9 15.5 14.9 14.8 12.7 12.2 12.1 11.6 12.1
5
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: CEIC, Goldman Sachs Strategy Research.
Also, we believe the chance that a severe global recession will take place is low based on our Global Leading Indicator (GLI) which still shows that the global growth momentum
Goldman Sachs Global Strategy Research - May 15, 2006 47 Portfolio Strategy China
remains resilient. The positive signs from the GLI reinforce our view that equities, in general, could outperform bonds in the context of current healthy robust global growth conditions (see Exhibit 57).
Exhibit 57: Our GS GLI suggests that equities could still outperform bonds GS GLI and relative performance of equities versus bonds
(%) Relative performance of Global leading indicator (right-scale) (%) 50 equities vs. bonds 8
40 6 Equities outperform 30 4 20 2 10
0 0
-10 -2 -20 Equities underperform -4 -30 -6 -40
-50 -8
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Note: We use the world global bond index (total return index) and MSCI world equity index (US dollar) as proxies for bonds and equities performance, respectively.
Source: DataStream, Goldman Sachs Strategy Research.
However, if a global recession is initiated by external shocks, such as an oil supply disruption due to geo-political instability in the Middle East or an outbreak of avian flu, we believe the impact on the equity market would be broad-based and the Chinese equity market would inevitably suffer.
I, Thomas Deng, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
48 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Appendices Appendices
Goldman Sachs Global Strategy Research - May 15, 2006 49 Portfolio Strategy China
50 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Appendix 1: Earnings for H-share index (HSCEI)
Underlying universe for H-share index We choose to include all offshore-listed Chinese stocks in our analysis throughout most of this report, given that the H-share index does not broadly represent the spectrum of stocks and sectors and its constituents are instable. The problems with using the H-share index as a benchmark are:
• Instable universe. Given the rapid development of the Chinese equity market in the past decade, the sector weighting distribution time series has been affected by numerous and significant changes to the composition of the H-share index (see Exhibit 58).
• Skewed sectoral representation. Almost 70% of sector weightings are concentrated in the financials and energy sectors, making the H-share index a less representative proxy of fundamentals and price performance for broad-based Chinese stocks (see Exhibit 59).
• Selection bias. The H-share index does not include all Chinese companies that are incorporated overseas (red chips) and other non-government-owned private listed companies (P-chips).
Exhibit 58: Unstable universe makes historical Exhibit 59: Financials and energy make up almost 70% comparison at an index level less meaningful than it of the total index weightings appears Sector weighting as of May 10, 2006, by GICS sector Sector weighting distribution for H-share index, 1995-2006
Consumer Discretionary Consumer Staples Energy Telecommunication Utilities Financials Health Care Industrials Services 4% Consumer Discretionary Information Technology Materials Telecommunication Services 5% 2% Utilities Materials 100% 10%
90% Information Technology Energy 80% 1% 33% 70% Industrials 60% 9%
50%
40%
30%
20%
10%
0% Financials 36% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: MSCI, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
EPS growth for H-share index: A sector rotation story While we conduct our analysis largely based on aggregate offshore universe and MSCI China index constituents, we are aware that aggregate EPS growth of the index constituents remains the key driver of index performance. For this reason, we also examine bottom-up earnings growth expectations for each of the index constituents and account for the sector weighting, and our conclusions are as follows:
Goldman Sachs Global Strategy Research - May 15, 2006 51 Portfolio Strategy China
• After the impressive 2003-2004 earnings growth, mainly driven by oil stocks, earnings growth decelerated significantly in 2005, and the market is expecting further moderation from 2005 onwards (see Exhibit 60).
• The market still expects overall market earnings growth will remain at a high-single- digit to low-teen levels.
• The expected earnings growth slowdown in the energy sector is offset by robust market consensus earnings forecasts for the financials and telecoms sectors (see Exhibit 61), which together contribute over 40% of the index weight.
Exhibit 60: Market is expecting a moderation of Exhibit 61: Expected earnings growth deceleration earnings growth for H-share index from 2006 onward looks set to be offset by robust growth from financials H-share index (HSECI) earnings growth, 1995-2008E telecoms Sectoral earnings growth, by GICS sector, 2005P-2008E
(%) EPS growth (H-share index) (%) 2005P 2006E 2007E 2008E 100 60 79.6 80 50 Earnings growth 40 60 45.7 to moderate 30 40 34.2 26.6 20 16.5 20 12.0 6.6 8.7 7.7 10 - -
(20) (9.7) (12.1) (12.3) (10) (27.5) Driven by high (20) (40) oil prices (60) Energy Utilities
(61.4) Materials Financials Industrials Information Technology (80) Consumer Discretionary Services Consumer Staples Telecommunication 1995A 1996A 1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004A 2005P 2006E 2007E 2008E
Source: MSCI, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
52 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Appendix 2: Extrapolating earnings growth
Different samples to reduce sample error To quantify our top-down earnings estimates, we examine three different sample groups to reduce sample bias:
1. Industrial companies: The National Bureau of Statistics (NBS) compiles the fundamental data for all Chinese companies with net sales over Rmb5 mn. The sample size is around 260,000, most of which are unlisted companies.
2. Aggregate offshore-listed Chinese companies: Includes all H-share and red chips (according to the Hong Kong Stock Exchange’s definition) plus most of the non- state-owned companies (P-chips) listed in overseas market. The sample size is around 350.
3. Domestically listed companies: These are domestic A- and B-share companies listed on either the Shanghai or Shenzhen stock exchanges. The sample size is around 1400.
Extrapolating the R-squared Based upon our argument that corporate profitability and overall economy growth should follow a congruent path, we take one step forward to estimate the earnings effect (dependent variable) in response to different rates of economic growth (independent variable) from a pure top-down perspective. We concentrate our study on offshore-listed Chinese companies, on which most investors are focusing.
Earnings growth could reach 26% and 12% in 2006 and 2007, respectively. By keeping the coefficient constant and using our China economics team’s GDP forecasts as inputs, we estimate that aggregate earnings growth for the offshore-listed market universe will be 26% and 12% in 2006 and 2007, respectively (see Exhibits 62 and 63). Although these are just rough estimates, we think the earnings growth could overshoot our forecasts, given that:
• China could be at the sweet spot of growth and its GDP growth potential could even surpass our already-above-consensus forecasts.
• As more high-quality companies have gone public, profitability might increase faster than GDP growth, i.e., the slope of the regression line could increase.
Goldman Sachs Global Strategy Research - May 15, 2006 53 Portfolio Strategy China
Exhibit 62: EPS growth could reach 26% in 2006, Exhibit 63: …using the same logic, we estimate that according to our top-down extrapolation… EPS growth in 2007 could be at around 12% GDP growth versus EPS growth, 2001-2006E GDP growth versus EPS growth, 2001-2007E
60 60 R2 = 0.89 R2 = 0.89 50 50 Top-down extrapolation 40 based on 9.6% GDP 40 2006 EPS growth growth asummption extrapolation Top-down extrapolation 30 30 based on 9.1% GDP 26% EPS growth asummption 20 growth for 2006 20
10 10 12% EPS growth for 2007
0 earnings growth (%) Offshore 0 Offshore earnings Offshore growth (%) 8 8.5 9 9.5 10 10.5 8 8.5 9 9.5 10 10.5 -10 -10
-20 -20 GDP growth (%) GDP growth (%)
Source: CEIC, National Bureau of Statistics (NBS), Bloomberg, Wind, Goldman Sachs Strategy Research.
54 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Appendix 3: Sector-neutral valuation comparison
Skewed sector weightings to “average down” the valuations? One of the most frequently heard criticisms on Chinese stocks has been the sectoral skewness of the listed equity universe, where weightings are skewed towards low P/E sectors such as Energy and Telecoms. Some investors believe these two big-cap sectors, which make up almost half of the total index market cap (based on MSCI China adjusted market cap), tend to average down the valuations for the aggregate universe and make Chinese stocks appear “artificially cheap”
We are totally aware of the differences in sectoral representation from the two equity universes—aggregate China and MSCI APxJ index—with regional weighting leaning more towards financials and IT while that of China concentrating more on energy, financials, and telecoms (see Exhibits 64 and 65). We believe the distribution of sector weighting should be perceived as a reflection of social, economic, and capital market developments in different countries, rather than a proxy upon which investors should rely on when comparing investment attractiveness between heterogeneous equity markets.
Exhibit 64: Weightings for regional markets are more Exhibit 65: …whereas for China are more skewed concentrated on financials and IT… towards energy, financials, and telecoms MSCI APxJ index weighting, by GICS sector Aggregate offshore China free-float adjusted weighting, by GICS sector
Utilities, 4.7 Utilities, 3.5 Consumer Telecommunicatio Discretionary, 7.2 Consumer n Services, 5.8 Discretionary, 5.3 Consumer Staples, Telecommunication 4.6 Services, 13.6 Consumer Staples, 3.4 Materials, 12.4 Energy, 6.2
Materials, 4.6 Energy, 26.5
Information Technology, 4.7
Information Technology, 15.8 Industrials, 10.9 Financials, 33.1
Health Care, 0.4
Industrials, 10.0 Financials, 25.8 Health Care, 1.5
Source: MSCI, FactSet, Goldman Sachs Strategy Research.
However, to address investors’ concerns, we compare the relative weightings and valuations by sector between the aggregate China offshore universe and the regional benchmark.
According to our study, we find it difficult to accept the argument that China valuations appear “cheap” is mainly driven by the high representation of low-P/E sectors. Sectors that have higher representation in China relative to the region, that is energy and telecoms, do not seem to enjoy more favorable valuations compared to their regional peers. In contrast, sectors that are underweight in China relative to the benchmark, such as IT, financials, and consumer discretionary, are trading at relatively higher multiples and could drive up the aggregate valuations on a sector neutral basis (see Exhibit 66)
Goldman Sachs Global Strategy Research - May 15, 2006 55 Portfolio Strategy China
Exhibit 66: Contrary to common belief, heavy-weighted sectors in China do not seem to enjoy more favorable valuations relative to their regional peers Relative P/E and weightings, aggregate China offshore versus MSCI APxJ
60 Sectors that are underweight in Information China have higher P/Es than Technology regional peers 40
20 Consumer Financials Discretionary
Telecoms 0 Health Care Energy Industrials
Consumer Materials -20 Staples The two heavy-weighted sectors P/E premium/(discount) (%) P/E premium/(discount) do not seem to have lower -40 Information valuations than regional peers Technology
-60 -15 -10 -5 0 5 10 15 20 25 Weighting difference (pp): (China-regional)
Source: MSCI, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
Apple-to-apple comparison. We compare the valuations of China and the regional markets on a like-to-like basis by adjusting China’s weighting to the regional benchmark weighting. By controlling the difference in index weighting, we are able to gauge where China stands at various valuation metrics relative to the regional aggregate (ex-China) (see Exhibit 67).
We note that, except for appearing slightly expensive on a book-value based metric, which we thoroughly discuss in the previous section, Chinese stocks are generally comfortably valued in a regional context.
56 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy
Exhibit 67: China’s valuations still look reasonable in a regional context, even after adjusting for the skewed sector weighting Valuations for aggregate offshore China, post sector neutralization
Sector neutral weight Aggregate offshore China's valuations Cash based Earnings based Book-value based Aggregate 2006E MSCI APxJ offshore China 2006E 2006E 2006E EV/EBITDA 2006E 2006E EPS 2006E 2006E GICS sector weight (%) weight (%) D/Y (%) P/C (X) P/S (X) (X) P/E (X) growth (%) P/B (X) ROE (%) Consumer Discretionary 7.2 5.3 2.0 13.2 0.8 6.1 16.5 28.0 2.3 13.2 Consumer Staples 4.6 3.4 2.1 13.8 1.4 7.5 16.2 24.2 2.8 17.0 Energy 6.2 26.5 3.0 8.2 2.1 4.7 11.4 11.2 2.8 25.0 Financials 33.1 25.8 1.2 NA NA NA 18.4 13.0 2.6 14.2 Health Care 1.5 0.4 2.3 6.8 2.3 7.0 14.8 19.5 2.5 15.7 Industrials 10.0 10.9 2.5 9.7 1.5 8.9 14.5 -3.1 2.0 13.4 Information Technology 15.8 4.7 0.8 9.6 0.7 5.9 21.7 139.6 2.9 13.9 Materials 12.4 4.6 2.9 7.7 0.8 3.4 10.6 41.5 2.1 19.3 Telecommunication Services 5.8 13.6 2.8 5.6 2.4 4.2 14.1 7.8 2.4 16.6 Utilities 3.5 4.7 3.3 6.4 1.8 7.5 13.0 -0.8 1.6 12.6 100.0 100.0
Valuations summary Orginal - China 2.4 7.8 1.6 4.9 14.9 13.1 2.5 17.2 Sector neutral - China 1.9 9.2 1.3 5.9 16.4 35.7 2.5 15.5 Regional 3.1 10.1 1.7 9.2 14.3 15.1 2.1 16.2 Regional ex-China 3.1 10.9 1.9 9.9 14.7 13.7 2.3 16.9
Difference (China neutral over regional ex-China) -40.3 -15.8 -33.6 -40.6 11.6 159.6 6.6 -8.0 Favorable? х√√ √ х √ хх Source: MSCI, FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
Goldman Sachs Global Strategy Research - May 15, 2006 57 Portfolio Strategy China
Appendix 4: Are Chinese companies creating value?
ROE is improving but are Chinese companies creating “real” value? We observe a trend of ROE improvement across the board with increasing number of companies being able to generate higher returns to shareholders (see Exhibit 68). With only around a quarter of total companies being able to achieve higher than 15% ROE ten years ago, this number has increased substantially to around 40% and is expected by market to reach 45% by the end of 2008.
Exhibit 68: We observe a broad-based improvement in corporates’ ROE over the last decade ROE distribution by range, 1995A –2008E
<0 0 <= X < 5 5 <= X < 10 10 <= X < 15 15 <= X < 20 20 <= X < 25 25 <= X < 30 => 30 100%
90% Increasing levels of ROE of levels Increasing 80%
70%
60%
50%
40%
30%
20%
10%
0% 2005P 2006E 2007E 2008E 1995A 1996A 1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004A
More and more companies are able to achieve higher profitability than in the past
Source: FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research.
Chinese companies are value creators. Companies generating positive returns do not necessarily mean they are adding economic value to shareholders if their achieved ROEs are lower than their cost of equity (COE) required by shareholders.
We employ a very conservative COE of 12.9% to assess the proportion of value creators (ROE>COE) versus value destroyers (ROE 58 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy Exhibit 69: More and more companies are generating Exhibit 70: Big caps tend to generate higher economic economic values to shareholders values than the small caps Number of value creators versus value destructors, Value creators versus value destructors, by market cap, aggregate China offshore aggregate China offshore Value creator Value destructor Value creator Valuen destructor 100% 100% 90% 80% 80% 70% 60% 60% 50% 40% 40% 30% 20% 20% 10% 0% 0% 2005P 2006E 2007E 2008E 2005P 2006E 2007E 2008E 1995A 1996A 1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004A 1995A 1996A 1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004A Source: FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research. What are the value (ROE) drivers? We decompose the ROE into its five Dupont components (see Exhibit 71) and arrive at a conclusion that: 1. Consistent with our economists’ arguments, profitability for Chinese companies seems heavily reliant on operational efficiency and productivity (asset turnover), which shows significantly high correlation (96%) with the aggregate market ROE. 2. To a lesser extent than asset turnover, net margin also plays an important role in driving market ROE. 3. Leverage shows a negative correlation with market ROE, suggesting that Chinese companies are gradually de-levering and reducing their dependency on debt to finance their capital needs. Lower financial leverage also leads to decreasing interest burdens (higher percentage of EBT over EBIT). 4. Tax burden remains somewhat stable across time, reflecting the status quo of the current corporate income tax system, which was put in place in 1994. However, we believe a lower structural tax burden on the back of the proposed income tax reform could be a marginal driver for market ROE in 2008 given that the market is still embedding around 30% tax rate in its forecasts. Goldman Sachs Global Strategy Research - May 15, 2006 59 Portfolio Strategy China Exhibit 71: Asset turnover has been the main driver for improving corporates’ ROE Dupont analysis, 1995A-2008E EBIT/Sales Sales/Asset Asset/Equity EBT/EBIT NI/EBT A B C D E =A*B*C*D*E EBIT margin Asset Financial Interest Tax burden (%) turnover (X) leverage (X) burden (X) (X) ROE (%) 1995A 15.0 0.4 2.1 0.8 0.7 6.7 1996A 13.2 0.5 2.1 0.7 0.8 7.4 1997A 17.8 0.4 1.9 0.8 0.8 7.6 1998A 12.8 0.4 1.9 0.6 0.8 3.9 1999A 12.1 0.4 1.8 0.7 0.7 4.5 2000A 17.4 0.5 1.8 0.8 0.7 8.3 2001A 16.9 0.5 1.8 0.9 0.7 9.5 2002A 16.6 0.5 1.8 0.9 0.7 10.1 2003A 16.3 0.6 1.9 0.9 0.7 11.4 2004A 16.7 0.6 1.9 0.9 0.8 13.8 2005P 17.2 0.7 1.9 0.9 0.7 15.9 2006E 16.9 0.8 1.8 0.9 0.7 16.4 2007E 16.5 0.8 1.8 0.9 0.7 16.2 2008E 17.5 0.8 1.6 0.9 0.7 16.3 Correlation (1995A - 2008E) 0.67 0.96 (0.43) 0.88 (0.24) Source: FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research. 60 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy Appendix 5: Sector scorecard Exhibit 72: Sector outlook, GS China team sector preferences and longer-term thematic investment ideas at a glance GS China Industry team preference 2006 outlook Key issues/themes Stocks to buy Stocks to avoid w Downside risks outweigh potential upside drivers w Direction of jet fuel prices w Air China (0753.HK) w CEA (0670.HK) Airlines Cautious w High fuel cost remains a serious challenge w Capacity expansion outpacing demand growth w CSA (1055.HK) w Further potential Rmb reval could be positive for airlines w We expect China s airport sector to remain on a fast growth track in w Non-aeronautical revenue growth w BCIA (0694.HK) 2006 Positive / w w Airports We view China s aviation market as a tug-of-war between the large International and domestic tourism traffic Neutral players w Regulatory risks w We expect gradual rise of money/bond rates, which could benefit w ROE/ROA expansion potential w BoCom (3328.HK) w Hua Xia Bank liquid banks (600015.SS) w Banks with solid consumer banking franchise/exposure are likely to w Consumer banking development w CMB (600036.SS) w CCB (0939.HK) Banks Positive outperform peers w Compensation plan from share unification - unique catalysts for A- w SPDB (600000.SS) share banks w Unattractive risk/reward balance: higher feedstock costs and w Higher feedstock costs and lower demand growth w Sinochem (0297.HK) w Yizheng Chemical weaker demand (1033.HK) Chemicals Cautious w w Weakening pricing power leading to margin squeeze Capacity expansion leading to weakening pricing power w Working capital constraints may arise if plastic prices rise further w We argue that soft panel prices and robust domestic consumption w ASP enhancement and margin expansion are the keys w TCLM (1070.HK) w Skyworth Consumer - will stimulate LCD TV demand, hence boost blended ASPs (0751.HK) Neutral Electronics w We estimate that China's LCD TV demand will grow at a CAGR of w Industry restructuring 61% during 2006-2009 w Sales per store under pressure; inter-format competition w New housing formation growth w Parkson (3368.HK) w Wumart intensifying (8277.HK) Consumer - w w Neutral M&A activity increasingly likely as fragmented markets come under A balance of M&A and market share gains against format Retailing margin pressure competition, rising rentals, and falling sales/store w We expect a demand CAGR of 14% over 2004-2007 in the wine w Demand growth for wine is higher than that for beer w COFCO (0506.HK) w Dynasty industry (0828.HK) Positive / w w w Consumer - Wine Foreign players are likely to remain at the high end of the market Wine is a concentrated market, with top-three players account for Changyu B Neutral 46% market share (200869.SZ) w Foreign competition remains weak w Valuations/ROE appear more attractive for wine than beer w China Merchants (CM) and China Resources (CRE) are our top w Solid earnings growth in 2006 for CM on the back of its fast-growing w China Merchants picks in the sector ports network in China (0144.HK) w Ongoing momentum in CRE's restructuring w China Resources Conglomerates Neutral (0291.HK) w Domestic demand and consumption growth likely to be a key investment theme w Improved investment environment due to a potential upward shift of w Investment yield w Ping An (2318.HK) w China Life Positive / yield curve and increasing investment channels (2628.HK) Insurance w w Neutral We expect steady sector premium growth at 10% to 15% yoy in Strategic issues including potential shareholding changes, 2006 for both life and non-life introduction of foreign competition, government sell-down, M&A Note: The following stocks are covered by Gao Hua Securities and valuation estimates are from Gao Hua Securities Research: Beijing Capital International Airport by Bingchao Cao [email protected], 86-10-6535-3023; COFCO International, Dynasty Fine Wines Group, and Yantai Changyu Pioneer Wine by Yifan Deng, [email protected], 86-10-6535-3036; TCl Multimedia Technology by Cheryl Tang, [email protected]; 86-10-6535-3007. Other stocks and valuation estimates are Goldman Sachs Research coverage and estimates. Source: Goldman Sachs Research estimates, Gao Hua Securities Research estimates. Goldman Sachs Global Strategy Research - May 15, 2006 61 Portfolio Strategy China Exhibit 73: Sector outlook, GS China team sector preferences and longer-term thematic investment ideas at a glance GS China Industry team preference 2006 outlook Key issues/themes Stocks to buy Stocks to avoid w Aggregate advertising may improve in 2H w Computer game market is shifting from 2D to 3D w Tencent (0700.HK) w Baidu (BIDU) Internet Positive w Substantial downside risks to Chinese computer operating margins w Search-engine market appears attractive but we believe Baidu's w Sina (SINA) valuations seem stretched w Out-of-home media companies to benefit from increasing w Introduction of new regulation to allow foreign entities to own 100% w Beijing Media w Phoenix TV advertising growth and taking market share from traditional media of a PRC advertising company, subject to various conditions (1000.HK) (8002.HK) channels Media Neutral w w Recovery of property and auto advertising Travel and online recruiting markets appear attractive, but we believe company valuations seem full w Newspaper advertising to maintain 10% yoy growth w Risks of supply response high after 3 years of an upcycle w Sustainability of margins is the key theme to watch in 2006 w Jiangxi Copper w Yanzhou Coal (0358.HK) (1171.HK) Metals and mining Positive w We are bearish on coal, see more upside potential for base metals, w Cyclicality among different commodity sub-sectors w Magang (0323.HK) and are turning less bearish on cement w Another good year for oil equities due to continued cyclicality, w Potential policy responses to the heavy loss-making refining sector w PetroChina (0857.HK) resilient demand, and luckluster supply growth Positive / w w w Oil/Energy Favorable risk/reward balance The tipping point at which demand suffers due to rising oil prices Sinopec (0386.HK) Neutral w Domestic margins should improve in 2006 w Higher growth of property market in 2nd-tier cities than 1st-tier cities w Margin pressure is more imminent for developers expanding in 1st- w China Overseas Land tier cities (0688.HK) w Shenzhen could enjoy faster growth among 1st-tier cities w Continuing credit tightening w China Vanke (A) Property Positive (000002.SZ) w Price correction in Shanghai property market to continue in 2006 w Further reinforcement of tax collection w A tougher year for container shipping in 2006 due to exceptionally w US/Europe consumer consumption levels which drive container w Pacific Basin w CSCL (2866.HK) high base in 2005 demand (2343.HK) w We expect a soft landing for dry bulk shipping w Iron ore imports from China w China Cosco Shipping Neutral (1919.HK) w Capital management (dividend/buybacks) w Port congestion in China w We expect high PC shipment growth in 2006 w Growing PC penetration rate implies rapid overall market expansion w Foxconn International w SMIC (0981.HK) (2038.HK) Technology Neutral w Further price competition due to higher foreign competition in the w Lenovo's post merger performance w Lenovo (0992.HK) PC market w Challenging outlook for comm. tech and components owing to w Positive long-term growth potential for ZTE w ZTE (0763.HK) uncertainties of China 3G licensing w 3G license to be granted in 2H2006 w The potential industry restructuring and 3G licensing w China Unicom (0762.HK) Telecom services Neutral w Either China Telecom or China Mobile has to get a standalone TD- w Uncertainty over who will get the 3G license SCDMA license w China Unicom has to sell at least one of its two networks w Questions about how to break up China Unicom w Strong demand growth offset by rapid capacity additions w Significant disparity in utilization rate trends between provinces over w Guangdong Electric w Huaneng Power the next two years (000539.SZ) (0902.HK) w Utilization rate outlook for Eastern China appears most negative w Introduction of competitive scheme may put downward pressure on w Huadian Power Utilities Cautious tariffs (1071.HK) w Competitive bidding system is a potential threat to Chinese IPPs w Fall in coal prices on debottlenecking w Xinao Gas (2688.HK) Note: The following stocks are covered by Gao Hua Securities and valuation estimates are from Gao Hua Securities Research: China Overseas Land & Investment, China Vanke, by Yi Wang, [email protected], 86-10-6535-3022; Guangdong Electric Power Development, by Franklin Chow, [email protected]; 86-10-6535-3012; China Mobile (HK), China Netcom. China Telecom, China Unicom, by Hao Fei Chen, [email protected], 86-10-6535-3063. Other stocks and valuation estimates are Goldman Sachs Research coverage and estimates. Source: Goldman Sachs Research estimates, Gao Hua Securities Research estimates. 62 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy Appendix 6: Earnings movement at glance Exhibit 74: Sector/industry group/industry earnings momentum at a glance Price performance Earnings revisions - ytd (%) Earnings revisions - last 4 weeks (%) Price index Last 4 GICS Sector/Industry Group/Industry as of 5/8 Ytd (%) weeks (%) 2006E 2007E 2006E 2007E Energy 463.6 40.3 10.4 8.6 10.4 (0.2) 3.1 Materials 864.7 68.9 10.7 35.3 25.6 11.7 15.7 Chemicals 511.0 45.5 0.7 (2.5) (29.5) (4.3) (16.8) Construction Materials 161.4 68.1 44.7 14.7 22.9 16.1 29.9 Metals & Mining 1583.7 75.6 10.2 44.4 39.7 14.2 21.1 Industrials 128.7 25.0 3.1 (5.4) (6.2) (5.8) (1.6) Capital Goods 79.4 24.6 1.2 (1.1) (10.7) (0.8) (0.9) Electrical Equipment 66.7 24.6 (1.6) (0.8) (1.4) 1.3 0.0 Industrial Conglomerates 104.7 18.2 (1.7) 8.5 (9.1) (0.1) (1.1) Machinery 100.4 67.4 22.9 (31.3) (24.1) (6.5) (2.0) Transportation 395.6 25.2 4.2 (7.6) (3.8) (8.4) (2.1) Air Freight & Logistics 125.2 (11.1) (6.6) (4.9) (5.7) (5.6) 0.0 Airlines 369.0 20.0 5.2 (14.3) 3.8 (44.4) (1.0) Marine 788.7 3.8 (2.5) (12.4) (9.1) (7.7) (4.0) Road & Rail 455.8 44.1 5.6 (9.3) 6.9 (4.7) (9.0) Transportation Infrastructure 340.4 35.9 6.6 (2.8) (2.2) (2.6) (0.5) Consumer Discretionary 168.2 25.9 (1.6) (0.6) 1.0 (1.9) (5.4) Automobiles & Components 726.5 29.8 (2.1) 2.8 6.5 1.3 (7.1) Consumer Durables & Apparel 62.0 18.7 (4.2) (6.4) (9.6) (6.4) (7.8) Consumer Services 138.7 15.6 3.7 0.0 0.6 0.1 0.0 Retailing 212.2 27.0 (1.0) (1.6) 1.8 (4.1) (1.0) Consumer Staples 517.7 40.7 (3.3) 6.0 8.2 1.3 1.5 Food Beverage & Tobacco 448.1 40.7 (3.3) 6.0 8.2 1.3 1.5 Health Care 155.5 10.9 (4.9) (19.0) (19.1) (15.2) (7.0) Financials 276.2 52.7 5.2 5.7 8.4 3.6 2.8 Diversified Financials 78.2 49.2 (1.0) 10.5 0.0 0.1 0.0 Insurance 161.1 67.1 9.3 2.0 3.2 (0.8) 1.3 Real Estate 610.7 83.7 5.7 12.8 14.3 8.7 (0.6) Information Technology 71.7 3.4 (3.1) (16.0) (16.4) (11.4) (15.1) Software & Services 38.3 38.5 12.6 12.6 29.3 7.6 0.0 Technology Hardware & Equipment 90.7 (2.4) (5.5) (13.5) (9.0) (9.4) (1.3) Telecommunication Services 76.0 22.0 2.9 4.5 8.9 2.7 7.2 Diversified Telecommunication Services 190.8 (0.8) 1.0 (14.0) (9.9) (14.7) (10.5) Wireless Telecommunication Services 80.2 26.7 3.2 10.5 14.5 8.2 12.6 Utilities 328.8 18.8 8.9 (4.9) (1.4) (2.3) 1.1 MSCI China 39.3 34.6 5.4 1.9 2.1 0.4 0.4 Exhibit 75: Energy and financials have seen strong Exhibit 76: 12-month consensus forward earnings for CY2006 momentum in the past four weeks (%) telecom/energy companies raised in past four weeks Health Care Information Technology Information Technology Consumer Discretionary Industrials Health Care Utilities Utilities Consumer Discretionary Industrials (-) Negative (+) Positive Energy (-) Negative revisions (+) Positive revisions momentum momentum Financials Consumer Staples Consumer Staples Telecommunication Services Materials Financials Energy Materials Telecommunication Services -20 -15 -10 -5 0 5 10 15 (%) (Earnings -8 -3 2 7 12 17 revisions index) Source: MSCI, I/B/E/S, Datastream, Goldman Sachs Strategy Research. Goldman Sachs Global Strategy Research - May 15, 2006 63 Portfolio Strategy China Appendix 7: China in a regional context Exhibit 77: Chinese equities appear inexpensive compared with regional counterparts Index US$ bn US$ mn Close Index Avg daily Number Price/earnings (X) EPS growth (%) Price/book (X) EV/EBITDA (X) Dividend yield (%) Return on average equity (%) Market/region/sector 5/10/2006 cap turnover of stocks 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E MSCI market (local currency) Australia 1082 640.1 1723 84 18.0 15.9 14.9 20.8 13.6 6.5 3.6 2.8 2.6 11.2 10.2 9.6 3.7 3.8 4.1 18.7 19.8 17.9 China 39 173.3 991 77 15.3 13.6 12.6 17.9 12.7 7.2 2.7 2.2 2.0 7.6 6.6 6.0 2.5 2.7 2.9 18.3 18.2 16.5 Hong Kong 9028 189.9 536 41 16.4 16.1 16.0 15.3 3.2 0.1 2.0 1.6 1.6 9.9 13.0 11.8 3.2 3.2 3.4 11.9 11.4 10.0 India 513 132.3 266 64 23.3 21.1 18.2 19.1 18.2 14.9 4.7 4.0 3.6 14.5 12.5 11.9 1.1 1.4 1.4 22.3 21.5 20.9 Indonesia 2135 35.5 73 25 17.3 13.7 11.9 2.1 25.8 15.1 3.8 3.3 2.8 7.8 6.6 5.9 2.0 3.0 3.5 23.6 24.4 25.6 Japan 1064 3034.7 12702 369 22.5 20.3 18.4 36.4 11.8 10.1 2.2 2.0 1.9 9.4 9.5 8.8 0.9 1.0 1.1 10.9 10.8 10.6 Korea 412 362.3 1647 74 11.6 11.5 9.9 9.7 (0.5) 16.5 1.7 1.7 1.5 8.2 8.5 7.2 1.6 1.9 2.1 14.5 14.5 15.8 Malaysia 361 55.4 86 74 16.7 15.0 13.5 6.8 13.0 11.2 2.0 1.9 1.8 9.1 8.5 7.7 3.8 3.7 3.9 12.0 13.3 13.4 New Zealand 133 18.1 50 13 15.0 15.1 14.4 8.3 1.6 4.4 4.4 3.3 3.1 7.8 8.0 7.8 5.9 5.4 5.3 27.5 27.0 22.1 Pakistan 406 5.5 363 14 13.4 12.2 11.0 23.6 9.2 11.0 4.5 3.3 2.9 7.7 7.1 6.5 3.3 4.6 5.0 36.9 30.1 28.2 Philippines 525 9.7 13 18 17.2 16.0 13.7 22.2 7.2 17.1 2.6 2.1 1.9 8.3 8.6 8.0 2.4 2.4 2.9 17.3 15.1 14.4 Singapore Free 315 101.2 286 40 18.2 15.9 14.7 (7.2) 13.4 8.2 2.4 1.9 1.8 12.0 13.1 10.9 3.6 3.2 3.6 12.4 13.0 12.3 Sri Lanka 328 0.9 1 9 22.7 - - 75.6 - - 9.3 - - 14.0 - - 2.5 - - 54.1 - - Taiwan 308 282.5 1156 102 18.7 13.6 11.6 (21.0) 38.0 16.7 2.1 2.1 1.9 10.3 9.1 7.7 3.5 3.4 3.8 10.9 15.6 16.7 Thailand 316 34.3 126 40 11.7 11.2 10.5 3.8 4.6 6.8 2.6 2.2 1.9 11.5 11.0 10.2 3.7 3.8 4.1 23.0 21.3 19.7 Source: Datastream, I/B/E/S, MSCI, Goldman Sachs Research estimates. Exhibit 78: China has one of the highest implied equity risk premiums in a regional context Now Monthly average since Dec. 1994 Difference Potential Potential +/(-) if implied Index US$ implied US 10Y govt. US$ implied US$ implied Standard from monthly avg. Fair equity risk premium reverts close cost of equity bond yield risk premium risk premium deviation since Dec. 1994 Index to historical average Market/ region 5/10/2006 (%) (1) (%) (2) (%) (1) - (2) (%) (%) (SD) (X) Level (%) Australia 732.4 9.7 5.1 4.6 4.9 1.1 (0.2) 726.8 (0.8) China 38.4 12.5 5.1 7.4 7.5 2.6 (0.1) 36.6 (4.7) Hong Kong 6560.4 9.2 5.1 4.1 4.6 1.2 (0.4) 6329.2 (3.5) India 345.8 8.2 5.1 3.1 5.1 1.4 (1.4) 185.3 (46.4) Indonesia 382.4 10.0 5.1 4.9 7.3 3.5 (0.7) 259.5 (32.1) Korea 342.9 10.8 5.1 5.7 6.1 2.4 (0.2) 316.2 (7.8) Malaysia 248.5 10.4 5.1 5.3 4.7 1.6 0.4 330.8 33.1 Philippines 206.2 9.0 5.1 3.9 3.9 1.3 0.0 207.9 0.8 Singapore 398.6 10.2 5.1 5.1 4.8 1.5 0.2 466.0 16.9 Taiwan 281.0 12.1 5.1 7.0 4.6 1.8 1.3 471.3 67.7 Thailand 202.9 11.2 5.1 6.1 5.6 2.4 0.2 225.8 11.3 APxJ 363.5 10.5 5.1 5.4 5.3 1.6 0.1 384.4 5.7 AEJ/ NJA 415.0 10.4 5.1 5.3 5.1 1.7 0.1 454.7 9.6 FExJ 390.6 10.9 5.1 5.8 5.2 1.9 0.3 492.1 26.0 DM APxJ 1056.6 9.7 5.1 4.6 4.7 1.1 (0.1) 1105.1 4.6 EM Asia 343.5 10.6 5.1 5.5 5.2 1.9 0.2 373.3 8.7 Source: Consensus Economics, I/B/E/S, MSCI, Goldman Sachs Research estimates. Exhibit 79: Price performance for MSCI standard market Exhibit 80: Price performance for local market indexes indexes (local currency) (%) 1 Month Year-to-date (%) 1 Month Year-to-date 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 -5 -5 klci JCI India STI HSI SET TPX China Korea Japan AS51 Taiwan NZSE Free TWSE KOSPI HSCEI HSCCI Thailand Australia Malaysia PCOMP Indonesia HSMFCI Singapore SENSEX Philippines SZCOMP Hong Kong SHCOMP Source: Bloomberg, Goldman Sachs Strategy Research. 64 Goldman Sachs Global Strategy Research - May 15, 2006 Goldman Sachs Global Strategy Research -May 15, 2006 China Appendix 8: Index/sector valuation update Exhibit 81: Valuation summary of local Chinese equity indexes Index US$ bn US$ mn Close Index Avg daily Number Price/earnings (X) EPS growth (%) Price/book (X) EV/EBITDA (X) Dividend yield (%) Return on average equity (%) Market Index 5/10/2006 cap turnover of stocks 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E Local market indexes (local currency) HK/China HS Comp 2312.3 1153.82 1936.66 200 14.8 14.6 13.6 23.8 1.8 6.9 2.3 2.0 1.8 8.3 8.8 8.0 2.8 3.1 3.3 15.6 14.56 13.82 HS FFloat Comp 2468.1 546.31 1936.66 200 15.0 14.5 13.7 21.9 3.9 6.0 2.3 1.9 1.8 8.6 9.0 8.2 2.8 3.1 3.3 15.1 14.41 13.57 China HS H share 7361.7 111.70 670.85 37 15.3 13.8 13.0 17.2 11.2 5.8 2.6 2.3 2.0 6.8 6.0 5.6 1.9 2.5 2.6 18.6 17.79 16.42 HSCEI ex oils 72.87 484.66 32 16.8 15.4 14.2 12.4 9.3 8.2 2.5 2.2 2.0 6.5 5.6 5.1 1.5 2.1 2.3 15.8 15.18 14.67 HSCEI ex oils ex telcos 67.90 451.27 31 18.0 16.0 14.8 14.7 12.6 8.2 2.7 2.4 2.1 7.6 6.1 5.6 1.4 2.1 2.3 15.7 15.68 15.16 HS Red chip 2430.2 228.50 311.78 31 15.2 13.7 12.6 33.2 10.7 9.4 3.0 2.3 2.1 6.7 6.3 5.7 2.7 2.8 3.1 19.7 19.30 17.42 HSCCI ex oils 191.43 230.25 29 16.7 14.9 13.0 24.0 12.3 15.1 2.9 2.3 2.0 6.7 6.5 5.8 2.7 2.6 3.2 16.9 17.21 16.53 HSCCI ex oils ex telcos 49.44 113.51 26 16.9 16.5 13.5 20.7 2.5 22.9 2.2 1.9 1.7 13.0 13.9 11.2 4.2 2.2 2.7 11.4 12.30 13.51 HS ML FFloat 4086.4 226.82 1066.50 98 15.8 14.3 13.1 18.4 10.5 9.0 2.7 2.3 2.0 7.4 6.6 6.0 2.1 2.5 2.7 17.9 17.47 16.46 HSMFCI ex oils 168.68 793.82 90 17.5 15.9 13.9 11.2 10.2 14.0 2.6 2.2 2.0 7.7 6.8 6.0 1.9 2.2 2.6 14.9 15.05 15.11 HSMFCI ex oils ex telco 127.86 643.09 85 18.5 16.7 14.6 8.6 10.5 14.8 2.6 2.3 2.1 10.1 8.6 7.4 1.8 2.0 2.3 13.7 14.19 14.68 FX China 25 12220.0 82.67 828.60 25 15.5 13.9 13.2 20.4 11.6 5.0 2.5 2.2 1.9 6.9 6.4 6.0 3.0 2.7 2.9 17.6 17.11 15.55 FX A50 5116.7 46.67 429.54 49 15.6 14.8 12.6 4.0 8.1 17.6 2.3 2.0 1.8 7.2 6.0 5.0 2.4 2.6 3.0 14.5 16.84 17.35 FX 200 3743.3 89.90 914.31 195 17.7 15.2 12.9 11.6 14.1 18.0 2.2 2.0 1.8 8.7 6.8 5.7 2.4 2.6 3.0 12.9 15.77 16.39 FX 600 3190.3 140.05 1501.81 592 22.0 15.7 13.2 2.6 20.0 18.4 2.2 2.0 1.8 11.0 7.6 6.4 2.2 2.5 2.9 9.5 15.76 16.40 Source: FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research. Exhibit 82: Valuation summary of MSCI China Index US$ bn US$ mn Close Index Avg daily Number Price/earnings (X) EPS growth (%) Price/book (X) EV/EBITDA (X) Dividend yield (%) Return on average equity (%) Market/region/sector 5/10/2006 cap turnover of stocks 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E 2005P 2006E 2007E China ex oils 124.75 762.71 73 17.07 15.36 13.59 11.89 11.15 12.72 2.56 2.16 1.94 8.18 7.10 6.24 2.34 2.38 2.75 15.15 15.42 15.00 China ex oils ex telcos 91.0 636 71 17.8 15.9 14.1 8.9 11.9 12.6 2.4 2.1 1.9 10.2 8.4 7.2 2.4 2.2 2.5 13.2 14.0 13.9 MSCI China (local currency) GICS sector and industry Energy 453 48.5 229 4 12.1 10.4 10.7 30.6 15.5 (2.4) 3.0 2.4 2.0 6.6 5.8 5.7 3.0 3.5 3.4 27.1 25.4 20.7 Materials 859 9.9 98 8 17.9 11.5 12.1 (13.5) 55.0 (4.5) 2.5 2.2 1.9 9.2 5.5 5.6 2.2 2.8 2.9 15.9 21.0 16.9 Chemicals 506 1.7 27 2 52.6 16.8 19.6 (80.3) 213.9 (14.4) 1.6 1.4 1.3 11.7 7.1 9.4 1.7 1.7 1.8 3.0 8.8 6.9 Construction materials 159 0.9 3 1 54.0 27.5 19.6 (59.1) 96.1 40.1 - 3.4 3.0 12.5 8.1 6.6 0.4 0.7 1.1 - - 16.2 Metals and mining 1574 7.3 68 5 14.5 10.1 10.6 16.2 43.4 (5.1) 2.9 2.4 2.0 8.4 5.0 5.0 2.5 3.3 3.4 22.2 26.2 20.7 Industrials 128 21.9 88 21 14.4 14.1 13.6 9.8 1.8 4.4 1.8 1.7 1.5 10.4 9.4 8.2 5.4 3.0 3.2 12.5 12.3 11.9 Capital goods 79 7.6 30 7 14.5 13.5 13.9 5.5 7.5 (2.8) 1.5 1.5 1.4 10.2 10.1 9.2 3.2 3.1 3.2 11.0 10.9 10.2 Transportation 394 14.3 57 14 14.3 14.5 13.4 12.1 (1.1) 8.4 2.1 1.8 1.7 10.4 9.1 7.8 6.4 2.9 3.1 13.6 13.4 13.0 Consumer discretionary 168 8.8 47 11 19.4 15.3 13.0 (21.1) 26.2 18.1 1.4 1.8 1.6 12.3 9.5 8.1 2.0 2.0 2.4 3.5 8.1 13.2 Automobiles and components 721 3.9 24 5 19.7 13.4 11.6 (36.8) 47.1 16.1 0.7 1.7 1.5 14.6 9.8 8.3 2.4 1.9 2.3 (4.6) 2.4 13.7 Consumer durables and apparel 62 1.4 6 3 22.5 14.9 11.6 (20.6) 51.8 27.5 2.0 1.7 1.6 10.5 7.6 6.4 1.4 2.0 2.6 9.2 12.5 14.2 Hotels restaurants and leisure 135 0.7 4 1 16.7 14.0 11.8 (37.6) 19.0 18.7 1.2 1.1 1.1 10.5 10.6 8.5 2.9 3.4 3.9 7.1 8.5 9.5 Retailing 214 2.8 13 2 18.3 20.2 17.4 28.9 (9.3) 16.0 8.2 2.5 2.2 9.3 10.4 9.0 1.8 1.8 2.1 37.5 41.1 13.4 Consumer staples 519 3.6 15 5 18.0 15.1 12.0 (0.8) 19.4 25.7 2.4 2.3 2.4 12.0 9.8 9.0 1.3 1.6 2.0 17.5 17.2 15.1 Food beverage and tobacco 449 3.6 15 5 18.0 15.1 12.0 (0.8) 19.4 25.7 2.4 2.3 2.4 12.0 9.8 9.0 1.3 1.6 2.0 17.5 17.2 15.1 Health care 153 0.1 0 1 12.9 11.9 10.1 (36.0) 8.8 18.0 0.9 0.8 0.7 5.5 5.7 5.2 0.0 3.1 3.2 6.8 6.9 7.5 Financials 276 35.6 332 12 20.5 20.2 16.6 41.9 1.8 21.3 3.2 2.8 2.5 12.1 14.2 9.0 0.7 1.5 1.9 16.3 15.4 16.0 Banks 177 15.4 181 2 17.3 18.0 15.7 14.3 (3.9) 14.8 3.0 2.7 2.4 - - - 0.7 2.1 2.4 19.8 15.7 16.3 Diversified financials 77 0.4 6 1 24.6 24.5 23.3 - 0.5 5.3 1.5 1.4 - - - - - 0.9 0.9 6.4 5.9 - Insurance 161 14.2 101 3 35.0 25.4 21.2 42.3 37.5 19.8 3.9 3.5 3.0 - - - 0.5 0.8 1.0 12.0 14.5 15.1 Real estate 570 5.5 44 6 13.2 16.7 11.8 150.1 (20.8) 41.6 2.9 2.1 1.8 12.1 14.2 9.0 1.5 2.0 3.0 17.6 18.3 16.6 Information technology 70 4.7 27 6 25.8 18.2 13.2 (25.6) 41.7 37.9 1.8 1.6 1.5 7.4 5.7 4.6 1.5 1.7 2.1 7.0 9.4 11.9 Software and services 40 0.4 0 1 18.2 18.7 15.2 19.9 (2.4) 22.9 2.7 2.4 2.1 7.9 7.6 6.3 2.1 2.2 2.6 15.6 13.5 14.8 Technology hardware and equipment 88 3.2 19 4 15.4 14.0 10.8 9.5 10.4 29.4 2.5 2.1 1.9 9.4 7.4 5.8 2.0 2.2 2.8 19.1 16.5 18.4 Telecommunication services 74 33.8 126 2 15.4 14.1 12.5 19.6 9.5 13.0 3.1 2.4 2.1 5.8 5.3 4.8 2.3 2.8 3.3 20.8 19.4 18.2 Diversified telecommunication services 186 4.7 33 1 8.6 9.8 9.1 (0.8) (12.4) 8.0 1.3 1.1 1.0 4.1 4.1 3.9 2.7 2.8 3.0 16.2 12.2 11.5 Wireless telecommunication services 78.28 29.06 92.88 1 17.71 15.16 13.26 28.38 16.80 14.31 4.07 3.01 2.61 6.60 5.80 5.15 2.21 2.80 3.41 23.08 22.84 21.09 Utilities 324.30 6.44 30.34 7 13.83 13.52 11.62 11.44 2.30 11.07 2.16 1.59 1.45 9.54 8.27 6.77 3.04 3.45 3.87 15.04 13.92 13.09 Source: FactSet, I/B/E/S, Worldscope, Goldman Sachs Strategy Research. Portfolio Strategy Strategy Portfolio 65 66 Strategy Portfolio Goldman Sachs and Gao Hua China coverage (101 in total, 17 domestically-listed companies) Exhibit 83: Company basics Potential Absolute price change (%) Relative to MSCI China (%) Rating/ valuation 20D avg. coverage Quoted Last Price upside/ value traded Market cap. Free float 1W 1M 3M 1Y YTD 1W 1M 3M 1Y YTD Ticker Company view Analyst currency (05/10/2006) (down-side) (US$mn) 52 wk high 52 wk low (US$mn) (%) change change change change change change change change change change Airlines 753 HK Air China OP/C Julie Lim HKD 3.65 (8.2) 6.0 3.7 2.3 4442 24.2 9.0 19.7 37.7 32.7 47.5 5.3 14.8 20.3 (20.8) 13.6 1055 HK China Southern Airlines IL/C Julie Lim HKD 2.05 17.1 2.2 2.7 1.9 1157 26.8 3.5 (9.9) (10.9) (21.2) (7.9) (0.1) (14.8) (28.3) (74.7) (41.7) 670 HK China Eastern Airlines IL/C Julie Lim HKD 1.15 14.8 2.1 1.4 1.0 722 32.2 4.5 (8.0) (8.7) (20.7) (6.5) 0.9 (12.9) (26.2) (74.2) (40.4) Airports 694 HK Beijing Capital International Airport OP/N Bingchao Cao HKD 4.88 5.7 3.3 4.9 2.7 2419 35.0 3.2 3.7 18.9 68.1 37.3 (0.5) (1.1) 1.4 14.6 3.4 000089 CH Shenzhen Airport IL/N Bingchao Cao CNY 8.28 (5.8) 7.7 9.0 6.1 827 36.0 3.0 11.1 25.8 6.4 29.0 (0.7) 6.3 8.4 (47.1) (4.9) 600009 CH Shanghai International Airport IL/N Bingchao Cao CNY 12.69 (7.0) 24.2 17.6 11.4 3054 39.3 3.8 10.3 (21.0) (24.5) (12.0) 0.2 5.5 (38.4) (78.0) (45.9) 600004 CH Guangzhou Baiyun International Airport IL/N Bingchao Cao CNY 6.32 7.6 3.4 8.7 5.9 789 45.1 5.7 1.4 (6.5) (11.7) (6.5) 2.0 (3.4) (24.0) (65.3) (40.4) Banks HK-listed 3328 HK Bank of Communications IL/A Ning Ma HKD 5.15 1.4 51.3 5.2 2.8 30432 11.8 7.3 5.1 17.0 NA 46.1 3.6 0.2 (0.4) NA 12.2 939 HK China Construction Bank IL/A Ning Ma HKD 3.58 (3.3) 158.6 3.8 2.3 103629 11.4 4.4 2.9 10.0 NA 32.4 0.7 (2.0) (7.5) NA (1.5) 183 HK CITIC International Financial Holdings IL/A Darwin Lam, CFA HKD 4.48 11.7 25.1 4.9 2.8 1846 46.2 (2.2) (7.7) 40.9 45.5 55.7 (5.8) (12.6) 23.5 (8.0) 21.8 349 HK ICBC (Asia) IL/A Darwin Lam, CFA HKD 11.90 2.5 7.1 12.4 9.5 1721 42.5 2.1 (2.1) 16.7 22.1 25.3 (1.5) (6.9) (0.8) (31.5) (8.6) A-shares 600000 CH Shanghai Pudong Development Bank OP/A Ning Ma CNY 10.86 39.7 18.2 12.2 6.5 5310 23.0 0.0 0.0 (3.6) 58.1 11.4 (3.6) (4.9) (21.1) 4.5 (22.5) 600036 CH China Merchants Bank OP/A Ning Ma CNY 7.65 (0.9) 64.8 7.7 4.9 11732 38.3 6.4 15.0 8.2 36.2 26.2 2.8 10.2 (9.3) (17.4) (7.6) 000001 CH Shenzhen Development Bank IL/A Ning Ma CNY 8.39 (31.1) 10.2 8.4 5.5 2039 72.0 6.5 29.7 35.5 37.8 36.6 2.8 24.8 18.1 (15.8) 2.8 600015 CH Hua Xia Bank U/A Ning Ma CNY 5.68 (23.8) 50.4 6.1 3.6 2979 28.6 0.0 1.2 8.8 43.4 19.8 (3.6) (3.6) (8.6) (10.1) (14.0) Conglomerates 1199 HK COSCO Pacific IL/N Mike Warren HKD 17.65 (9.3) 11.6 18.5 12.3 5,012 47.8 (4.3) 10.3 11.7 6.0 24.3 (8.0) 5.4 (5.8) (47.5) (9.6) 144 HK China Merchants Holdings IL/N Mike Warren HKD 27.05 (22.4) 13.6 27.5 13.8 7,957 44.6 (0.4) 9.5 33.9 73.4 60.5 (4.0) 4.6 16.4 19.9 26.7 363 HK Shanghai Industrial IL/N Edward Chan HKD 17.35 (2.0) 3.8 18.2 13.6 2,166 43.3 1.5 (0.6) 7.8 9.5 7.4 (2.2) (5.4) (9.7) (44.1) (26.4) 392 HK Beijing Enterprises Holdings IL/N Edward Chan HKD 15.95 6.6 2.3 17.6 9.9 1,281 48.0 (7.8) (5.6) 12.3 59.5 21.8 (11.5) (10.5) (5.1) 6.0 (12.1) 267 HK CITIC Pacific IL/N Mike Warren HKD 25.55 1.8 19.2 28.6 19.7 7,227 45.9 (4.8) (3.0) 14.8 14.8 19.1 (8.5) (7.9) (2.6) (38.7) (14.8) 291 HK China Resources Enterprise OP/N Mike Warren HKD 17.70 7.3 8.7 17.8 10.5 5,099 45.1 2.3 4.4 6.3 57.3 27.8 (1.3) (0.4) (11.2) 3.8 (6.1) Consumer Electronics 1070 HK TCL Multimedia Technology OP/N Cheryl Tang HKD 1.19 37.8 1.6 1.5 1.1 599 31.4 0.0 (7.8) (15.6) (21.7) 6.3 (3.6) (12.6) (33.1) (75.2) (27.6) 751 HK Skyworth Digital U/N Cheryl Tang HKD 1.12 (16.1) 2.2 2.7 1.1 329 59.7 (4.3) (11.8) (18.8) (58.9) (58.9) (7.9) (16.7) (36.3) (112.4) (92.8) 600839 CH Sichuan Changhong IL/N Cheryl Tang CNY 3.26 (8.9) NA 4.5 3.1 773 65.2 6.5 (24.4) (25.1) (19.7) (14.0) 2.9 (29.2) (42.5) (73.2) (47.9) Food and Beverage 1068 HK China Yurun Food Group IL/N Yifan Deng HKD 6.35 5.5 4.1 6.7 3.3 1,189 32.3 2.4 (2.3) 8.5 NA 46.8 (1.2) (7.2) (8.9) NA 12.9 PFH SP People's Food Holdings IL/N Yifan Deng SGD 1.23 13.8 0.7 1.4 0.8 887 42.4 (4.7) (3.1) 8.9 10.8 15.0 (8.3) (8.0) (8.6) (42.7) (18.9) 506 HK COFCO International IL/N Yifan Deng HKD 4.90 2.0 4.6 5.2 2.8 1,112 31.5 2.6 0.0 7.1 49.6 42.0 (1.0) (4.9) (10.4) (3.9) 8.2 828 HK Dynasty Fine Wines Group U/N Yifan Deng HKD 3.30 (9.1) 0.6 3.7 2.5 530 31.3 5.6 (4.3) (5.0) 13.8 14.8 2.0 (9.2) (22.5) (39.7) (19.1) 200869 CH Yantai Changyu Pioneer Wine IL/N Yifan Deng HKD 26.80 (4.1) 0.9 26.8 10.3 1,785 46.2 4.7 8.6 48.8 126.0 102.4 1.1 3.7 31.3 72.4 68.5 Insurance 2328 HK PICC Property and Casualty Company OP/A Philippa Rogers, CFA HKD 2.90 10.3 12.3 3.5 1.7 4,169 21.1 0.0 (2.5) 13.7 43.2 30.3 (3.6) (7.4) (3.7) (10.3) (3.5) 2628 HK China Life Insurance Company IL/A Philippa Rogers, CFA HKD 11.75 (9.0) 107.8 11.8 5.0 40,572 NA 9.3 12.4 44.2 121.7 71.5 5.7 7.6 26.7 68.2 37.7 oda ah lblSrtg eerh-May 15, 2006 Goldman Sachs Global Strategy Research - 2318 HK Ping An Insurance Group IL/A Philippa Rogers, CFA HKD 23.90 (10.4) 20.9 23.9 12.1 19,101 21.4 8.6 3.7 40.2 87.5 67.1 5.0 (1.2) 22.7 33.9 33.3 Internet SINA US SINA Corporation OP/N James Mitchell, CFA USD 28.45 1.9 31.9 30.8 21.8 1,511 58.2 (1.2) 6.7 27.2 (0.5) 17.8 (4.9) 1.8 9.7 (54.1) (16.1) SOHU US Sohu.com IL/N James Mitchell, CFA USD 28.60 1.4 17.4 28.6 15.1 1,052 37.7 3.1 11.0 29.2 67.5 55.9 (0.6) 6.1 11.7 14.0 22.1 SNDA US Shanda Interactive Entertainment IL/N James Mitchell, CFA USD 12.79 32.9 10.0 40.4 12.4 904 24.0 (0.6) (5.3) (18.9) (61.9) (16.1) (4.3) (10.2) (36.4) (115.4) (50.0) NTES US Netease IL/N James Mitchell, CFA USD 22.20 (22.3) 68.0 24.8 12.1 2,893 48.8 4.8 (2.8) 23.3 76.4 58.1 1.2 (7.7) 5.9 22.9 24.2 IT services 696 HK TravelSky Technology OP/C Jean-Louis Morisot HKD 9.85 19.7 0.6 9.9 6.1 1,129 65.0 6.5 11.9 34.0 52.7 37.8 2.8 7.1 16.6 (0.8) 3.9 Media 1000 HK Beijing Media IL/N Kit Low HKD 9.90 41.4 0.1 19.6 9.1 252 17.9 (1.0) (25.6) (27.5) (45.5) (7.0) (4.6) (30.4) (44.9) (99.0) (40.9) FMCN US Focus Media OP/N Kit Low USD 68.80 4.7 30.4 68.8 17.8 3,387 39.3 10.6 12.8 25.3 NA 103.7 6.9 8.0 7.9 NA 69.9 700 HK Tencent Holdings OP/N James Mitchell, CFA HKD 15.80 (8.2) 9.1 15.8 5.3 3,598 42.0 1.6 12.9 59.6 182.1 90.4 (2.0) 8.0 42.1 128.6 56.5 8002 HK Phoenix Satellite Television U/N Kit Low HKD 1.41 (18.4) 2.7 1.5 0.9 898 16.5 (0.7) (2.8) 27.0 (4.1) 51.6 (4.4) (7.6) 9.6 (57.6) 17.7 BIDU US Baidu.com, Inc. U/A Anthony Noto USD 61.38 NA 45.1 122.5 45.2 2,123 NA 4.1 6.9 24.5 NA (2.4) 0.5 2.1 7.0 NA (36.3) CTRP US Ctrip.com International IL/N Kit Low USD 48.97 (22.4) 13.7 49.0 20.5 1,563 57.2 8.1 13.3 58.9 134.3 69.6 4.4 8.4 41.5 80.8 35.7 JOBS US 51job, Inc. IL/N Kit Low USD 23.72 (32.5) 1.9 25.2 10.7 660 23.8 (2.0) 20.0 38.6 61.4 61.4 (5.6) 15.1 21.1 7.8 27.5 100 HK Clear Media IL/N Kit Low HKD 10.00 (14.0) 0.5 10.0 6.1 647 36.8 1.5 4.2 40.8 53.8 58.7 (2.1) (0.7) 23.4 0.3 24.9 Note: The following stocks are covered by Gao Hua Securities and valuation estimates are from Gao Hua Securities Research: Beijing Capital International Airport, Guangzhou Baiyun International Airport, Shanghai International Airport, Shenzhen Airport, by Bingchao Cao [email protected], 86-10-6535-3023; COFCO International, China Yurun Food Group, Dynasty Fine Wines Group, People’s Food Holdings, and Yantai Changyu Pioneer Wine by Yifan Deng, [email protected], 86-10-6535-3036; Beijing Capital Land, China Overseas Land & Investment, China Resources Land, China Vanke, Guanghzhou R&F, Shanghai Forte Land, by Yi Wang, [email protected], 86-10-6535-3022; GD Power Development, Guangdong Electric Power Development, Guangdong Investment, Shanghai Municipal Raw Water, Shenergy Company, Tianjin Capital Environmental Protection by Franklin Chow, [email protected]; 86-10-6535-3012; China Mobile (HK), China Netcom. China Telecom, China Unicom, by Hao Fei Chen, [email protected], 86-10-6535-3063; TCl Multimedia Technology, Skyworth Digital, Sichuan Changhong, by Cheryl Tang, [email protected]; 86-10-6535-3007. Other stocks and valuation estimates are Goldman Sachs Research coverage and estimates. Source: Bloomberg, Goldman Sachs Research estimates, Gao Hua Securities Research. China China Goldman Sachs Global Strategy Research -May 15, 2006 China Exhibit 84: Company basics Potential Absolute price change (%) Relative to MSCI China (%) Rating/ Last Price valuation 20D avg. coverage Quoted as of upside/ value traded Market cap. Free float 1W 1M 3M 1Y YTD 1W 1M 3M 1Y YTD view Analyst currency 05/10/2006 (down-side)(US$mn) 52 wk high 52 wk low (US$mn) (%) change change change change change change change change change change Ticker Company Metals and mining 1088 HK China Shenhua Energy IL/N Song Shen HKD 15.85 (16.7) 33.5 15.9 7.3 36,990 18.8 8.6 16.1 47.4 NA 85.4 4.9 11.3 30.0 NA 51.5 600019 CH Baoshan Iron & Steel OP/N Song Shen CNY 4.36 26.1 19.3 5.2 3.8 9,536 70.8 3.3 3.3 5.3 (14.8) 5.8 (0.3) (1.5) (12.1) (68.4) (28.1) 600005 CH Wuhan Iron and Steel IL/N Song Shen CNY 2.72 17.6 6.8 3.9 2.5 2,663 24.2 3.0 (2.2) (5.6) (21.2) 0.4 (0.6) (7.0) (23.0) (74.7) (33.5) 1171 HK Yanzhou Coal Mining U/N Song Shen HKD 7.15 (41.8) 12.4 7.4 4.8 4,537 35.5 3.6 2.9 15.3 6.4 43.7 (0.0) (2.0) (2.1) (47.1) 9.8 2600 HK Aluminum Corporation of China IL/N Song Shen HKD 7.50 (5.3) 23.0 8.7 3.9 10,692 22.3 (1.3) (11.8) 0.7 77.5 27.1 (5.0) (16.6) (16.8) 24.0 (6.8) 347 HK Angang New Steel IL/N Song Shen HKD 7.05 2.1 7.2 7.9 3.5 5,396 32.8 2.2 0.0 28.2 64.9 68.9 (1.5) (4.9) 10.7 11.4 35.0 323 HK Maanshan Iron & Steel OP/N Song Shen HKD 2.88 47.8 6.8 3.3 2.3 2,394 36.8 (0.9) 3.6 7.5 3.6 19.8 (4.5) (1.3) (10.0) (49.9) (14.1) 914 HK Anhui Conch Cement IL/N Song Shen HKD 15.75 (7.9) 3.2 16.1 6.7 2,551 50.4 16.2 41.9 35.2 128.3 64.9 12.6 37.0 17.7 74.7 31.0 358 HK Jiangxi Copper OP/N Song Shen HKD 9.15 3.8 23.6 9.6 3.4 3,417 43.4 8.9 29.8 95.7 142.4 149.0 5.3 24.9 78.3 88.9 115.1 Oil and chemicals 857 HK PetroChina OP/N Kelvin Koh, CFA HKD 9.35 (7.0) 128.5 9.6 4.7 215,943 10.0 5.6 10.7 24.7 93.8 47.2 2.0 5.8 7.2 40.3 13.4 883 HK CNOOC IL/N Kelvin Koh, CFA HKD 6.45 3.1 70.4 6.9 4.1 34,176 29.4 0.8 4.9 (1.5) 47.4 22.9 (2.9) 0.0 (19.0) (6.1) (11.0) 386 HK China Petroleum and Chemical IL/N Kelvin Koh, CFA HKD 5.25 (23.8) 72.9 5.5 2.8 58,724 22.6 4.0 9.9 15.4 68.0 36.4 0.3 5.1 (2.1) 14.5 2.5 1033 HK Sinopec Yizheng Chemical Fibre U/C Kelvin Koh, CFA HKD 2.10 (50.0) 16.8 2.3 1.0 1,084 35.0 (9.7) 0.0 7.1 53.3 25.0 (13.3) (4.9) (10.3) (0.2) (8.9) 338 HK Sinopec Shanghai Petrochemical IL/C Kelvin Koh, CFA HKD 4.55 (39.6) 22.8 5.0 2.3 4,226 30.9 (1.1) 1.1 19.7 54.2 52.9 (4.7) (3.8) 2.3 0.7 19.1 297 HK Sinochem Hong Kong Holdings OP/C Kelvin Koh, CFA HKD 2.93 29.9 10.6 3.6 1.2 2,192 25.8 (8.6) 4.5 58.1 NA 103.1 (12.2) (0.4) 40.6 NA 69.2 2883 HK China Oilfield Services Limited U/N Kelvin Koh, CFA HKD 4.45 (32.6) 6.7 4.8 2.5 2,294 38.4 0.0 10.6 11.9 66.4 42.4 (3.6) 5.7 (5.5) 12.8 8.5 Property 688 HK China Overseas Land & Investment OP/N Yi Wang, CFA HKD 5.65 14.3 18.9 5.9 1.3 4,649 40.0 13.0 9.7 47.7 270.5 69.9 9.4 4.8 30.3 216.9 36.0 2337 HK Shanghai Forte Land IL/N Yi Wang, CFA HKD 3.70 19.5 4.5 4.4 1.9 1,207 34.8 (2.6) (11.9) 8.0 66.3 39.6 (6.3) (16.8) (9.4) 12.8 5.7 1109 HK China Resources Land U/N Yi Wang, CFA HKD 5.35 (0.9) 8.5 6.1 1.1 2,148 34.5 7.0 (9.3) 34.6 259.1 65.9 3.4 (14.2) 17.1 205.5 32.0 2868 HK Beijing Capital Land U/N Yi Wang, CFA HKD 3.38 (5.2) 3.1 4.2 1.6 752 39.5 10.7 (8.8) 6.3 66.7 48.4 7.0 (13.6) (11.2) 13.1 14.5 69 HK Shangri-La OP/A Carmen Tang, CFA HKD 14.25 3.9 4.0 14.9 10.3 4,646 56.9 2.2 2.9 14.9 21.3 10.0 (1.5) (2.0) (2.5) (32.3) (23.8) 000002 CH China Vanke (A) OP/N Yi Wang, CFA CNY 6.93 36.9 42.5 7.0 2.9 3,222 84.3 11.2 1.5 37.0 82.0 60.8 7.6 (3.4) 19.5 28.5 26.9 2777 HK Guangzhou R&F Properties IL/N Yi Wang, CFA HKD 48.90 (12.3) 9.6 48.9 11.0 4,815 28.0 15.9 17.0 44.0 NA 81.1 12.2 12.1 26.6 NA 47.2 Retailing 589 HK Ports Design IL/N Manning Doherty HKD 13.00 (11.5) 1.1 13.3 5.2 911 38.0 7.9 10.6 19.3 145.3 44.4 4.2 5.8 1.8 91.8 10.6 980 HK Lianhua Supermarket IL/N Manning Doherty HKD 9.15 5.6 1.3 10.5 6.9 734 32.8 5.2 (3.7) (4.2) 10.9 26.2 1.5 (8.5) (21.6) (42.6) (7.7) 8277 HK Wumart Stores IL/N Manning Doherty HKD 27.60 5.1 1.3 30.1 12.0 1,086 37.2 10.2 (5.0) 20.0 118.2 73.3 6.5 (9.9) 2.5 64.7 39.4 3368 HK Parkson Retail Group IL/N Manning Doherty HKD 22.65 14.8 3.9 27.0 12.0 1,613 24.6 (10.7) (11.9) 15.3 NA 61.8 (14.3) (16.7) (2.2) NA 27.9 503 HK China Paradise IL/N Manning Doherty HKD 2.83 38.1 3.9 4.3 2.3 790 48.2 9.7 (21.0) (21.0) NA 2.7 6.1 (25.8) (38.4) NA (31.2) Utilities HK-listed 991 HK Datang International Power Generation IL/N Stephen Oldfield HKD 5.80 5.2 10.6 6.2 4.9 3,863 27.7 3.6 12.6 4.5 (5.7) 1.8 (0.1) 7.8 (13.0) (59.2) (32.1) 1071 HK Huadian Power International OP/N Stephen Oldfield HKD 2.28 18.7 1.7 2.4 1.9 1,767 33.2 1.1 11.0 1.1 (2.2) 14.9 (2.5) 6.1 (16.3) (55.7) (19.0) 902 HK Huaneng Power International U/N Stephen Oldfield HKD 5.85 (14.5) 12.1 6.0 5.0 9,098 25.0 2.6 9.3 11.4 0.0 14.7 (1.0) 4.5 (6.0) (53.5) (19.2) 836 HK China Resources Power IL/N Stephen Oldfield HKD 6.40 (7.8) 5.0 6.6 4.0 3,144 27.8 5.8 13.3 29.3 54.2 46.3 2.1 8.4 11.8 0.7 12.4 2688 HK Xinao Gas Holdings IL/N Stephen Oldfield HKD 7.70 (2.6) 3.9 8.0 4.4 982 57.1 6.9 2.0 35.1 75.0 25.2 3.3 (2.9) 17.6 21.5 (8.7) 2380 HK China Power International IL/N Stephen Oldfield HKD 2.83 (15.0) 2.4 2.8 2.4 1,143 36.3 6.6 5.6 8.7 4.6 10.8 3.0 0.7 (8.8) (48.9) (23.1) 1065 HK Tianjin Capital Environmental Protection IL/N Franklin Chow, CFA HKD 1.90 10.5 1.1 3.1 1.7 474 34.0 0.5 (10.6) (8.4) (26.9) 3.8 (3.1) (15.5) (25.9) (80.5) (30.1) 270 HK Guangdong Investment IL/N Franklin Chow, CFA HKD 3.38 3.7 4.8 3.7 2.1 2,422 37.4 0.7 (8.8) (0.7) 51.7 16.4 (2.9) (13.6) (18.2) (1.8) (17.5) A-shares 000539 CH Guangdong Electric Power Development OP/N Franklin Chow, CFA CNY 4.48 13.8 3.2 5.6 3.8 1,474 44.3 13.4 12.6 10.1 (6.3) (6.3) 9.8 7.7 (7.4) (59.8) (40.2) 600795 CH GD Power Development IL/N Franklin Chow, CFA CNY 6.69 4.6 5.7 7.3 5.2 1,895 26.0 9.5 12.8 7.0 10.9 7.4 5.8 8.0 (10.4) (42.6) (26.5) 600649 CH Shanghai Municipal Raw Water IL/N Franklin Chow, CFA CNY 5.08 0.4 NA 6.1 4.2 1,196 29.8 6.9 (14.6) (13.0) 7.2 (4.3) 3.3 (19.5) (30.5) (46.4) (38.2) 600642 CH Shenergy U/N Franklin Chow, CFA CNY 6.48 (13.6) 7.7 7.8 4.8 2,177 30.3 15.1 23.7 17.4 (5.7) 17.0 11.5 18.8 (0.1) (59.2) (16.9) 600900 CH China Yangtze Power IL/N Stephen Oldfield CNY 6.97 0.4 28.4 8.7 6.4 7,126 29.5 7.6 8.1 3.3 (16.0) 0.7 3.9 3.2 (14.2) (69.6) (33.2) Technology 981 HK SMIC IL/N Donald Lu HKD 1.19 13.4 10.6 1.8 1.0 2,806 NA 0.8 0.0 (4.0) (23.2) 13.3 (2.8) (4.9) (21.5) (76.8) (20.5) 903 HK TPV Technology IL/N Helen Huang HKD 8.35 (28.1) 5.5 9.8 4.8 1,524 43.9 (3.5) (6.7) (9.2) 74.9 9.9 (7.1) (11.6) (26.7) 21.3 (24.0) 2038 HK Foxconn International Holdings IL/N Henry King HKD 18.00 1.7 16.5 18.0 4.9 16,085 26.2 6.8 11.8 45.7 263.6 42.3 3.2 6.9 28.3 210.1 8.4 992 HK Lenovo Group IL/N Henry King HKD 2.78 22.5 10.4 3.9 2.3 3,155 41.9 (3.5) (9.0) (9.0) 8.8 (22.4) (7.1) (13.9) (26.5) (44.7) (56.3) 763 HK ZTE Corporation OP/N Donald Lu HKD 29.65 14.7 6.0 32.9 21.3 3,670 52.0 11.9 (7.3) 1.4 15.9 13.6 8.2 (12.2) (16.1) (37.7) (20.3) Telecom services 941 HK China Mobile (HK) IL/N Hao Fei Chen HKD 46.60 (14.2) 181.1 46.8 26.3 118,632 21.4 4.8 3.3 28.6 67.9 27.0 1.2 (1.5) 11.1 14.4 (6.9) 762 HK China Unicom OP/N Hao Fei Chen HKD 7.80 2.6 9.7 7.8 5.9 12,653 22.5 9.9 15.6 21.9 22.8 23.8 6.2 10.7 4.4 (30.7) (10.1) 728 HK China Telecom IL/N Hao Fei Chen HKD 2.83 0.9 38.2 3.2 2.5 29,496 10.5 0.9 0.9 (4.2) 2.7 (0.9) (2.8) (4.0) (21.7) (50.8) (34.8) 906 HK China Netcom IL/N Hao Fei Chen HKD 15.45 (10.0) 16.7 15.5 10.4 13,142 18.2 8.0 11.2 23.6 43.7 23.1 4.4 6.3 6.1 (9.8) (10.8) Transportation 1138 HK China Shipping Development IL/A Julie Lim HKD 5.95 26.1 6.8 7.1 5.2 2,553 49.0 (1.7) (7.0) 0.0 (16.2) 4.4 (5.3) (11.9) (17.5) (69.7) (29.5) 1919 HK China COSCO Holdings IL/A Julie Lim HKD 3.83 9.8 3.3 4.2 3.0 3,030 36.5 (6.1) 4.1 3.4 NA 11.7 (9.8) (0.8) (14.1) NA (22.2) 2866 HK China Shipping Container Lines IL/A Julie Lim HKD 2.50 22.0 4.8 3.7 2.4 1,945 NA 1.0 (5.7) (12.3) (31.0) (7.4) (2.6) (10.5) (29.7) (84.6) (41.3) 2343 HK Pacific Basin Shipping OP/A Jean-Louis Morisot HKD 3.48 29.5 3.5 4.1 3.3 568 64.0 3.7 0.7 (0.7) (3.5) (3.5) 0.1 (4.1) (18.2) (57.0) (37.4) 316 HK Orient Overseas International OP/A Jean-Louis Morisot HKD 31.30 8.6 6.3 38.1 23.7 2,527 32.2 6.1 11.6 3.8 (17.6) 19.0 2.5 6.7 (13.6) (71.2) (14.9) Water Treatment Systems SINO SP Sinomem Technology OP/N Christina Hee, CFA SGD 0.92 18.5 3.0 1.1 0.6 271 30.0 (4.2) 2.2 17.2 37.3 30.5 (7.8) (2.6) (0.3) (16.2) (3.4) Note: The following stocks are covered by Gao Hua Securities and valuation estimates are from Gao Hua Securities Research: Beijing Capital International Airport, Guangzhou Baiyun International Airport, Shanghai International Airport, Shenzhen Airport, by Bingchao Cao [email protected], 86-10-6535-3023; COFCO International, China Yurun Food Group, Dynasty Fine Wines Group, People’s Food Holdings, and Yantai Changyu Pioneer Wine by Yifan Deng, [email protected], 86-10-6535-3036; Beijing Capital Land, China Overseas Land & Investment, China Resources Land, China Vanke, Strategy Portfolio Guanghzhou R&F, Shanghai Forte Land, by Yi Wang, [email protected], 86-10-6535-3022; GD Power Development, Guangdong Electric Power Development, Guangdong Investment, Shanghai Municipal Raw Water, Shenergy Company, Tianjin Capital Environmental Protection by Franklin Chow, [email protected]; 86-10-6535-3012; China Mobile (HK), China Netcom. China Telecom, China Unicom, by Hao Fei Chen, [email protected], 86-10-6535-3063; TCl Multimedia Technology, Skyworth Digital, Sichuan Changhong, by Cheryl Tang, [email protected]; 86-10-6535-3007. Other stocks and valuation estimates are Goldman Sachs Research coverage and estimates. 67 Source: Bloomberg, Goldman Sachs Research estimates, Gao Hua Securities Research. 68 Strategy Portfolio Exhibit 85: Forecast summary EPS (calendarized) DPS (calendarized) Sales (calendarized) Net profit (calendarized) EBITDA Net debt Rating/ (quoted currency) (quoted currency) (mn of quoted currency) (mn of quoted currency) (calendarized) (calendarized) coverage Ticker Company view 2005 2006E 2007E CAGR 2005 2006E 2007E 2005 2006E 2007E CAGR 2005 2006E 2007E CAGR 2005 2006E 2007E CAGR 2005 2006E 2007E CAGR Airlines 753 HK Air China OP/C 0.18 0.22 0.27 (0.13) 0.03 0.04 0.05 36,754 42,337 48,414 NA 1,619 2,096 2,512 NA 6,583 7,664 9,959 NA 26,429 33,094 37,788 NA 1055 HK China Southern Airlines IL/C (0.20) (0.02) 0.04 NM 0.00 0.00 0.00 37,510 43,609 50,667 0.5 (883) (82) 153 NM 3,641 4,799 7,635 0.5 43,425 56,915 66,254 0.5 670 HK China Eastern Airlines IL/C 0.01 (0.03) 0.06 (0.26) 0.00 0.00 0.00 25,585 29,780 34,767 0.3 47 (130) 272 (0.3) 2,825 3,105 5,151 0.2 30,397 44,810 52,420 0.5 Airports 694 HK Beijing Capital International Airport OP/N 0.23 0.25 0.30 0.26 0.08 0.09 0.11 2,997 3,050 3,384 0.1 849 973 1,153 0.3 1,776 1,943 2,297 0.2 236 (791) 1,033 NM 000089 CH Shenzhen Airport IL/N 0.45 0.47 0.53 0.27 0.27 0.24 0.26 1,013 1,069 1,182 0.1 362 377 420 0.3 530 550 606 0.1 (725) (824) (1,000) NM 600009 CH Shanghai International Airport IL/N 0.72 0.83 0.91 0.17 0.00 0.21 0.23 2,681 3,307 3,780 0.3 1,389 1,603 1,754 0.2 1,729 2,133 2,447 0.3 (492) 4,815 10,100 NM 600004 CH Guangzhou Baiyun International Airport IL/N 0.25 0.31 0.39 0.17 0.10 0.09 0.10 2,149 2,427 2,662 0.3 252 310 388 0.2 867 1,054 1,203 0.4 2,552 3,408 3,967 NM Banks HK-listed 3328 HK Bank of Communications IL/A 0.21 0.27 0.35 1.45 0.08 0.11 0.14 NA NA NA NA 9,098 12,560 15,816 2.2 NA NA NA NA NA NA NA NA 939 HK China Construction Bank IL/A 0.23 0.21 0.22 (0.05) 0.03 0.08 0.09 NA NA NA NA 46,416 46,583 49,542 0.0 NA NA NA NA NA NA NA NA 183 HK CITIC International Financial Holdings IL/A 0.35 0.28 0.34 0.09 0.17 0.14 0.17 1,971 2,150 2,335 0.0 1,103 1,005 1,623 0.3 NA NA NA NA NA NA NA NA 349 HK ICBC (Asia) IL/A 0.91 0.95 1.03 0.17 0.53 0.57 0.62 2,033 2,393 2,673 0.3 981 1,060 1,155 0.2 NA NA NA NA NA NA NA NA A-shares 600000 CH Shanghai Pudong Development Bank OP/A 0.65 0.93 1.16 0.52 0.13 0.19 0.22 NA NA NA NA 2,558 3,631 4,524 0.5 NA NA NA NA NA NA NA NA 600036 CH China Merchants Bank OP/A 0.36 0.44 0.57 0.34 0.08 0.12 0.16 NA NA NA NA 3,749 5,456 7,057 0.5 NA NA NA NA NA NA NA NA 000001 CH Shenzhen Development Bank IL/A 0.15 0.30 0.46 0.64 0.00 0.00 0.00 NA NA NA NA 286 580 886 0.6 NA NA NA NA NA NA NA NA 600015 CH Hua Xia Bank U/A 0.33 0.41 0.50 0.43 0.11 0.07 0.10 NA NA NA NA 1,401 1,734 2,106 0.4 NA NA NA NA NA NA NA NA Conglomerates 1199 HK COSCO Pacific IL/N 1.19 1.06 1.20 0.22 0.56 0.61 0.69 2,298 2,531 3,504 0.3 2,604 2,330 2,637 0.2 2,249 2,567 2,974 0.2 5,115 7,150 8,189 0.4 144 HK China Merchants Holdings IL/N 1.08 1.16 1.35 0.19 0.50 0.54 0.63 3,097 3,396 4,191 0.3 2,364 2,648 3,084 0.2 766 1,186 1,620 0.7 7,329 10,446 10,753 NM 363 HK Shanghai Industrial IL/N 0.99 1.04 1.24 (0.08) 0.55 0.55 0.55 5,294 5,703 5,965 0.3 958 1,010 1,201 (0.1) 1,241 1,365 1,513 0.3 (3,328) (1,461) (192) NM 392 HK Beijing Enterprises Holdings IL/N 0.92 0.61 0.82 0.01 0.30 0.30 0.30 11,001 9,791 7,797 (0.1) 570 382 512 0.0 1,543 1,597 1,655 0.0 (81) (1,075) (1,842) NA 267 HK CITIC Pacific IL/N 1.82 2.39 1.57 (0.02) 1.10 1.10 1.10 26,564 27,564 28,081 0.1 3,989 5,249 3,437 (0.0) 3,152 3,675 3,603 0.1 18,615 19,005 23,348 0.4 291 HK China Resources Enterprise OP/N 1.02 0.87 1.00 0.15 0.38 0.43 0.50 53,584 59,486 64,862 0.2 2,220 1,934 2,242 0.2 3,644 4,135 4,639 0.2 (1,858) 3,351 2,953 (0.2) Consumer Electronics 1070 HK TCL Multimedia Technology OP/N (0.12) 0.08 0.13 0.06 0.00 0.01 0.01 37,205 41,960 55,519 0.5 (356) 321 508 0.3 (53) 869 1,157 0.2 1,566 1,046 545 (0.5) 751 HK Skyworth Digital U/N 0.18 0.06 0.07 (0.35) 0.06 0.01 0.01 10,466 10,190 10,641 0.1 403 128 149 (0.3) 182 186 296 (0.2) (116) (365) (516) NM 600839 CH Sichuan Changhong IL/N 0.13 0.17 0.22 NM 0.00 0.00 0.00 15,028 20,370 22,264 0.4 285 334 423 NM 783 872 1,015 NM 56 (473) 107 (0.6) Food and Beverage 1068 HK China Yurun Food Group IL/N 0.33 0.37 0.44 0.56 0.09 0.11 0.13 4,314 5,835 7,832 0.8 348 532 632 1.0 428 590 813 0.6 (1,035) (795) (640) NA PFH SP People's Food Holdings IL/N 0.13 0.14 0.16 0.21 0.07 0.07 0.06 1,498 1,721 1,984 0.2 144 155 175 0.2 179 219 249 0.2 (29) (116) (101) NM 506 HK COFCO International IL/N 0.24 0.29 0.34 0.45 0.09 0.11 0.13 17,588 19,410 21,093 0.1 429 511 599 0.4 889 1,013 1,209 0.3 2,018 2,000 1,677 0.1 828 HK Dynasty Fine Wines Group U/N 0.15 0.15 0.17 (0.05) 0.06 0.06 0.07 947 1,125 1,374 0.3 179 187 208 0.1 231 247 293 0.1 (762) (838) (812) NM 200869 CH Yantai Changyu Pioneer Wine IL/N 0.75 0.93 1.12 0.60 0.68 0.78 0.95 1,633 2,090 2,499 0.4 303 376 454 0.6 442 562 680 0.5 (1,125) (994) (999) NM Insurance 2328 HK PICC Property and Casualty Company OP/A 0.10 0.19 0.24 3.57 0.07 0.07 0.10 NA NA NA NA 1,123 1,996 2,592 3.4 NA NA NA NA NA NA NA NA 2628 HK China Life Insurance Company IL/A 0.34 0.41 0.54 0.47 0.05 0.06 0.10 NA NA NA NA 9,386 10,959 14,542 0.4 NA NA NA NA NA NA NA NA 2318 HK Ping An Insurance Group IL/A 0.67 0.94 1.18 0.50 0.20 0.28 0.35 NA NA NA NA 4,262 5,863 7,310 0.6 NA NA NA NA NA NA NA NA Internet SINA US SINA Corporation OP/N 0.82 0.86 1.21 (0.05) 0.00 0.00 0.00 194 213 282 0.2 43 46 65 (0.0) 54 51 76 (0.0) (201) (242) (296) NM SOHU US Sohu.com IL/N 0.82 0.81 1.07 0.04 NA NA 0.32 108 141 174 0.3 30 30 39 0.1 32 39 49 0.1 (53) (87) (118) NM SNDA US Shanda Interactive Entertainment IL/N 0.28 0.52 0.90 (0.07) 0.00 0.00 0.00 241 212 289 0.3 21 38 63 (0.0) 89 38 73 (0.0) (118) (150) (251) NM NTES US Netease IL/N 0.88 0.99 0.95 0.51 NA NA NA 202 261 302 0.6 117 130 126 0.5 127 158 157 0.6 (316) (451) (588) NM IT services oda ah lblSrtg eerh-May 15, 2006 Goldman Sachs Global Strategy Research - 696 HK TravelSky Technology OP/C 0.58 0.57 0.68 0.18 0.22 0.23 0.27 1,450 1,658 1,935 0.2 513 508 608 0.2 702 791 937 0.3 (830) (2,167) (2,479) NM Media 1000 HK Beijing Media IL/N 0.08 0.61 0.83 (0.19) 0.38 0.24 0.33 831 982 1,139 (0.0) 16 120 163 (0.1) 54 127 164 (0.2) (1,343) (1,205) (1,290) NM FMCN US Focus Media OP/N 0.93 1.33 2.52 NM NA NA NA 68 202 335 2.4 24 65 124 NM 27 81 166 2.5 (71) (50) (118) NM 700 HK Tencent Holdings OP/N 0.25 0.39 0.53 0.41 0.08 0.29 0.55 1,389 2,451 3,241 0.7 473 704 965 0.5 526 938 1,372 0.7 (2,316) (3,012) (3,617) NM 8002 HK Phoenix Satellite Television U/N 0.03 0.04 0.05 0.34 0.01 0.01 0.02 1,035 1,154 1,261 0.1 186 213 271 0.3 185 273 338 0.4 (513) (604) (765) NM BIDU US Baidu.com, Inc. U/A 0.30 0.80 1.50 2.46 0.00 0.00 0.00 37 100 187 2.7 4 24 49 4.6 13 35 66 2.8 (113) (179) (258) NA CTRP US Ctrip.com International IL/N 0.87 1.00 1.35 0.60 0.26 0.34 0.52 66 99 129 0.8 28 32 43 0.6 29 34 46 0.6 (92) (124) (160) NM JOBS US 51job, Inc. IL/N 0.27 0.40 0.54 0.43 NA NA NA 71 90 109 0.4 8 11 15 0.4 10 15 19 0.2 (102) (108) (128) NM 100 HK Clear Media IL/N 0.21 0.27 0.40 0.50 NA NA 0.28 675 816 1,004 0.4 105 135 198 0.5 280 319 421 0.3 6 (207) (195) NM Note: The following stocks are covered by Gao Hua Securities and valuation estimates are from Gao Hua Securities Research: Beijing Capital International Airport, Guangzhou Baiyun International Airport, Shanghai International Airport, Shenzhen Airport, by Bingchao Cao [email protected], 86-10-6535-3023; COFCO International, China Yurun Food Group, Dynasty Fine Wines Group, People’s Food Holdings, and Yantai Changyu Pioneer Wine by Yifan Deng, [email protected], 86-10-6535-3036; Beijing Capital Land, China Overseas Land & Investment, China Resources Land, China Vanke, Guanghzhou R&F, Shanghai Forte Land, by Yi Wang, [email protected], 86-10-6535-3022; GD Power Development, Guangdong Electric Power Development, Guangdong Investment, Shanghai Municipal Raw Water, Shenergy Company, Tianjin Capital Environmental Protection by Franklin Chow, [email protected]; 86-10-6535-3012; China Mobile (HK), China Netcom. China Telecom, China Unicom, by Hao Fei Chen, [email protected], 86-10-6535-3063; TCl Multimedia Technology, Skyworth Digital, Sichuan Changhong, by Cheryl Tang, [email protected]; 86-10-6535-3007. Other stocks and valuation estimates are Goldman Sachs Research coverage and estimates. Source: Bloomberg, Goldman Sachs Research estimates, Gao Hua Securities Research estimates. China China Goldman Sachs Global Strategy Research -May 15, 2006 China Exhibit 86: Forecast summary EPS (calendarized) DPS (calendarized) Sales (calendarized) Net profit (calendarized) EBITDA Net debt (quoted currency) (quoted currency) (mn of quoted currency) (mn of quoted currency) (calendarized) (calendarized) 2005 2006E 2007E CAGR 2005 2006E 2007E 2005 2006E 2007E CAGR 2005 2006E 2007E CAGR 2005 2006E 2007E CAGR 2005 2006E 2007E CAGR Ticker Company Metals and mining 1088 HK China Shenhua Energy 0.90 1.03 1.10 0.40 0.40 0.36 0.39 51,289 60,707 70,112 0.4 15,347 18,691 19,987 0.5 28,529 35,027 38,989 0.4 28,117 36,808 27,693 (0.3) 600019 CH Baoshan Iron & Steel 0.72 0.65 0.71 (0.03) 0.32 0.32 0.32 126,608 127,828 134,452 0.5 12,666 11,318 12,496 0.2 30,020 30,310 32,438 0.2 24,531 10,003 11,514 1.0 600005 CH Wuhan Iron and Steel 0.62 0.54 0.56 0.17 0.32 0.24 0.25 40,746 45,752 46,433 0.4 4,825 4,231 4,353 0.2 10,546 8,839 9,498 0.2 2,472 4,420 6,702 1.2 1171 HK Yanzhou Coal Mining 0.56 0.54 0.52 (0.09) 0.15 0.16 0.16 12,211 10,987 11,367 0.1 2,827 2,686 2,546 (0.1) 5,504 4,993 4,766 (0.1) (6,051) (7,927) (10,408) NM 2600 HK Aluminum Corporation of China 0.61 1.01 0.48 (0.05) 0.21 0.33 0.16 36,434 56,584 47,152 0.2 6,894 11,453 5,614 (0.0) 12,309 19,073 12,198 0.1 7,738 5,771 3,012 (0.3) 347 HK Angang New Steel 0.68 1.15 0.90 0.25 0.35 0.57 0.44 25,055 47,926 49,342 0.5 2,077 6,870 5,339 0.7 3,848 13,948 12,125 0.9 264 14,178 9,072 2.8 323 HK Maanshan Iron & Steel 0.43 0.40 0.79 0.23 0.16 0.14 0.28 31,498 32,209 40,292 0.2 2,857 2,590 5,109 0.2 5,654 5,951 9,752 0.3 7,423 14,858 17,341 1.3 914 HK Anhui Conch Cement 0.29 0.71 0.96 0.16 0.07 0.12 0.16 10,420 13,223 14,943 0.4 371 901 1,210 0.1 2,001 3,323 4,280 0.3 7,094 8,094 8,882 0.3 358 HK Jiangxi Copper 0.65 1.16 1.07 0.66 0.19 0.34 0.31 12,920 16,941 15,709 0.2 1,835 3,386 3,108 0.7 2,827 5,017 4,825 0.6 3,239 4,655 5,242 0.2 Oil and chemicals 857 HK PetroChina 0.73 0.83 0.79 0.18 0.33 0.37 0.36 534,873 577,888 609,994 0.3 129,171 147,941 141,865 0.2 235,824 273,692 270,913 0.2 (9,044) (24,553) (29,184) NA 883 HK CNOOC 0.60 0.69 0.67 0.33 0.20 0.23 0.22 67,273 92,974 92,105 0.3 24,527 28,529 27,469 0.3 40,812 46,718 44,973 0.3 (3,690) 409 (6,663) NM 386 HK China Petroleum and Chemical 0.46 0.47 0.48 0.10 0.13 0.13 0.14 806,366 878,352 922,803 0.3 39,634 40,374 42,000 0.1 95,140 98,142 102,339 0.0 130,263 159,213 195,294 0.3 1033 HK Sinopec Yizheng Chemical Fibre (0.23) 0.00 (0.03) NA 0.00 0.00 0.00 15,302 14,351 13,699 0.0 (937) 10 (109) NA 394 1,171 1,124 (0.1) 1,114 1,695 1,598 0.9 338 HK Sinopec Shanghai Petrochemical 0.25 0.32 0.29 (0.26) 0.10 0.13 0.12 43,770 48,902 49,917 0.2 1,792 2,337 2,082 (0.3) 4,043 5,212 4,969 (0.1) 4,382 5,037 5,133 (0.1) 297 HK Sinochem Hong Kong Holdings 0.13 0.19 0.25 0.96 0.02 0.03 0.04 19,249 25,729 33,280 0.7 779 1,085 1,473 1.0 1,026 1,402 1,880 0.8 1,193 1,372 1,395 (0.1) 2883 HK China Oilfield Services Limited 0.20 0.17 0.18 0.03 0.05 0.03 0.04 4,651 5,390 6,224 0.3 795 672 724 0.0 1,516 1,797 2,076 0.3 (766) 815 2,216 NM Property 688 HK China Overseas Land & Investment 0.24 0.33 0.47 0.66 0.07 0.13 0.19 7,931 7,195 12,990 0.2 1,535 2,135 3,000 0.7 1,743 2,158 4,024 0.7 2,053 4,992 3,961 0.3 2337 HK Shanghai Forte Land 0.23 0.33 0.45 0.48 0.11 0.13 0.18 1,963 3,724 6,599 0.9 543 832 1,131 0.6 625 1,032 1,729 0.8 1,393 3,098 2,513 NM 1109 HK China Resources Land 0.25 0.23 0.32 3.75 0.07 0.06 0.09 2,707 4,467 5,955 0.8 385 700 995 5.8 479 1,016 1,420 8.5 3,805 4,924 5,563 0.6 2868 HK Beijing Capital Land 0.12 0.16 0.34 0.48 0.05 0.07 0.14 1,099 1,319 5,936 0.9 205 269 587 0.5 330 394 1,338 0.7 3,176 1,186 6,851 0.7 69 HK Shangri-La 0.48 0.50 0.59 0.26 0.20 0.25 0.25 6,527 7,691 8,542 0.2 1,171 1,293 1,527 0.3 2,061 2,570 2,965 0.3 6,233 8,595 9,155 0.2 000002 CH China Vanke (A) 0.42 0.49 0.67 0.55 0.17 0.20 0.27 9,918 14,131 16,374 0.5 1,350 1,941 2,680 0.7 2,098 2,905 3,392 0.6 394 4,095 2,038 0.5 2777 HK Guangzhou R&F Properties 1.65 3.03 4.40 1.15 0.66 1.06 1.32 5,630 11,367 12,883 0.8 1,224 2,313 3,361 1.5 1,280 3,025 4,125 1.5 1,048 2,884 2,782 0.1 Retailing 589 HK Ports Design 0.29 0.46 0.62 0.61 0.18 0.28 0.38 825 1,082 1,413 0.4 160 251 336 0.6 208 304 408 0.6 (209) (221) (225) NM 980 HK Lianhua Supermarket 0.37 0.44 0.51 0.21 0.13 0.15 0.17 13,863 15,860 17,759 0.3 232 273 317 0.2 564 672 759 0.2 (1,031) (975) (1,004) NM 8277 HK Wumart Stores 0.56 0.81 1.05 0.67 0.19 0.16 0.21 3,795 6,478 8,767 0.9 159 245 322 0.8 256 465 616 0.9 (325) (257) (201) NM 3368 HK Parkson Retail Group 0.53 0.75 0.95 0.68 0.25 0.36 0.45 1,176 1,971 2,548 0.8 240 415 522 0.9 447 772 988 0.8 (1,788) (1,678) (1,925) NM 503 HK China Paradise 0.17 0.15 0.19 0.27 0.05 0.03 0.04 11,861 15,671 21,639 0.6 280 336 408 0.5 274 345 556 0.5 (1,164) (1,348) (671) NM Utilities HK-listed 991 HK Datang International Power Generation 0.43 0.53 0.50 0.09 0.22 0.26 0.25 17,519 26,915 31,946 0.6 2,289 2,729 2,569 0.1 7,075 10,820 13,035 0.5 36,285 47,281 51,315 0.5 1071 HK Huadian Power International 0.17 0.20 0.23 0.10 0.06 0.07 0.08 12,924 14,752 20,905 0.5 1,036 1,207 1,363 0.2 3,571 4,471 6,529 0.4 17,024 32,582 45,566 0.9 902 HK Huaneng Power International 0.39 0.44 0.41 (0.00) 0.24 0.27 0.26 39,012 43,992 49,213 0.3 4,742 5,345 4,976 (0.0) 12,827 15,157 16,823 0.2 39,288 48,470 52,622 0.5 836 HK China Resources Power 0.75 0.55 0.55 0.27 0.19 0.15 0.15 5,927 9,261 12,237 1.5 2,858 2,106 2,095 0.3 1,872 2,993 3,784 1.3 6,571 10,535 11,782 0.4 2688 HK Xinao Gas Holdings 0.33 0.44 0.52 0.36 0.05 0.07 0.08 2,028 3,191 4,096 0.7 299 400 478 0.4 632 978 1,154 0.6 1,719 1,995 2,296 1.3 2380 HK China Power International 0.20 0.25 0.34 0.14 0.08 0.09 0.13 4,254 5,973 7,915 0.6 646 775 1,072 0.3 937 1,352 2,022 0.5 1,761 10,120 13,747 NM 1065 HK Tianjin Capital Environmental Protection 0.13 0.14 0.18 (0.13) 0.04 0.06 0.07 593 728 935 0.1 171 191 236 (0.1) 403 484 595 0.0 1,144 1,481 1,506 0.2 270 HK Guangdong Investment 0.23 0.23 0.25 0.10 0.09 0.09 0.10 5,249 5,383 5,573 0.0 1,303 1,347 1,479 0.1 3,376 3,326 3,448 0.1 11,042 9,186 7,672 (0.2) A-shares 000539 CH Guangdong Electric Power Development 0.27 0.38 0.46 0.14 0.18 0.19 0.23 8,317 9,524 10,886 0.2 720 1,013 1,225 0.1 2,321 2,894 3,263 0.2 2,591 6,260 9,850 2.2 600795 CH GD Power Development 0.41 0.43 0.45 0.10 0.08 0.08 0.09 11,045 11,979 12,416 0.3 930 970 1,021 0.1 3,659 3,989 4,141 0.2 19,170 21,654 25,228 0.3 600649 CH Shanghai Municipal Raw Water 0.20 0.21 0.24 0.02 0.10 0.11 0.12 1,011 1,082 1,247 0.1 377 398 451 0.0 618 652 763 0.1 (721) (244) (310) NM 600642 CH Shenergy 0.50 0.54 0.46 0.03 0.25 0.27 0.23 7,964 8,600 8,961 0.3 1,343 1,443 1,238 0.0 2,813 2,931 2,839 0.1 3,087 3,156 4,070 0.1 600900 CH China Yangtze Power 0.41 0.38 0.39 (0.00) 0.19 0.21 0.21 7,259 7,147 8,244 0.2 3,338 3,126 3,554 0.1 6,410 6,285 7,282 0.2 14,281 11,520 11,601 0.4 Technology 981 HK SMIC (0.05) (0.01) 0.07 0.54 0.00 0.00 0.00 9,106 12,213 15,660 0.4 (867) (167) 1,331 0.6 5,703 8,128 10,716 0.5 3,170 3,594 4,721 0.7 903 HK TPV Technology 0.80 0.65 0.48 (0.11) 0.00 0.00 0.00 39,284 56,144 57,828 0.4 1,254 1,348 996 0.1 1,563 1,818 3,118 0.7 1,129 2,510 2,204 NM 2038 HK Foxconn International Holdings 0.43 0.68 1.01 1.07 0.00 0.00 0.30 49,339 86,561 133,355 1.3 2,970 4,780 7,185 1.3 3,910 6,150 9,112 1.2 (1,429) (3,126) (5,461) NA 992 HK Lenovo Group 0.15 0.09 0.19 0.16 0.05 0.05 0.04 22,555 105,983 130,016 1.4 1,120 867 1,894 0.3 1,174 2,905 4,353 1.0 (2,658) (5,189) (8,905) NM 763 HK ZTE Corporation 1.30 1.30 2.13 0.29 0.24 0.24 0.40 20,898 24,917 33,141 0.3 1,247 1,248 2,040 0.3 2,240 2,538 3,385 0.3 (3,903) (3,790) (4,824) NM Telecom services 941 HK China Mobile (HK) 2.63 2.81 3.00 0.21 1.02 1.27 1.50 235,402 266,729 294,422 0.3 51,866 55,477 59,238 0.2 129,147 139,998 148,660 0.2 (66,264) (60,199) (70,192) NM 762 HK China Unicom 0.38 0.46 0.24 (0.16) 0.11 0.16 0.10 84,314 93,106 103,607 0.2 4,779 5,765 3,092 (0.2) 27,546 30,751 32,618 0.1 28,199 34,395 45,454 0.1 728 HK China Telecom 0.25 0.29 0.30 0.12 0.07 0.09 0.10 157,421 163,694 169,809 0.1 20,467 23,096 24,584 0.1 79,253 83,358 85,809 0.1 121,393 106,968 86,681 (0.2) 906 HK China Netcom 1.54 1.21 1.11 NM 0.47 0.55 0.56 81,192 83,195 85,537 0.1 10,154 8,007 7,342 NM 40,824 42,239 42,919 0.1 65,316 64,067 52,687 (0.1) Transportation 1138 HK China Shipping Development 0.78 0.82 0.94 0.32 0.29 0.33 0.38 8,248 9,675 11,548 0.4 2,607 2,738 3,132 0.3 4,052 4,353 4,961 0.3 541 618 263 (0.5) 1919 HK China COSCO Holdings 1.05 0.70 0.58 (0.15) 0.13 0.18 0.14 37,935 42,415 46,491 0.2 5,279 4,308 3,561 (0.1) 8,439 8,306 7,267 0.1 8,274 11,126 14,369 0.1 2866 HK China Shipping Container Lines 0.77 0.62 0.43 (0.25) 0.19 0.09 0.07 28,197 32,211 35,255 0.3 4,639 3,747 2,622 (0.2) 10,685 8,701 6,198 (0.2) 3,705 4,805 5,618 0.9 2343 HK Pacific Basin Shipping 0.90 0.65 0.72 (0.02) 0.65 0.45 0.45 2,052 1,910 2,116 0.2 1,138 829 910 0.1 1,293 1,077 1,188 0.1 1,817 2,334 2,565 0.0 316 HK Orient Overseas International 8.45 5.74 3.41 (0.39) 2.09 1.44 0.78 36,406 40,224 42,755 0.2 5,046 3,594 2,132 (0.4) 7,047 5,423 4,144 (0.2) 7,889 10,097 9,970 0.4 Water Treatment Systems SINO SP Sinomem Technology 0.06 0.05 0.08 0.23 0.01 0.01 0.01 81 91 150 0.7 24 25 38 0.3 26 28 48 0.6 (89) (76) (52) NM Note: The following stocks are covered by Gao Hua Securities and valuation estimates are from Gao Hua Securities Research: Beijing Capital International Airport, Guangzhou Baiyun International Airport, Shanghai International Airport, Shenzhen Airport, by Bingchao Cao [email protected], 86-10-6535-3023; COFCO International, China Yurun Food Group, Dynasty Fine Wines Group, People’s Food Holdings, and Yantai Changyu Pioneer Wine by Yifan Deng, [email protected], 86-10-6535-3036; Beijing Capital Land, China Overseas Land & Investment, China Resources Land, China Vanke, Strategy Portfolio Guanghzhou R&F, Shanghai Forte Land, by Yi Wang, [email protected], 86-10-6535-3022; GD Power Development, Guangdong Electric Power Development, Guangdong Investment, Shanghai Municipal Raw Water, Shenergy Company, Tianjin Capital Environmental Protection by Franklin Chow, [email protected]; 86-10-6535-3012; China Mobile (HK), China Netcom. China Telecom, China Unicom, by Hao Fei Chen, [email protected], 86-10-6535-3063; TCl Multimedia Technology, Skyworth Digital, Sichuan Changhong, by Cheryl Tang, [email protected]; 86-10-6535-3007. Other stocks and valuation estimates are Goldman Sachs Research coverage and estimates. 69 Source: Bloomberg, Goldman Sachs Research estimates, Gao Hua Securities Research estimates. 70 Strategy Portfolio Exhibit 87: Valuation summary P/E P/B ROE EV/EBITDA DE ratio Dividend yield (calendarized) (%) (calendarized) (calendarized) (calendarized) (%) (calendarized) (%) Ticker Company 2005 2006E 2007E 2006 PEG 2005 2006E 2007E 2005 2006E 2007E 2005 2006E 2007E 2005 2006E 2007E Current Airlines 753 HK Air China 19.7 15.5 13.0 NM 1.8 1.7 1.5 0.8 1.3 1.5 9.4 10.8 11.6 9.0 7.7 5.9 149.8 1055 HK China Southern Airlines (10.2) (109.7) 58.4 NA 0.8 0.9 0.8 0.0 0.0 0.0 (8.3) (0.8) 1.4 14.4 10.9 6.9 410.0 670 HK China Eastern Airlines 118.3 (42.8) 20.4 1.6 0.8 0.8 0.8 0.0 0.0 0.0 0.7 (2.0) 4.0 12.7 11.6 7.0 452.8 Airports 694 HK Beijing Capital International Airport 21.6 19.6 16.5 0.8 2.4 2.2 2.1 1.6 1.8 2.1 11.1 11.5 12.6 10.3 9.4 7.9 NA 000089 CH Shenzhen Airport 17.9 17.3 15.5 0.6 2.1 2.0 1.9 3.3 2.9 3.2 11.8 11.7 12.1 10.7 10.4 9.4 NA 600009 CH Shanghai International Airport 17.2 14.9 13.6 0.9 2.6 2.3 2.0 0.0 1.7 1.8 15.2 15.4 14.9 16.6 13.5 11.7 46.2 600004 CH Guangzhou Baiyun International Airport 25.1 20.3 16.2 1.2 1.6 1.5 1.4 1.6 1.5 1.5 6.3 7.4 8.6 11.2 9.2 8.1 81.2 Banks HK-listed 3328 HK Bank of Communications 24.8 19.0 15.1 0.1 2.9 2.7 2.4 1.6 2.1 2.7 11.9 14.2 16.2 NA NA NA NA 939 HK China Construction Bank 15.6 17.6 16.4 NM 2.9 2.6 2.3 0.9 2.3 2.4 18.6 14.8 14.3 NA NA NA NA 183 HK CITIC International Financial Holdings 12.7 15.8 13.1 1.8 1.5 1.4 1.3 3.9 3.2 3.8 11.7 8.6 9.8 NA NA NA NA 349 HK ICBC (Asia) 13.0 12.5 11.5 0.8 1.3 1.3 1.2 4.5 4.8 5.3 10.3 10.3 10.7 NA NA NA NA A-shares 600000 CH Shanghai Pudong Development Bank 16.6 11.7 9.4 0.2 2.7 2.3 1.9 1.2 1.7 2.0 16.0 19.5 20.3 NA NA NA NA 600036 CH China Merchants Bank 20.6 16.9 13.1 0.5 3.3 2.7 2.4 1.1 1.6 2.1 15.8 16.2 18.2 NA NA NA NA 000001 CH Shenzhen Development Bank 56.3 27.8 18.2 0.4 3.2 2.9 2.5 0.0 0.0 0.0 5.6 10.3 13.5 NA NA NA NA 600015 CH Hua Xia Bank 17.0 13.8 11.3 0.3 2.2 2.1 1.8 1.9 1.3 1.8 13.0 15.2 16.3 NA NA NA NA Conglomerates 1199 HK COSCO Pacific 14.6 16.5 14.6 0.8 2.9 2.7 2.5 3.2 3.5 4.0 20.0 16.6 17.2 20.3 17.7 15.3 50.8 144 HK China Merchants Holdings 25.6 23.8 20.4 1.3 3.9 3.5 3.2 1.8 1.9 2.3 15.2 14.9 15.7 95.8 61.9 45.3 62.4 363 HK Shanghai Industrial 17.2 16.3 13.7 NM 1.0 0.9 0.9 3.2 3.2 3.2 5.6 5.8 6.6 10.6 9.6 8.7 NA 392 HK Beijing Enterprises Holdings 16.6 24.9 18.5 27.8 1.1 1.1 1.1 2.0 2.0 2.0 6.8 4.4 5.7 5.5 5.3 5.1 NA 267 HK CITIC Pacific 13.9 10.5 16.1 NM 1.4 1.3 1.3 4.4 4.4 4.4 10.1 12.4 7.9 23.6 20.2 20.6 44.9 291 HK China Resources Enterprise 17.3 20.3 17.5 1.4 2.1 2.0 1.9 2.2 2.5 2.9 12.2 10.1 11.1 11.7 10.3 9.2 17.5 Consumer Electronics 1070 HK TCL Multimedia Technology (9.9) 14.5 9.1 2.4 1.3 1.2 1.0 0.0 0.7 1.1 (12.7) 8.0 11.4 (116.5) 7.1 5.4 42.7 751 HK Skyworth Digital 6.3 20.2 17.3 NM 0.9 0.9 0.8 4.9 1.0 1.2 13.9 4.3 4.9 12.3 12.0 7.5 NA 600839 CH Sichuan Changhong 25.4 19.6 15.0 NA 0.7 0.7 0.7 0.0 0.0 0.0 2.9 3.6 4.5 7.5 6.7 5.8 NA Food and Beverage 1068 HK China Yurun Food Group 19.2 17.5 14.7 0.3 4.3 3.7 3.1 1.4 1.7 2.0 22.3 21.0 21.1 19.9 14.4 10.5 NA PFH SP People's Food Holdings 9.8 9.1 8.1 0.4 2.1 1.8 1.6 5.9 5.5 5.0 21.1 20.0 20.0 7.3 5.9 5.2 NA 506 HK COFCO International 19.9 16.7 14.2 0.4 1.8 1.7 1.6 1.8 2.3 2.7 9.2 10.2 11.1 11.8 10.4 8.7 39.7 828 HK Dynasty Fine Wines Group 22.7 22.2 19.9 NM 3.2 2.9 2.7 1.7 1.9 2.1 14.0 13.0 13.4 14.3 13.4 11.3 NA 200869 CH Yantai Changyu Pioneer Wine 35.3 28.5 23.6 0.5 5.9 5.6 5.2 2.6 3.0 3.6 16.8 19.7 22.2 28.9 22.7 18.8 NA Insurance 2328 HK PICC Property and Casualty Company 28.6 15.3 11.7 0.0 1.8 1.6 1.5 2.6 2.6 3.4 6.3 10.8 13.0 NA NA NA NA 2628 HK China Life Insurance Company 34.3 28.9 21.7 0.6 3.9 3.5 3.0 0.4 0.5 0.8 11.5 11.9 14.0 NA NA NA NA 2318 HK Ping An Insurance Group 35.2 25.2 20.1 0.5 4.5 3.9 3.4 0.8 1.2 1.5 12.7 15.5 17.0 NA NA NA NA Internet SINA US SINA Corporation 34.6 32.9 23.5 NM 4.7 4.1 3.5 0.0 0.0 0.0 13.5 12.6 15.0 23.3 24.7 16.6 NA SOHU US Sohu.com 34.5 34.9 26.5 7.9 7.9 6.5 5.6 NA NA 1.1 22.9 18.7 21.0 30.1 24.5 19.5 NA SNDA US Shanda Interactive Entertainment 48.1 25.3 14.8 NM 4.6 3.7 3.0 0.0 0.0 0.0 9.5 14.7 20.1 8.8 20.8 10.7 NA NTES US Netease 24.3 21.7 22.6 0.4 9.4 6.6 5.2 NA NA NA 38.6 30.4 22.9 18.5 14.9 15.0 NA IT services oda ah lblSrtg eerh-May 15, 2006 Goldman Sachs Global Strategy Research - 696 HK TravelSky Technology 18.0 18.2 15.2 1.0 2.7 2.4 2.2 2.1 2.2 2.6 14.8 13.4 14.5 10.1 8.9 7.5 NA Media 1000 HK Beijing Media 121.5 16.0 11.8 NM 1.5 1.4 1.3 3.9 2.5 3.4 1.3 9.0 11.3 13.3 5.7 4.4 NA FMCN US Focus Media 73.8 51.9 27.4 NA 9.1 9.0 6.6 NA NA NA 12.3 17.4 24.2 122.1 41.2 20.1 NA 700 HK Tencent Holdings 62.4 41.1 29.8 1.0 10.0 7.8 6.7 0.5 1.8 3.4 15.9 19.0 22.3 47.6 26.7 18.3 NA 8002 HK Phoenix Satellite Television 45.0 32.7 25.7 1.0 7.0 6.1 5.2 0.9 0.9 1.3 15.5 18.5 20.4 34.4 23.3 18.8 NA BIDU US Baidu.com, Inc. 279.3 104.6 55.9 0.4 21.4 17.3 13.1 0.0 0.0 0.0 7.7 16.5 23.5 210.6 77.0 41.3 NA CTRP US Ctrip.com International 57.2 50.1 37.1 0.8 16.6 13.3 10.7 0.5 0.7 1.0 29.1 26.5 28.9 50.5 43.0 32.3 NA JOBS US 51job, Inc. 89.8 60.3 45.0 1.4 6.4 5.5 4.7 NA NA NA 7.1 9.1 10.5 55.1 38.3 30.4 NA 100 HK Clear Media 48.2 37.5 25.6 0.7 3.3 3.0 2.9 NA NA 2.8 6.8 8.0 11.5 17.3 15.2 11.6 NA Note: The following stocks are covered by Gao Hua Securities and valuation estimates are from Gao Hua Securities Research: Beijing Capital International Airport, Guangzhou Baiyun International Airport, Shanghai International Airport, Shenzhen Airport, by Bingchao Cao [email protected], 86-10-6535-3023; COFCO International, China Yurun Food Group, Dynasty Fine Wines Group, People’s Food Holdings, and Yantai Changyu Pioneer Wine by Yifan Deng, [email protected], 86-10-6535-3036; Beijing Capital Land, China Overseas Land & Investment, China Resources Land, China Vanke, Guanghzhou R&F, Shanghai Forte Land, by Yi Wang, [email protected], 86-10-6535-3022; GD Power Development, Guangdong Electric Power Development, Guangdong Investment, Shanghai Municipal Raw Water, Shenergy Company, Tianjin Capital Environmental Protection by Franklin Chow, [email protected]; 86-10-6535-3012; China Mobile (HK), China Netcom. China Telecom, China Unicom, by Hao Fei Chen, [email protected], 86-10-6535-3063; TCl Multimedia Technology, Skyworth Digital, Sichuan Changhong, by Cheryl Tang, [email protected]; 86-10-6535-3007. Other stocks and valuation estimates are Goldman Sachs Research coverage and estimates. Source: Bloomberg, Goldman Sachs Research estimates, Gao Hua Securities Research estimates. China China Goldman Sachs Global Strategy Research -May 15, 2006 China Exhibit 88: Valuation summary P/E P/B ROE EV/EBITDA DE ratio Dividend yield (calendarized) (%) (calendarized) (calendarized) (calendarized) (%) (calendarized) (%) 2005 2006E 2007E 2006 PEG 2005 2006E 2007E 2005 2006E 2007E 2005 2006E 2007E 2005 2006E 2007E Current Ticker Company Metals and mining 1088 HK China Shenhua Energy 17.1 15.0 14.0 0.4 5.0 4.2 3.4 2.6 2.3 2.5 29.3 28.2 24.4 11.1 9.0 8.1 57.6 600019 CH Baoshan Iron & Steel 6.0 6.7 6.1 NM 1.0 0.9 0.9 7.4 7.5 7.4 17.0 14.1 14.4 2.9 2.8 2.6 12.5 600005 CH Wuhan Iron and Steel 4.5 5.1 4.9 0.3 1.0 0.9 0.9 11.7 8.9 9.1 23.0 18.6 17.3 2.5 2.9 2.7 19.4 1171 HK Yanzhou Coal Mining 12.2 12.6 13.2 NM 1.9 1.7 1.5 2.1 2.4 2.3 16.0 13.7 11.5 4.7 5.2 5.4 NA 2600 HK Aluminum Corporation of China 12.4 7.6 15.8 NM 2.7 2.0 1.8 2.8 4.4 2.1 21.3 26.5 11.3 7.3 4.7 7.4 13.0 347 HK Angang New Steel 10.6 6.3 8.1 0.2 2.0 1.5 1.4 4.8 7.8 6.1 18.6 23.7 17.4 14.9 4.1 4.7 49.3 323 HK Maanshan Iron & Steel 6.6 7.2 3.6 0.3 1.0 0.9 0.7 5.5 5.0 9.8 15.6 12.9 20.5 5.9 5.6 3.4 74.5 914 HK Anhui Conch Cement 54.9 22.2 16.5 1.4 3.8 3.2 2.6 0.4 0.8 1.0 6.9 14.2 15.9 14.0 8.4 6.6 128.3 358 HK Jiangxi Copper 14.0 7.8 8.5 0.1 3.3 2.4 1.9 2.1 3.7 3.4 23.3 30.3 22.7 11.0 6.2 6.4 41.8 Oil and chemicals 857 HK PetroChina 12.8 11.3 11.8 0.6 3.3 2.9 2.5 3.5 4.0 3.8 25.9 25.3 21.4 7.0 6.0 6.1 NA 883 HK CNOOC 10.8 9.3 9.6 0.3 3.7 2.9 2.4 3.2 3.6 3.5 34.4 31.2 25.1 6.5 5.7 5.9 0.4 386 HK China Petroleum and Chemical 11.4 11.2 10.7 1.1 2.1 1.8 1.6 2.4 2.5 2.6 18.3 16.4 15.2 6.4 6.2 6.0 64.8 1033 HK Sinopec Yizheng Chemical Fibre (8.8) 840.6 (75.5) NA 1.0 1.0 1.0 0.0 0.0 0.0 (11.5) 0.1 (1.4) 25.1 8.5 8.8 20.8 338 HK Sinopec Shanghai Petrochemical 18.1 13.9 15.6 NM 1.8 1.6 1.5 2.2 2.9 2.6 9.8 11.7 9.9 9.3 7.2 7.5 25.3 297 HK Sinochem Hong Kong Holdings 22.0 15.8 11.6 0.2 4.9 3.9 3.0 0.7 0.9 1.3 22.4 24.4 25.6 18.0 13.2 9.8 30.9 2883 HK China Oilfield Services Limited 22.2 26.3 24.4 8.1 2.4 2.2 2.1 1.2 0.8 0.8 10.7 8.5 8.7 12.2 10.3 8.9 10.3 Property 688 HK China Overseas Land & Investment 22.5 16.2 11.5 0.2 3.3 3.0 2.6 1.3 2.5 3.5 14.6 18.4 22.4 22.6 18.3 9.8 43.1 2337 HK Shanghai Forte Land 15.7 10.9 8.2 0.2 2.6 2.0 1.7 2.9 3.6 4.9 16.5 18.5 21.1 19.7 11.9 7.1 67.8 1109 HK China Resources Land 20.8 21.9 16.1 0.1 1.0 1.6 1.5 1.3 1.2 1.7 4.8 7.5 9.5 43.7 20.6 14.7 50.6 2868 HK Beijing Capital Land 26.9 20.7 9.5 0.4 2.2 2.0 1.8 1.5 2.2 4.2 8.2 9.9 18.5 20.5 17.2 5.0 43.7 69 HK Shangri-La 31.1 29.4 24.9 1.1 1.8 1.7 1.5 1.3 1.7 1.7 5.9 5.7 6.1 22.3 17.9 15.5 34.3 000002 CH China Vanke (A) 16.0 13.8 10.0 0.3 3.0 2.5 2.1 2.6 2.9 4.0 18.9 18.4 21.5 12.1 8.8 7.5 4.7 2777 HK Guangzhou R&F Properties 28.5 15.5 10.7 0.1 7.0 5.2 3.8 1.4 2.3 2.8 24.7 33.4 35.5 30.3 12.8 9.4 41.6 Retailing 589 HK Ports Design 44.4 28.3 21.1 0.5 9.6 8.5 7.3 1.4 2.2 2.9 21.7 30.1 34.8 33.1 22.6 16.8 NA 980 HK Lianhua Supermarket 25.7 21.9 18.8 1.1 3.3 3.0 2.7 1.3 1.5 1.8 12.7 13.6 14.3 8.9 7.4 6.6 NA 8277 HK Wumart Stores 49.9 34.7 26.6 0.5 6.4 4.5 4.0 0.7 0.6 0.8 12.9 13.0 15.0 32.4 17.8 13.4 NA 3368 HK Parkson Retail Group 45.1 32.0 25.4 0.5 7.7 6.8 6.0 1.0 1.5 1.9 17.0 21.3 23.5 25.9 15.0 11.7 NA 503 HK China Paradise 17.5 18.9 15.5 0.7 2.5 2.6 2.3 1.7 1.1 1.3 14.3 14.0 15.0 18.2 14.5 9.0 NA Utilities HK-listed 991 HK Datang International Power Generation 13.3 11.0 11.7 1.2 1.7 1.5 1.4 3.8 4.5 4.3 12.7 13.7 11.8 10.9 7.1 5.9 238.2 1071 HK Huadian Power International 13.3 11.4 10.1 1.2 1.1 1.0 0.9 2.8 3.2 3.7 8.5 9.0 9.2 13.0 10.4 7.1 244.3 902 HK Huaneng Power International 15.3 13.4 14.3 NM 1.8 1.7 1.6 4.1 4.6 4.3 12.1 12.6 10.9 9.3 7.9 7.1 114.3 836 HK China Resources Power 8.5 11.6 11.6 0.4 1.9 1.6 1.4 3.0 2.4 2.4 21.8 13.7 12.4 18.6 11.7 9.2 68.7 2688 HK Xinao Gas Holdings 23.7 17.9 15.1 0.5 3.4 2.7 2.3 0.6 0.8 1.0 14.3 15.1 15.5 15.4 9.9 8.4 69.8 2380 HK China Power International 14.6 12.0 8.6 0.8 1.4 1.3 1.1 2.6 3.1 4.4 9.6 10.5 12.7 20.7 14.3 9.6 137.6 1065 HK Tianjin Capital Environmental Protection 15.0 13.1 10.6 NM 1.1 1.1 1.0 2.0 3.1 3.9 7.6 8.2 9.4 12.9 10.8 8.7 63.2 270 HK Guangdong Investment 14.9 15.0 13.6 1.5 1.8 1.6 1.5 2.7 2.8 3.0 11.8 11.0 11.2 8.3 8.4 8.1 65.7 A-shares 000539 CH Guangdong Electric Power Development 17.1 12.2 10.1 0.9 1.5 1.4 1.3 3.9 4.1 5.0 8.6 11.4 12.7 7.9 6.3 5.6 70.2 600795 CH GD Power Development 16.3 15.6 14.8 1.5 2.0 1.8 1.7 1.2 1.3 1.3 12.5 11.8 11.3 10.1 9.2 8.9 263.2 600649 CH Shanghai Municipal Raw Water 25.1 23.8 21.0 11.9 1.6 1.5 1.4 2.0 2.1 2.4 6.2 6.3 6.9 14.9 14.1 12.1 NA 600642 CH Shenergy 12.8 11.9 13.9 3.6 1.8 1.6 1.6 3.9 4.2 3.6 13.7 13.7 11.2 7.2 6.9 7.2 29.9 600900 CH China Yangtze Power 17.2 18.3 18.2 NM 2.6 2.4 2.0 2.7 3.0 3.0 15.0 13.1 11.2 10.7 11.0 9.5 48.4 Technology 981 HK SMIC (24.0) (126.0) 15.8 NM 0.9 0.9 0.8 0.0 0.0 0.0 (3.7) (0.7) 5.2 4.3 3.0 2.3 15.0 903 HK TPV Technology 10.3 12.8 17.3 NM 2.2 2.4 2.1 0.0 0.0 0.0 21.1 18.5 12.0 8.2 7.1 4.1 19.0 2038 HK Foxconn International Holdings 43.6 27.4 18.5 0.3 11.0 7.8 6.0 0.0 0.0 1.6 25.3 28.6 32.7 32.8 20.8 14.1 NA 992 HK Lenovo Group 18.5 32.1 14.7 2.0 4.0 2.1 1.8 1.9 1.7 1.3 21.5 6.5 12.5 16.4 6.6 4.4 NA 763 HK ZTE Corporation 22.8 22.8 14.0 0.8 2.9 2.6 2.2 0.8 0.8 1.3 12.6 11.4 16.0 11.0 9.7 7.3 NA Telecom services 941 HK China Mobile (HK) 17.4 16.2 15.2 0.8 3.4 3.1 2.8 2.2 2.8 3.3 19.8 19.4 18.8 6.5 6.0 5.6 NA 762 HK China Unicom 19.7 16.4 30.5 NM 1.3 1.2 1.2 1.4 2.1 1.3 6.5 7.4 3.9 4.6 4.2 3.9 44.4 728 HK China Telecom 11.0 9.7 9.1 0.8 1.3 1.1 1.0 2.4 3.1 3.8 11.6 11.7 11.3 4.2 4.0 3.9 54.1 906 HK China Netcom 9.9 12.6 13.7 NA 1.6 1.5 1.3 3.1 3.6 3.7 16.6 11.8 9.8 4.0 3.9 3.8 94.0 Transportation 1138 HK China Shipping Development 7.6 7.2 6.3 0.2 1.9 1.5 1.3 4.9 5.5 6.3 24.8 21.2 20.8 5.0 4.7 4.1 4.8 1919 HK China COSCO Holdings 3.7 5.6 6.8 NM 1.1 1.1 1.0 3.2 4.5 3.7 29.6 19.9 14.8 4.2 4.2 4.8 51.3 2866 HK China Shipping Container Lines 3.2 4.0 5.7 NM 0.9 0.8 0.7 7.7 3.7 2.6 26.7 19.4 12.3 1.8 2.2 3.0 21.4 2343 HK Pacific Basin Shipping 3.8 5.3 4.8 NM 1.5 1.2 1.1 18.7 13.0 13.0 40.2 22.4 22.7 5.2 6.2 5.6 62.9 316 HK Orient Overseas International 3.7 5.4 9.1 NM 1.1 1.0 0.9 6.8 4.6 2.5 28.7 17.7 9.7 4.2 5.4 7.1 50.0 Water Treatment Systems SINO SP Sinomem Technology 16.3 17.1 11.4 0.7 3.0 2.6 2.2 1.0 1.1 1.2 18.2 15.2 19.0 13.4 12.5 7.4 NA Note: The following stocks are covered by Gao Hua Securities and valuation estimates are from Gao Hua Securities Research: Beijing Capital International Airport, Guangzhou Baiyun International Airport, Shanghai International Airport, Shenzhen Airport, by Bingchao Cao [email protected], 86-10-6535-3023; COFCO International, China Yurun Food Group, Dynasty Fine Wines Group, People’s Food Holdings, and Yantai Changyu Pioneer Wine by Yifan Deng, [email protected], 86-10-6535-3036; Beijing Capital Land, China Overseas Land & Investment, China Resources Land, China Vanke, Strategy Portfolio Guanghzhou R&F, Shanghai Forte Land, by Yi Wang, [email protected], 86-10-6535-3022; GD Power Development, Guangdong Electric Power Development, Guangdong Investment, Shanghai Municipal Raw Water, Shenergy Company, Tianjin Capital Environmental Protection by Franklin Chow, [email protected]; 86-10-6535-3012; China Mobile (HK), China Netcom. China Telecom, China Unicom, by Hao Fei Chen, [email protected], 86-10-6535-3063; TCl Multimedia Technology, Skyworth Digital, Sichuan Changhong, by Cheryl Tang, [email protected]; 86-10-6535-3007. Other stocks and valuation estimates are Goldman Sachs Research coverage and estimates. 71 Source: Bloomberg, Goldman Sachs Research estimates, Gao Hua Securities Research estimates. Portfolio Strategy China Recent China Strategy ideas and associated publications Publication title Date of publication Key ideas for investors China Stance-at-a-Glance (May 2006 issue): Solid May 3, 2006 Provides latest market overview, sector analysis, 2005 results; Brace for further tightening? allocation, and stock picks. China Strategy: QDII – The vanguard for Chinese April 21, 2006 Updates the development of QDII scheme and discusses money investment implications. China Stance-at-a-Glance (April 2006 issue): Solid April 4, 2006 Provides latest market overview, sector analysis, earnings; abundant liquidity allocation, and stock picks. China Strategy: Implication of a potential monetary March 20, 2006 Discusses investment implications on a potential monetary tightening on Chinese equities - Short-term tightening. headwind, long-term positive China Strategy/Taxation: Revisiting the EIT reform March 17, 2006 Updates our view on potential EIT reform and discusses investment implications. China Stance-at-a-Glance (March 2006 issue): March 1, 2006 Provides latest market overview, sector analysis, Charting the results season allocation, and stock picks. Investing in China (February issue): A speedy February 2, 2006 Provides latest market overview, sector analysis, bulldog allocation, and stock picks. China StrategyFlash: Is the bulldog running too January 20, 2006 Identifies the catalysts behind the recent market rally. fast? Proposes ways to manage risks using index derivatives 2006 Outlook: Riding the bulldog January 4, 2006 Market and sector analysis/allocation. GS China top-ten stock picks. Style-oriented stock screens China Strategy: GDP upward revision – Positive for December 22, 2005 Analyzes the potential implications of the US$280 bn GDP Chinese equities; may create trading opportunities upward revision Investing in China (December/January issue): Rally December 1, 2005 Provides market overview, sector analysis, allocation, and should continue stock picks FocusChina – 11th Five-Year Program Insights: November 29, 2005 Previews the 11th Five-Year Program. Outlines potential Pursuing quality and balanced growth beneficiaries of the Program. Highlights key takeaways from 16 presentations at the NDRC conference Investing in China (November issue): Reaching an November 1, 2005 Provides market overview, sector analysis, allocation, and inflection point stock picks. Highlights our positive view on the Energy sector China StrategyFlash: Play the Go West theme September 12, 2005 Suggests ways to play the “Go West” theme. Screens stocks to gain exposure from inland economic expansion. China StrategyFlash: China B-share market— August 4, 2005 Analyzes the recent pullback in the B-share market and The time could be right associated trading ideas. Details screens of low-P/E stocks with reasonably high liquidity Goldman Sachs/Gao Hua China Investment June 1, 2005 Details investor views on the Chinese equity market and Frontier 2005 Conference: Key takeaways highlights key takeaways from the Goldman Sachs / Gao Hua China Conference FocusChina: Rmb reval—Look beyond the surface May 13, 2005 Outlines analytical framework for renminbi revaluation, assesses impact at stock, sector and market levels, and identifies potential winners and losers China StrategyFlash: A move in the right direction May 4, 2005 Analyzes market impact of CSRC’s latest regulation on the non-tradable shares disposal program. Draws on international experience and highlights the long-term implication of such moves China Strategy/Taxation: Incremental positive to March 1, 2005 Discussion of implications of taxation reform in China on Chinese equities Chinese equities; identification of potential key winners and losers China Daily Insights Daily Our leading research views on more than 80 Chinese companies, headline news, and market update Source: Goldman Sachs Strategy Research. 72 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy Disclosures Goldman Sachs Global Strategy Research - May 15, 2006 73 Portfolio Strategy China 74 Goldman Sachs Global Strategy Research - May 15, 2006 China Portfolio Strategy Coverage group(s) of stocks by primary analyst(s) Compendium report: please see disclosures at http://www.gs.com/research/hedge.html Company-specific regulatory disclosures Compendium report: please see disclosures at http://www.gs.com/research/hedge.html Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe Rating Distribution Investment Banking Relationships OP/Buy IL/Hold U/Sell OP/Buy IL/Hold U/Sell Global 26% 59% 15% 58% 52% 47% As of April 1, 2006, Goldman Sachs Global Investment Research had investment ratings on 2,048 equity securities. 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No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc. Goldman Sachs Global Strategy Research - May 15, 2006 Portfolio Strategy China Olympics analogy: Olympics gold medals for China and nominal GDP are growing at a similar CAGR, but will the equity market follow? China’s Olympic gold medal and nominal GDP (# of medals) Gold Silver Bronze Nominal GDP (Rmb bn) 80 20000 CAGR growth for China's gold medals (from 1984): 16.4% CAGR growth for nominal GDP (from 1984): 16.8% 18000 70 ? 16000 60 14 14000 ? 50 15 12000 16 12 40 17 10000 16 8000 30 9 22 22 ? 6000 12 20 8 32 4000 28 10 11 15 16 16 2000 5 0 0 1984 Los 1988 Seoul 1992 Barcelona 1996 Atlanta 2000 Sydney 2004 Athens 2008 Beijing Angeles Source: CEIC, Goldman Sachs Strategy Research.