Up to 2 Lines

Strategy China

NOMURA INTERNATIONAL (HK) LIMITED

China equity – short term pain, long term gain

Henry Wu, CFA

June 2011 Strategy China Historical FYPs and 12th FYP outlook

Summary of historical FYPs and 12th FYP outlook 8th FYP 9th FYP 10th FYP 11th FYP 12th FYP outlook Indicators Description (1991-1995) (1996-2000) (2001-2005) (2006-2010) (2011-2015) GDP Nominal GDP Five-year CAGR 27% 10% 13% 17% Real GDP Five-year CAGR 12% 9% 10% 11% targeting 7% low er than 11th FYP of 7.5% Real GDP per capita Five-year CAGR 11% 8% 9% 11% GDP Component Consumption % of GDP at FYP period end 58% 62% 53% 48% to increase compared to 11th FYP Capital Formation % of GDP at FYP period end 40% 35% 42% 48% stabilize compared to 11th FYP Export % of GDP at FYP period end 2% 2% 5% 4% to decrease compared to 11th FYP Structure (Primary:Secondary:Tertiary) at FYP period end 20:47:33 15:46:39 12:47:41 10:47:43 Tertiary to account for higher proportion Industry Return - A share listed companies Primary--Agriculture ROE Five-year average 27% 15% 3% 7% to increase compared to 11th FYP Secondary--Steel ROE Five-year average 9% 12% 15% 10% to increase compared to 11th FYP Tertiary--Whole & retail trading ROE Five-year average 21% 9% 5% 13% to increase compared to 11th FYP Equity Market A Share Return SHCOMP 5y change 90% 273% -44% 142% H Share Return HSCEI 5y change -61% -51% 228% 138%

Note: H share return starts 1993 Source: CEIC, WIND, Nomura research

2 © Nomura International (Hong Kong) Limited Strategy China Historical FYPs and economic development cycle

Economic development cycle for each FYP

45%

6th 7th 8th 9th 10th 11th 12th FYP FYP FYP FYP FYP FYP FYP 30%

Asia finanical Outbreak of crisis SARS 15%

Economic cycle for Economic cycle for every five years every five years -15% Opening up We expect another major economic transition to take place triggered by 12th FYP

-30%

1953 1955 1961 1963 1965 1971 1973 1981 1983 1989 1991 1993 1999 2001 2003 2009 1957 1959 1967 1969 1975 1977 1979 1985 1987 1995 1997 2005 2007

Source: WIND, Nomura research

3 © Nomura International (Hong Kong) Limited Strategy China Top-ten H share price performance during each FYP period

Ticker Name Sector 8th FYP (1991-1995) 270 HK Guangdong Investment Ltd Gas, Water & Multiutilities 729.6% 171 HK Silver Grant International Industries Ltd Financial Services 553.8% 267 HK CITIC Pacific Ltd General Industrials 429.0% 349 HK Industrial and Commercial Bank of China (Asia) Ltd Banks 265.1% 31 HK China Aerospace International Holdings Ltd Electronic & Electrical Equipment 239.4% 181 HK Fujian Holdings Ltd Real Estate Investment & Services 189.3% * 1203 HK Guangnan (Holdings) Ltd General Industrials 131.7% * 1199 HK COSCO Pacific Ltd Industrial Transportation 117.2% 291 HK China Resources Enterprise Ltd General Industrials 100.0% 217 HK China Chengtong Development Group Ltd Real Estate Investment & Services 55.3% Ticker Name Sector 9th FYP (1996-2000) 992 HK Lenovo Group Ltd Technology Hardw are & Equipment 2548.3% 135 HK Kunlun Energy Co Ltd Oil & Gas Producers 351.5% 165 HK China Everbright Ltd Financial Services 312.8% * 941 HK China Mobile Ltd Mobile Telecommunications 303.8% 517 HK COSCO International Holdings Ltd Chemicals 233.3% 618 HK EC-Founder (Holdings) Co Ltd Technology Hardw are & Equipment 227.0% 152 HK Shenzhen International Holdings Ltd Industrial Transportation 216.3% 203 HK Denw ay Motors Ltd Automobiles & Parts 188.8% 144 HK China Merchants Holdings (International) Co Ltd Industrial Transportation 172.3% 291 HK China Resources Enterprise Ltd General Industrials 148.8% Ticker Name Sector 10th FYP (2001-2005) 1072 HK Dongfang Electric Corporation Ltd Industrial Engineering 2251.2% 914 HK Anhui Conch Cement Co Ltd Construction & Materials 1636.4% 1133 HK Harbin Pow er Equipment Co Ltd Industrial Engineering 1407.2% 124 HK Kingw ay Brew ery Holdings Ltd Beverages 995.2% 323 HK Maanshan Iron & Steel Co Ltd Industrial Metals & Mining 548.6% 1053 HK Chongqing Iron & Steel Co Ltd Industrial Metals & Mining 534.9% 347 HK Angang Steel Co Ltd Industrial Metals & Mining 487.8% * 2355 HK Baoye Group Co Ltd Construction & Materials 451.7% 358 HK Jiangxi Copper Co Ltd Industrial Metals & Mining 432.6% 995 HK Anhui Expressw ay Co Ltd Industrial Transportation 428.2% Ticker Name Sector 11th FYP (2006-2010) 8058 HK Shandong Luoxin Pharmacy Stock Co Ltd Pharmaceuticals & Biotechnolog 2657.1% 8102 HK Shanghai Fudan Microelectronics Co Ltd Technology Hardw are & Equipmen 1650.0% 2302 HK CNNC International Ltd Industrial Engineering 1640.0% 3311 HK China State Construction International Holdings Ltd Construction & Materials 1548.1% 1211 HK BYD Co Ltd Electronic & Electrical Equipm 1198.9% 1066 HK Shandong Weigao Group Medical Polymer Co Ltd Health Care Equipment & Servic 1197.1% 2308 HK EVOC Intelligent Technology Co Ltd Technology Hardw are & Equipmen 1126.9% 895 HK Shenzhen Dongjiang Environmental Co Ltd Support Services 1096.0% 317 HK Guangzhou Shipyard International Co Ltd Industrial Engineering 1080.8% 257 HK China Everbright International Ltd Support Services 959.7% Note: A total 255 China stocks were explored in the stock pool including 120 H shares in Main board, 93 Red chip shares in Main board, 37 H shares in GEM and 5 Red chip shares in GEM, * represents share performance since IPO Source: Bloomberg, Nomura research 4 © Nomura International (Hong Kong) Limited Strategy China Economic growth vs equity market

HSCEI index performance vs GDP growth SHCOMP index performance vs GDP growth

20% 200% 20% 200% GDP y-y % HSCEI index y-y % (RHS) GDP y-y % SHCOMP index y-y % 15% 150% 15% 150% Average GDP growth = 10% Average GDP growth = 10% 10% 100% 10% 100%

5% 50% 5% 50%

0% 0% 0% 0%

-5% -50% -5% -50%

-10% -100% -10% -100%

1990 1991 1994 1995 1998 1999 2002 2003 2006 2007 2010 1992 1993 1996 1997 2000 2001 2004 2005 2008 2009

1996 1997 1998 1999 2003 2004 2005 2006 2009 2010 1994 1995 2000 2001 2002 2007 2008 Source: Bloomberg, CEIC, WIND, Nomura research Source: Bloomberg, CEIC, WIND, Nomura research HSCEI index P/E vs quarterly GDP growth

Source: Bloomberg, CEIC, WIND, Nomura research 5 © Nomura International (Hong Kong) Limited Strategy China Consumption – Transforming growth pattern

Average y-y growth rate by industries (1990-2005) Fixed asset investment growth vs GDP growth 16% Average grow th rate (8th - 10th FYP) (1990-2005) 20% GDP growth Fixed asset investment y-y % (RHS) 75%

12.1% 12% 15% 50% 9.8%

8% 10% 25%

4.1% 4% 5% 0%

0% -25% 0%

Primary industry Secondary industry Tertiary industry

1981 1985 1987 1991 1993 1997 2001 2003 2007 2009 1983 1989 1995 1999 2005 Source: CEIC, WIND, Nomura research Source: CEIC, WIND, Nomura research Contribution to GDP by industries Contribution to GDP growth by expenditure

Contribution to GDP by primary industry 80% 8% Contribution to GDP by consumption Contribution to GDP by secondary industry Contribution to GDP by capital formation Contribution to GDP by tertiary industry Contribution to GDP by net export 60% 6%

40% 4%

20% 2%

0% 0% 9th FYP 10th FYP 11th FYP 9th FYP 10th FYP 11th FYP

Source: CEIC, WIND, Nomura research Source: CEIC, WIND, Nomura research 6 © Nomura International (Hong Kong) Limited Strategy China Consumption – Income distribution reform

Minimum wages standard adjustment in China

Note:* including three provinces which disclosed the 2010 GDP per capita information Source: Nomura research 7 © Nomura International (Hong Kong) Limited Strategy China Consumption – Income distribution reform

Total deposit changes (1997-2010) Average y-y deposit growth (2000-2010)

Enterprise as % of total deposit 40% Average deposit growth for 10th and 11th FYPs (2000-2010) 80% Government as % of total deposit 34.3% Saving as % of total deposit 60% 30%

19.6% 40% 20% 16.3%

20% 10%

0% 0%

Enterprise Governement Savings

1997 1998 2002 2003 2004 2005 2006 2010 1999 2000 2001 2007 2008 2009 Source: CEIC, WIND, Nomura research Source: CEIC, WIND, Nomura research Saving deposit vs retail sales (1953-2010) China’s total wages as % of GDP (1960-2010)

20,000 25% Wages as % of GDP y = 0.5086x + 239.43 16,000 R² = 0.9938 20%

12,000 15%

8,000 10%

Retail sales (RMB bn)salesRetail (RMB 4,000 5%

1961 1965 1969 1971 1975 1979 1981 1985 1989 1991 1995 1999 2001 2005 2009 1967 1973 1977 1983 1987 1993 1997 2003 2007 - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 1963 Saving deposit (RMB bn)

Source: CEIC, WIND, Nomura research Source: CEIC, Nomura research 8 © Nomura International (Hong Kong) Limited Strategy China Consumption – Foreign countries

GDP per capita vs consumption as % of GDP – Japan GDP per capita vs consumption as % of GDP – Korea

70% 60,000 90% 25,000 GDP per capita (USD) (RHS) Consumption as % of GDP GDP per capita (USD) (RHS) Consumption as % of GDP

20,000 65% 45,000 80% GDP per capita GDP per capita of USD3,368 of USD3,817 15,000 60% 30,000 70% Lowest consumption 10,000 as % of GDP of 60% 15,000 60% 55% Lowest consumption as 5,000 % of GDP of 52%

50% - 50% -

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 2010 1994 1996 1998 2000 2002 2004 2006 2008

1957 1961 1963 1967 1971 1973 1975 1977 1981 1985 1987 1991 1995 1997 2001 2005 2007 1955 1959 1965 1969 1979 1983 1989 1993 1999 2003 2009 Source: CEIC, WIND, World Bank, Nomura research Source: CEIC, WIND, World Bank, Nomura research GDP per capita vs consumption as % of GDP – U.S. GDP per capita vs consumption as % of GDP – China

85% 60,000 100% 6,000 GDP per capita (USD) (RHS) Consumption as % of GDP GDP per capita (USD) (RHS) Consumption as % of GDP

75% GDP per capita of 45,000 85% GDP per capita of 4,500 USD3,458 USD4,384 in 2010

65% 30,000 70% 3,000

55% Lowest consumption as 15,000 55% 1,500 % of GDP of 61% ex Lowest consumption World War II as % of GDP of 47%

45% - 40% -

1935 1938 1941 1944 1947 1950 1965 1968 1971 1974 1977 1980 1983 1998 2001 2004 2007 2010 1929 1932 1953 1956 1959 1962 1986 1989 1992 1995

1952 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1954 1956 1958 1960 1962 1964 1966 1968 1970

Source: CEIC, WIND, World Bank, Nomura research Source: CEIC, WIND, World Bank, Nomura research 9 © Nomura International (Hong Kong) Limited Strategy China Industry reforms – Improving efficiency

Gross margin for steel manufacturers Steel production and RoE

750 30% Highest ROE and growth of steel 600 production in 10th FYP 20% Gross margin Ticker 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 450 Angang 347 HK 11.0% 11.8% 15.7% 14.5% 14.1% 23.1% 22.5% 10.4% 5.9% 7.1% 10% Maanshan 323 HK 13.8% 14.7% 25.5% 22.3% 14.7% 12.9% 11.4% 6.0% 5.4% 5.3% 300 Baosteel 600019 CH 20.0% 27.2% 30.1% 28.8% 20.6% 17.0% 14.0% 8.8% 9.7% 11.9% China Steel 2002 TT 14.0% 24.8% 35.5% 38.0% 35.9% 24.5% 26.2% 15.2% 8.8% 18.0% 0% 150 POSCO 005490 KS 18.9% 22.1% 27.5% 30.7% 32.2% 25.0% 25.2% 25.9% 16.2% 20.2%

- -10%

1980 1981 1988 1989 1990 1991 1992 1993 1994 1995 1996 2003 2004 2005 2006 2007 2008 2009 2010 1982 1983 1984 1985 1986 1987 1997 1998 1999 2000 2001 2002 Steel production (mn tonnes) Production growth y-y % (RHS) Sector ROE (RHS)

Source: Bloomberg, Nomura research Source: CEIC, WIND, Nomura research Declining industry RoEs Sector ROE Summary (%) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Trend Primary Industry Agriculture (1.8) 0.4 0.9 1.6 2.0 2.3 1.8 2.2 2.3 2.0 down Secondary Industry Auto Manufacturing 6.0 6.5 7.5 7.4 10.0 5.8 7.8 8.6 8.2 10.8 up Building Material Industry 0.8 1.0 1.7 2.1 4.8 4.2 2.0 3.2 4.0 4.5 down Chemical Fundamental Material 3.5 2.0 1.1 1.9 6.3 2.2 5.9 6.5 4.3 3.2 down Gas Production & Supply (2.1) (0.1) 0.6 0.7 1.4 1.2 1.8 1.8 2.9 2.8 up IT Equipment Manufacturing 10.2 10.0 4.3 4.5 0.4 2.2 0.8 0.8 0.8 2.7 down Pharmaceutical Industry 6.4 6.6 6.4 7.4 7.0 6.8 5.3 5.8 6.3 8.6 up Water Production & Supply - - (0.6) (0.1) (0.4) (0.4) 1.0 1.1 1.2 1.4 up Coal Industry (0.8) 0.5 2.8 2.9 7.2 9.6 8.3 10.9 11.2 7.7 down Electric Utility Industry 2.9 3.9 2.2 3.3 3.4 3.9 2.5 2.8 2.2 1.9 down Electronic Component Manufacturing 6.0 0.2 2.5 2.8 2.8 3.7 (1.3) (1.3) (1.1) (1.0) down Ferrous Metal Industry 2.1 2.5 4.0 4.7 7.9 10.9 9.1 10.0 6.6 3.9 down Food & Beverage Manufacturing 1.5 3.5 1.7 3.3 4.5 5.6 5.8 6.4 6.0 2.4 down Machinery 2.3 2.7 2.9 4.7 4.5 7.3 4.6 5.3 5.5 5.5 down Mining-Crude Oil & Natural Gas 12.3 6.2 6.5 5.2 7.8 11.7 12.5 12.8 9.5 9.4 down Stationary and Sporting Goods 2.0 3.7 3.8 4.3 5.5 5.9 3.3 3.7 3.3 3.7 down Tertiary Industry Computer and Software Service n.a. 8.7 3.4 3.7 5.8 4.4 3.2 3.5 3.7 3.9 down IT Service n.a. 6.1 5.2 4.7 6.2 9.3 7.5 8.3 6.0 5.8 down Telecom Service n.a. 5.9 4.2 5.3 7.2 9.5 4.5 6.1 6.3 6.1 down Source: *2010 sector data not disclosed yet, WIND, Nomura research 10 © Nomura International (Hong Kong) Limited Strategy China Central & western China – Leading growth

Secondary industry value by region

(RMBbn) Eastern 14,000 2010 Y-Y growth = 18% Central 12,000 Western 10,000 2010 Y-Y growth = 26% 8,000 6,000 2010 Y-Y growth = 27% 4,000 2,000

1995 1997 1999 2001 2002 2003 2004 2006 2008 2010 1996 1998 2000 2005 2007 2009

Source: CEIC, Nomura research FAI y-y growth – rural areas FAI y-y growth – urban areas

80% 40% Eastern Central Western

60% 30%

40% 20%

20% 10% Eastern Central Western

0% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: *2010 data not disclosed yet, CEIC, Nomura research Source: CEIC, Nomura research

11 © Nomura International (Hong Kong) Limited Strategy China Central & western China – Leading growth

Overview of Eastern, Central, Western and Northeastern China

Northeastern China: Heavy industry base, Developed transportation network Heilongjiang

Jilin Xinjiang Liaoning Eastern China: Inner Mongolia Beijing Gansu Developed industry system, Tianjin Hebei rising labor and land costs, Ningxia Shandong more correlated to world Qinghai Shanxi economy Shaanxi Jiangsu Henan Anhui Shanghai Tibet Hubei SichuanSichuan Zhejiang

Chongqing Jiangxi Hunan Fujian Guizhou Western China: Yunnan Central China: Rich resources reserve, less Developed transportation Guangxi Guangdong developed transportation network, network, relative lower Taiwan low labor costs and urbanization rate labor and land costs Macau Hongkong

Hainan

Source: Nomura research 12 © Nomura International (Hong Kong) Limited Strategy China Energy consumption – Efficiency & alternative

Energy consumption per unit of GDP Energy consumption growth

20% 600 TCE per RMB mn Energy Consumption per GDP (LHS) 20% Energy Consumption Growth y-y grow th (RHS) 16% 450 0% 12%

300 -20% 8% ending year of 9th, 10th FYP 4% 150 -40% 0%

0 -60%

1978 1980 1984 1986 1990 1992 1996 1998 2002 2004 2008 2010 1988 1994 2000 2006 -4% 1982 1991 1994 1997 2000 2003 2006 2009 Source: *2010 not disclosed yet, CEIC, Nomura research Source: CEIC, Nomura research Energy consumption breakdown Investment of pollution treatment

500,000 Coal Crude Oil Natural Gas Hydo Power Investment of pollution treatment (RMB mn) 100 95 400,000 90 85 300,000 80 75 200,000 70 65 60 100,000 55 50 -

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1979 1980 1981 1982 1985 1986 1987 1988 1992 1993 1994 1995 1998 1999 2000 2001 2004 2005 2006 2007 1978 1983 1984 1989 1990 1991 1996 1997 2002 2003 2008 2009

Source: *2010 not disclosed yet, CEIC, Nomura research Source: *2010 not disclosed yet, CEIC, Nomura research 13 © Nomura International (Hong Kong) Limited Strategy China Development of FYPs

Historical FYP timeline vs GDP growth

Develop II, III industry and Economic growth restructure —— GDP Growth Rate%(LHS) domestic equity market

HSCEI Index Y-Y%(RHS)

Accelerating economic growth, Put forward 'Central and 30 improve living standard after Western Development' strategy, 'Opening-up' continue to develop II, III industry 20 200 150 10 100 50 0 0 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 -50 -10 -100 1st 2nd Phase of 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 5 year 5 year adjustment 5 year 5 year 5 year plan 5 year 5 year 5 year plan 5 year plan 5 year 5 year 5 year plan -20

-30 Adjustment after Emphasize 'Rural Area overheated economic Development', 'Industry development upgrade' and energy saving

Boost domestic demand post crisis; Opening-up Set clear target for 'Energy Saving and Pollutant Emissions'

Source: Bloomberg, CEIC, www.people.com.cn, Nomura research 14 © Nomura International (Hong Kong) Limited Strategy China Near term outlook – flattish performance YTD

Source: WIND,CEIC, Bloomberg, Nomura research

15 © Nomura International (Hong Kong) Limited Strategy China Tightening and economic cycles

Source: WIND,CEIC, Bloomberg, Nomura research

16 © Nomura International (Hong Kong) Limited Strategy China Inflation cycle for the past decade

Three inflation cycles: 03/04; 07/08 and current Causes are different – domestic vs global

Quarterly GDP % (RHS) Monthly CPI G7 inflation World inflation index China CPI 9% 17% 6% 5% 6% 14% 4% CPI=3% CPI=3% 3% 11% 3% 2% 0% 8% 1% 0% -3% 5%

-1%

00 05 10

00 00 05 05 10 10

02 07

03 08

02 04 07 09

01 03 06 08 11

01 02 04 06 07 09

- - -

------

- -

- - - - -

------

Jul Jul

Apr Oct Apr Oct Apr

Jan Jun Jan Jun Jan Jun

Feb Mar Feb Mar

Nov Sep Dec Aug Nov Sep Dec Aug Nov

2001 2002 2003 2004 2008 2009 2010 2000 2005 2006 2007

May May

Source: WIND, CEIC, Nomura research Source: WIND, CEIC, Nomura research Causes are different – FAI vs CPI Causes are different – M2 vs CPI

FAI YTD y-y % CPI (RHS) M2 y-y % CPI (RHS) 58% 9% 34% 9%

48% 6% 28% 6%

38% 3% 22% 3%

28% 0% 16% 0%

18% -3% 10% -3%

10 00 05

10 10 00 00 05 05

02 07

03 08

04 09

02 07

11 01 03 06 08

02 07

09 01 04 06

02 05 06 07 08 11 03 04 09 10

02 03 04 07 08 09 10 05 06

- - -

------

- -

- - - -

- - - - -

------

Jul Jul

Apr Apr Oct Apr Oct

Jan Jun Jan Jun Jan Jun

Mar Mar

Feb Feb

Aug Nov Nov Sep Dec Aug Nov Sep Dec

Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb

May May

Aug Aug Aug Aug Aug Aug Aug Aug Aug

Source: WIND, CEIC, Nomura research Source: WIND, CEIC, Nomura research 17 © Nomura International (Hong Kong) Limited Strategy China Current inflation cycle vs historical cycles

Index performance under IR hike cycles One-year performance comparison during IR hike

200% 16% 30% 11.5% MSCI China Index relative performance MSCI China Index relative performance

150% 15% 20% Qly GDP (04 cycle, RHS) 11.0% Qly GDP (06-07 cycle,RHS) +27bp 100% +27bp +18bp 14% 10% 1y performance 10.5% +27bp +18bp since Oct. 2004 IR +18bp Hike 50% +27bp the last IR Hike 13% 0% 10.0% cycle since Apr. +27bp +27bp 2006 to Dec. 2007 +25bp +25bp 0% 12% -10% +25bp the current IR 9.5% +25bp the current IR +25bp Hike cycle since +25bp +25bp Hike cycle since +25bp October 2010

-50% October 2010 11% -20% 9.0%

31 61 91

181 211 241 331 361 391 481 511 541 631 121 151 271 301 421 451 571 601

151 181 211 241 271 301 331 361 days 121 days Source: WIND, CEIC, Nomura research Source: WIND, CEIC, Nomura research Current inflation cycle vs 07/08 Current inflation cycle vs 03/04

CPI during 2007-2008 CPI during 2010-2011 CPI during 2010-2011 CPI during 2003-2004 10% 6%

8% 4% 6%

4% 2%

2% Month Month 0% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Source: WIND, CEIC, Nomura research Source: WIND, CEIC, Nomura research

Sector and index performance under inflation Sector relative performance against index

Total monthly return during inflation cycle Under/Outperformance vs index Sector return 2003/04 2007/08 Current Sector return 2003/04 2007/08 Current Consumer discretionary -9.8% -48.6% -0.7% Consumer discretionary U U U Consumer staples -30.7% -20.8% 8.5% Consumer staples U U O Energy 36.7% -8.0% 20.5% Energy O O O Financial 9.5% -11.5% 6.5% Financial U O U Healthcare -29.6% n/a -11.0% Healthcare U n/a U Industrial 7.9% -33.8% -2.6% Industrial U U U IT -37.6% -48.9% 22.6% IT U U O Material 39.8% -52.6% 15.5% Material O U O Telecom 5.2% 7.6% 1.8% Telecom U O U Utilities 3.1% -12.0% -1.2% Utilities U O U Index return Index return MSCI China 10.2% -15.4% 7.6% MSCI China 10.2% -15.4% 7.6% HSCEI 22.3% -12.8% 7.3% HSCEI 22.3% -12.8% 7.3% CPI 4.0% ** 6% ** 4.3% ** CPI 4.0% ** 6% ** 4.3% ** Note: ** stands for average CPI for the period. Source: WIND, CEIC, Nomura research Note: ** stands for average CPI for the period. Source: WIND, CEIC, Nomura research Discretionary gross margin vs CPI Staples gross margin vs CPI

Discretionary gross margin (A-share) Quarterly CPI (RHS) Staples gross margin (A-share) Quarterly CPI (RHS) 19% 12% 28% 12%

27% 9% 18% 8%

26% 6% 17% 4% 25% 3%

16% 0% 24% 0%

15% -4% 23% -3% 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

Source: WIND, CEIC, Nomura research Source: WIND, CEIC, Nomura research

ANALYST CERTIFICATIONS I, Henry Wu, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

ISSUER SPECIFIC REGULATORY DISCLOSURES Conflict-of-interest disclosures Important disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx. If you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-865-5752) or email [email protected] for assistance.

Online availability of research and additional conflict-of-interest disclosures: Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities.

Distribution of Ratings: Nomura Global Equity Research has 1842 companies under coverage. 50% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*. 36% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 47% of companies with this rating are investment banking clients of the Nomura Group*. 13% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 3% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 June 2010.

*The Nomura Group as defined in the Disclaimer section at the end of this report.

20 Nomura International (Hong Kong) Limited Strategy China

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008: The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. Stocks: • A rating of "1", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. • A rating of "2", or "Neutral", indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. • A rating of "3", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. • A rating of "RS-Rating Suspended", ‖ indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research); Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. Sectors: A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX® 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.

Explanation of Nomura’s equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009: Stocks: Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target – Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target will equal the analyst’s 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. • A "Buy" recommendation indicates that potential upside is 15% or more. • A "Neutral" recommendation indicates that potential upside is less than 15% or downside is less than 5%. • A "Reduce" recommendation indicates that potential downside is 5% or more. • A rating of "RS" or "Rating Suspended" indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. • Stocks labelled as "Not rated" or shown as "No rating" are not in Nomura's regular research coverage. Sectors: A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. 21 Nomura International (Hong Kong) Limited Strategy China

Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008): Stocks: • A rating of "1", or "Strong buy", indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. • A rating of "2", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. • A rating of "3", or "Neutral", indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. • A rating of "4", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. • A rating of "5", or "Sell", indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. • Stocks labeled "Not rated" or shown as "No rating" are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. Sectors: A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector — Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008: Stocks: Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. • A "Strong buy" recommendation indicates that upside is more than 20%. • A "Buy" recommendation indicates that upside is between 10% and 20%. • A "Neutral" recommendation indicates that upside or downside is less than 10%. • A "Reduce" recommendation indicates that downside is between 10% and 20%. • A "Sell" recommendation indicates that downside is more than 20%. Sectors: A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Price targets Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. 22 Nomura International (Hong Kong) Limited Strategy China

DISCLAIMERS: This publication contains material that has been prepared by the Nomura entity identified on the banner at the top or the bottom of page 1 herein and, if applicable, with the contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or elsewhere identified in the publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the "Nomura Group"), include: Nomura Securities Co., Ltd. ("NSC") Tokyo, Japan; Nomura International plc, United Kingdom; Nomura Securities International, Inc. ("NSI"), New York, NY; Nomura International (Hong Kong) Ltd., Hong Kong; Nomura Financial Investment (Korea) Co., Ltd., Korea; Nomura Singapore Ltd., Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd., Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia, Indonesia; Nomura Securities Malaysia Sdn. Bhd., Malaysia; Nomura International (Hong Kong) Ltd., Taipei Branch, Taiwan; Nomura Financial Advisory and Securities (India) Private Limited, Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034). This material is: (i) for your private information, and we are not soliciting any action based upon it; (ii) not to be construed as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such offer or solicitation would be illegal; and (iii) based upon information that we consider reliable. NOMURA GROUP DOES NOT WARRANT OR REPRESENT THAT THE PUBLICATION IS ACCURATE, COMPLETE, RELIABLE, FIT FOR ANY PARTICULAR PURPOSE OR MERCHANTABLE AND DOES NOT ACCEPT LIABILITY FOR ANY ACT (OR DECISION NOT TO ACT) RESULTING FROM USE OF THIS PUBLICATION AND RELATED DATA. TO THE MAXIMUM EXTENT PERMISSIBLE ALL WARRANTIES AND OTHER ASSURANCES BY NOMURA GROUP ARE HEREBY EXCLUDED AND NOMURA GROUP SHALL HAVE NO LIABILITY FOR THE USE, MISUSE, OR DISTRIBUTION OF THIS INFORMATION. Opinions expressed are current opinions as of the original publication date appearing on this material only and the information, including the opinions contained herein, are subject to change without notice. Nomura is under no duty to update this publication. If and as applicable, NSI's investment banking relationships, investment banking and non- investment banking compensation and securities ownership (identified in this report as "Disclosures Required in the United States"), if any, are specified in disclaimers and related disclosures in this report. In addition, other members of the Nomura Group may from time to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicit investment banking or other business from, companies mentioned herein. Further, the Nomura Group, and/or its officers, directors and employees, including persons, without limitation, involved in the preparation or issuance of this material may, to the extent permitted by applicable law and/or regulation, have long or short positions in, and buy or sell, the securities (including ownership by NSI, referenced above), or derivatives (including options) thereof, of companies mentioned herein, or related securities or derivatives. In addition, the Nomura Group, excluding NSI, may act as a market maker and principal, willing to buy and sell certain of the securities of companies mentioned herein. Further, the Nomura Group may buy and sell certain of the securities of companies mentioned herein, as agent for its clients. Investors should consider this report as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Please see the further disclaimers in the disclosure information on companies covered by Nomura analysts available at www.nomura.com/research under the "Disclosure" tab. Nomura Group produces a number of different types of research product including, amongst others, fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise; it is possible that individual employees of Nomura may have different perspectives to this publication. NSC and other non-US members of the Nomura Group (i.e., excluding NSI), their officers, directors and employees may, to the extent it relates to non-US issuers and is permitted by applicable law, have acted upon or used this material prior to, or immediately following, its publication. Foreign currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. The securities described herein may not have been registered under the U.S. Securities Act of 1933, and, in such case, may not be offered or sold in the United States or to U.S. persons unless they have been registered under such Act, or except in compliance with an exemption from the registration requirements of such Act. Unless governing law permits otherwise, you must contact a Nomura entity in your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material. This publication has been approved for distribution in the United Kingdom and European Union as investment research by Nomura International plc ("NIPlc"), which is authorised and regulated by the U.K. Financial Services Authority ("FSA") and is a member of the London Stock Exchange. It does not constitute a personal recommendation, as defined by the FSA, or take into account the particular investment objectives, financial situations, or needs of individual investors. It is intended only for investors who are "eligible counterparties" or "professional clients" as defined by the FSA, and may not, therefore, be redistributed to retail clients as defined by the FSA. This publication may be distributed in Germany via Nomura Bank (Deutschland) GmbH, which is authorised and regulated in Germany by the Federal Financial Supervisory Authority ("BaFin"). This publication has been approved by Nomura International (Hong Kong) Ltd. ("NIHK"), which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This publication has been approved for distribution in Australia by Nomura Australia Ltd, which is authorised and regulated in Australia by the Australian Securities and Investment Commission (―ASIC‖). This publication has also been approved for distribution in Malaysia by Nomura Securities Malaysia Sdn. Bhd. In Singapore, this publication has been distributed by Nomura Singapore Limited (―NSL‖). NSL accepts legal responsibility for the content of this publication, where it concerns securities, futures and foreign exchange, issued by its foreign affiliate in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this publication may contact NSL in respect of matters arising from, or in connection with, this publication. NSI accepts responsibility for the contents of this material when distributed in the United States 23 Nomura International (Hong Kong) Limited Strategy China

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 Nomura Group member identified in the banner on page 1 of this report. Further information on any of the securities mentioned herein may be obtained upon request. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this publication, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. This publication has not been approved for distribution in the Kingdom of Saudi Arabia or to clients other than 'professional clients' in the United Arab Emirates by Nomura Saudi Arabia, Nomura International plc or any other member of the Nomura Group, as the case may be. Neither this publication nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into the Kingdom of Saudi Arabia or in the United Arab Emirates or to any person located in the Kingdom of Saudi Arabia or to clients other than 'professional clients' in the United Arab Emirates. By accepting to receive this publication, you represent that you are not located in the Kingdom of Saudi Arabia or that you are a 'professional client' in the United Arab Emirates and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the Kingdom of Saudi Arabia or the United Arab Emirates..

Additional information available upon request NIPlc and other Nomura Group entities manage conflicts identified through the following: their Chinese Wall, confidentiality and independence policies, maintenance of a Stop List and a Watch List, personal account dealing rules, policies and procedures for managing conflicts of interest arising from the allocation and pricing of securities and impartial investment research and disclosure to clients via client documentation.

Disclosure information is available at the Nomura Disclosure web page: http://www.nomura.com/research/pages/disclosures/disclosures.aspx

24 Nomura International (Hong Kong) Limited Strategy China Asian Equity Research Group

HONG KONG KUALA LUMPUR TOKYO Nomura International (Hong Kong) Limited Nomura Securities Malaysia Sdn. Bhd. Financial & Economic Research Center 30/F Two International Finance Centre Suite No 16.5, Level 16, Menara IMC Nomura Securities Co., Ltd. 8 Finance Street, Central, Hong Kong 8 Jalan Sultan Ismail, 17/F Urbannet Building, Tel: +852 2536 1111 50250 Kuala Lumpur, Malaysia 2-2, Otemachi 2-chome Chiyoda-ku, Fax: +852 2536 1820 Tel: +60 3 2027 6811 Tokyo 100-8130, Japan Fax: +60 3 2027 6888 SINGAPORE Equity Research DepartmentⅠ/Ⅱ/Ⅲ Nomura Singapore Limited SYDNEY Tel: +81 3 5255 1658 5 Temasek Boulevard #11-01, Nomura Australia Ltd. Fax: +81 3 5255 1718 Suntec Tower Five, Level 25, Governor Phillip Tower Singapore 038985, Singapore 1 Farrer Place, Sydney NSW 2000 Investment Strategy Department Tel: +65 6433 6288 Tel: +61 2 8062 8000 Tel: +81 3 5255 1735 Fax: +65 6433 6169 Fax: +61 2 8062 8362 Fax: +81 3 5255 1655

TAIPEI INDIA Economic Research Department Nomura International (Hong Kong) Limited, Nomura Financial Advisory and Tel: +81 3 5203 0445 Taipei Branch Securities (India) Private Limited Fax: +81 3 5203 0498 17th Floor, Walsin Lihwa Xinyi Building Ceejay House, Level 11, Plot F, Shivsagar No.1, Songzhi Road, Taipei 11047, Taiwan, R.O.C. Estate, Dr. Annie Besant Road, Worli, Tel: +886 2 2176 9999 Mumbai- 400 018, India Fax: +886 2 2176 9900 Tel: +91 22 4037 4037 Fax: +91 22 4037 4111 SEOUL Nomura Financial Investment (Korea) Co., Ltd. INDONESIA 17th floor, Seoul Finance Center PT. Nomura Indonesia 84 Taepyeongno 1-ga, Jung-gu Suite 209A, 9th Floor, Sentral Senayan II Seoul 100-768, Korea Building, Jl. Asia Afrika No. 8, Tel: +82 2 3783 2000 Gelora Bung Karno, Jakarta 10270, Fax: +82 2 3783 2500 Indonesia Tel: +62 21 2991 3300 Fax: +62 21 2991 3333