Strategy | CHINA 2011 Outlook NOMURA INTERNATIONAL (HK) LIMITED Henry Wu, CFA +852 2252 2122
[email protected] And the China Equity Research Team TOP DOWN ANCHOR REPORT Higher ground Stocks for action Following the rebound of 2009 and consolidation of 2010, we are positive on the Our top picks are front-line beneficiaries outlook for China’s equity markets in 2011F. We have year-end targets for the MSCI of investment opportunities in China in China Index and HSCEI Index of 83 and 16,000, implying 24% and 25% upside 2011, and feature strong earnings potential, respectively. We see index performance being backed by: 1) 21%+ earnings growth potential, healthy balance growth, with large-cap sectors such as Financials and Energy on course to deliver sheets, and attractive valuations. strong earnings; 2) attractive valuations (on our forecasts, 13x FY11F earnings, in line with the past 10-year average, and 2.5x price/book with RoE of 20%); and 3) a positive Price Stock Rating Price target liquidity outlook. We believe fundamentals will provide the surest footing for stock Agile Properties (3383 HK) BUY 11.1 13.3 pickers in 2011. Sectors with improving earnings prospects and strong RoEs are best Agricultural Bank of China (1288 HK) BUY 4.1 4.7 placed to scale the heights, in our view, particularly when there are uncertainties on China Everbright (257 HK) BUY 4.4 6.1 China Life Insurance (2628 HK) BUY 33.7 40.0 the policy front and the cost of capital is on the rise. While concerns over high inflation China Mengniu (2319 HK) BUY 22.7 32.0 could weigh on equity market performance in the short term, we recommend investors China Railway Construction Corp BUY 9.4 11.8 (1186 HK) position themselves for resulting buying opportunities, since historically the market Gome Electrical Appliances (493 HK) BUY 3.2 4.3 tends to rally once inflation has peaked out.