July 9, 2011 China China Weekly Kickstart Portfolio Strategy Research July 4-8: Strong market after the long awaited rate hike China equity markets rallied, with MXCN +2.1% (MXAPJ +1.8%) and CSI300 +1.9% . Vice Premier Wang Qishan said the govt needs to help SMEs tackle financing difficulties, which further raised expectations on possible loosening in 2H2011 (although we believe a quota allocation change is more likely than a total quota increase). PBOC hiked interest rates mid week, which was long expected and should be the last this year. Upbeat global trends (Greece etc) also contributed to the strong market. We expect 2Q GDP growth of 9.4% yoy (8.0% qoq sa ann), with June CPI rising to 6.4% from 5.5% in May; July may remain elevated or possibly even higher. This week’s performance summary Key ideas from GS China Research Sectoral performance diverged between onshore We remain upbeat and expect performance to Helen Zhu +852-2978-0048 [email protected] and offshore this week. Cyclicals generally year-end to be driven largely by earnings growth Goldman Sachs (Asia) L.L.C. outperformed offshore in the rally. Building (some slight multiple expansion is possible by late materials and property topped the performance in the year). However, market expectations on Hanfeng Wang, Ph.D, CFA table on a possible switch in policy stance but loosening have risen significantly, so more +86(10)6627-3318 [email protected] Beijing Gao Hua Securities Company Limited underperformed onshore. Autos performed well volatility near-term is possible as the inflation data given newsflow (Xinhua News) on possible may remain concerning for June/July and we Timothy Moe, CFA supportive policies emerging. Other consumers believe loosening may not be imminent. +852-2978-1328 [email protected] lagged offshore. Sportswear companies dropped Goldman Sachs (Asia) L.L.C. Key China reports: 1) 2H2011 A-share outlook 2) sharply on Li Ning’s disappointing earnings China econ data preview 3) China Auto, initiate guidance. Banks continued to underperform Ben Bei Xingda and Minth 4) China solar industry move to +852-2978-1220 [email protected] offshore on continued LGFV uncertainties and block mid cycle 5) China insurance’s impact from rate Goldman Sachs (Asia) L.L.C. sales, but saw some buying in the A-share market hike. on the back of the NIM-positive rate hike. Oil price rebounded from recent corrections and helped to lift Valuation oil offshore at the expense of transport, but the MXCN: 11.4X 11E P/E; 20.0% 11E EPS growth. relationship was less obvious onshore. Telcos and CSI300: 13.9X 11E P/E; 25.3% 11E EPS growth. utilities lagged in both markets given the rally of the market. Key upcoming events to watch China: CPI, PPI, IP, FAI, GDP (July 9-13) Goldman Sachs does and seeks to do business with companies covered in its 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 a single factor in making their investment decision. For Reg AC see the end of the text. For other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research July 9, 2011 China Goldman Sachs’ China strategy view at a glance Goldman Sachs’ 12-month index target and EPS growth assumptions* Implied fwd valuations 2011E EPS growth (%) Top-down Bottom-up Consensus Index Potential 30% MSCI China level +/(-) % P/E (X) P/B (X) Current index level 67.5 10.5 25% Bull case 106.8 58.2 14.0 2.7 20% Base case 83.2 23.2 12.0 2.1 Bear case 69.4 2.8 11.0 1.8 15% Implied fwd Index Potential 10% CSI300 level +/(-) % P/E (X) Current index level 3,109.2 12.4 5% Bull case 3,800 22.2 13.2 Base case 3,400 9.4 12.8 0% MSCI China CSI 300 Bear case 2,700 (13.2) 10.7 * CSI300 targets are 2011 Year-end. Conviction Buy/Conviction Sell List Conviction Buy/Conviction Sell stocks rated by Goldman Sachs/Gao Hua Securities analysts, ranked by potential upside/downside to target price Conviction Buy list Quoting Quoted price Potential Market cap 6M ADVT P/E (X) EPS growth (%) P/B (X) ROE (%) D/Y (%) Ticker Name currency 08-Jul-2011 Target price +/- to TP (%) (US$ mn) (US$ mn) 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 601318 CH Ping An Insurance Group (A) CNY 48.49 84.70 75% 55198.6 171.0 21.0 18.3 22% 15% 3.3 2.9 17% 16% 1% 2% 600036 CH China Merchants Bank (A) CNY 13.41 21.60 61% 41253.6 138.8 10.7 8.2 37% 31% 2.1 1.8 23% 24% 2% 3% 601888 CH China International Travel Service Corp. CNY 24.35 37.30 53% 3335.2 20.7 52.7 31.3 15% 68% 5.3 4.5 10% 14% 0% 0% 998 HK China CITIC Bank (H) HKD 4.91 7.34 49% 25240.2 21.8 8.0 6.0 49% 32% 1.3 1.1 19% 20% 0% 4% 867 HK China Medical System Holdings HKD 7.86 11.90 51% 1264.9 1.0 33.2 21.6 40% 54% 5.9 3.1 24% 19% 0% 0% YOKU US Youku.com Inc. USD 36.85 55.00 49% 4090.8 118.6 79% 46% 10.5 6.1 -13% -3% 0% 0% 3333 HK Evergrande Real Estate Group HKD 5.72 8.20 43% 10619.4 39.8 9.5 7.4 592% 28% 3.4 2.5 43% 37% 3% 3% 000002 CH China Vanke (A) CNY 8.82 12.72 44% 14948.9 82.9 13.2 8.3 37% 59% 2.2 1.8 15% 18% 1% 2% 601006 CH Daqin Railway CNY 8.23 12.00 46% 19057.6 63.1 11.8 9.2 38% 28% 2.2 2.0 21% 22% 4% 5% 600376 CH Beijing Capital Development Co. CNY 12.71 18.46 45% 2956.1 30.9 14.2 9.7 44% 47% 1.8 1.6 13% 17% 1% 2% 848 HK Maoye International Holdings HKD 3.68 5.20 41% 2397.3 3.9 28.0 20.5 24% 37% 4.1 3.5 13% 14% 0% 1% 358 HK Jiangxi Copper (H) HKD 27.05 37.30 38% 11768.0 49.2 14.5 8.1 104% 79% 2.3 1.8 17% 24% 1% 2% SVN US 7 Days Group Holdings Ltd. USD 21.2 29.00 37% 1057.7 2.9 62.0 30.6 140% 103% 5.1 4.3 9% 15% 0% 0% 1199 HK COSCO Pacific HKD 14.26 19.30 35% 4940.2 19.0 12.8 11.5 85% 12% 1.5 1.4 9% 11% 3% 3% 000527 CH GD Midea Holding CNY 17.98 24.30 35% 9508.6 55.3 18.1 14.4 10% 26% 4.6 3.1 21% 20% 1% 1% Conviction Sell list Quoting Quoted price Potential Market capP/E (X) EPS growth (%) P/B (X) ROE (%) D/Y (%) Ticker Name currency 08-Jul-2011 Target price target price (US$ mn) 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 1898 HK China Coal Energy (H) HKD 10.78 7.40 -31% 18296.3 42.0 16.2 13.1 -1% 24% 1.6 1.5 9% 10% 2% 2% 175 HK Geely Automobile Holdings HKD 3.3 2.61 -21% 2501.0 13.7 15.6 13.9 10% 12% 2.6 2.2 17% 15% 1% 1% 857 HK PetroChina (H) HKD 11.78 9.40 -20% 270901.8 129.9 13.1 9.9 37% 33% 1.9 1.7 14% 17% 3% 5% Source: I/B/E/S, Goldman Sachs Research estimates, Gao Hua Securities Research estimates, Goldman Sachs Global ECS Research estimates. Goldman Sachs Global Economics, Commodities and Strategy Research 2 July 9, 2011 China Sector view from GS/GH China research team GS strategy preference 11P/E Weighting GS Sector Offshore Onshore MXCN CSI300 MXCN CSI300 GS comment on sector trends and valuation Positive outlook as commodities team has become more bullish on oil prices. Upstream earnings outlook Oil and gas OW Neutral 10.4 15.9 19% 9% is strong with easing downstream earnings pressure starting from 2H11. This sector is trading slightly below historical average valuation and could benefit from several positive regulatory reform catalysts. NAV discount close to 08 market trough levels; although home purchase restriction (HPR) will stifle volume near-term, our estimates are already well below companies' targets and reflective of a 20% Property OW OW 9.8 10.6 6% 5% pullback in ASP from peak 2010 levels. Policy bad news is all out for the near to medium term. A-shares may be more volatile given more policy newsflow sensitivity/less valuation sensitivity. Favor dept stores with lower store vintage that pose better growth potential such as Intime and Maoye; Retail, hotels, consumer durables long-term positive on industry leading brands such as Belle. Beneficiary of wage increase/inflation and OW OW 19.6 16.0 4% 6% and apparel good operating leverage.