119459_Nomura on RMB 21OCT

21 October 2009 Nomura 1

Any authors named on this report are strategists unless otherwise indicated. See the important disclosures and analyst certifications on pages 16 to 19.

Strategy | A S I A Sean Darby +852 2252 2182 [email protected]

Action

The China currency forward market has continued to indicate a faster appreciation of the renminbi over the next 12 months. After stealthily shadowing the US dollar over the past year, the turnaround in exports ought to provide some support for policy makers.

Anchor themes Asia’s strong rebound in exports and relatively attractive domestic economy has caused both current and capital accounts to rebound simultaneously. This has put pressure on Asian currencies to appreciate.

On PPP measures, and based on current account surpluses, Asian exchanges have further room to appreciate.

Resistance is futile (III) and Tobin taxes (II)

Managing expectations China faces the unpleasant task of letting its exchange rate appreciate while also undermining its export competitiveness and diminishing the value of its existing US reserves. However, this would serve to cool latent inflationary pressures. The authorities also run the additional risk of attracting ever more fund flows and hot money if they were to raise interest rates or signal too fast an appreciation in currency expectations.

How investors can implement our view We continue to recommend China toll roads, Asian REIT CBs, banks and Asian telecoms. In Exhibit 31, we highlight companies that would stand to benefit from an appreciation in the renminbi.

Managing expectations “In finance, a non-deliverable forward (NDF) is an outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount. It is used in various markets such as foreign exchange and commodities. NDFs are prevalent in some countries where forward FX trading has been banned by the government (usually as a means to prevent exchange rate volatility).”, Wikipedia

Ironically, China’s capital account is considered to be a closed one and this has meant that there is little scope for companies or investors to utilise formal hedging tools by buying or selling the renminbi into the future. Of course, in reality, the capital account is quite porous, as rises in HK property prices can attest, as can intervention by the HKMA to restrain the HK dollar. The influence of forward exchange rate expectations in the global financial system is high, since it is an assumption of total aggregate inflows into an economy in the future. In this regard, it is essentially a barometer of sentiment and an attempt to measure the balance of payments.

N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D

TOPDOWN

Market calls

We highlight in Exhibit 31 companies that would stand to benefit from appreciation in the renminbi. There has also been an historical relationship between the movement in China renminbi currency forwards and the China A-share market. We would also highlight the benefits accruing to US-dollar based investors through the movement of the China toll road companies. Beneficiaries of an overall increase in Asian currencies would also include Telecoms, Asia REIT CBs and Banks.

Strategist Sean Darby +852 2252 2182 [email protected] Analysts Winnie Chan +852 2252 2199 [email protected] Amy Lee +852 2252 2181 [email protected]

Running baskets Bloomberg Nomura LastCompany code rating PriceAsia telecoms China Telecom-H 728 HK BUY 3.82 SK Telecom 017670 KS BUY 187,500 Taiwan Mobile 3045 TT BUY 59.90 Reliance Communications

RCOM IN BUY 231.60

Digi.Com DIGI MK BUY 21.50 PLDT TEL PM BUY 2,580 Singapore Telecom. ST SP BUY 3.15 Advanced Info Svc. ADVANC TB BUY 90.50 China toll road Jiangsu Expressway 177 HK BUY 6.42 Shenzhen Expressway

548 HK NEUTRAL 3.85

Sichuan Expressway 107 HK BUY 3.28 Anhui Expressway 995 HK BUY 4.87 Asia REIT CB basket Yanlord land 0% 06 Feb 12 n/a 112.88Capitacommercial Trust 2% 06 May 2013

n/a 103.03

Capitamall Trust 1% 02 Jul 2013 n/a 100.85

Note: 20 October, 2009; Source: Bloomberg; Nomura

mailto:[email protected]




Strategy | Asia Sean Darby


Over the course of the past 18 months, the Chinese offshore currency forwards signalled a period of relative weakness in the exchange rate relative to major currencies. Indeed, the authorities stealthily shadowed the US dollar in the past year, presumably attempting to restore some export competitiveness.

Interestingly, capital account recycling by China is limited to US treasury buying. Although there are other purchases by the central bank, US assets still make up a fair proportion of the composition of the foreign exchange reserves.

Much like the rest of the region, China faces the unpleasant task of letting its exchange rate appreciate while also undermining its export competitiveness and diminishing the value of its existing US reserves. However, this would serve to cool off latent inflationary pressures.

The authorities also run the additional risk of attracting ever more fund flows and hot money if they were to raise interest rates or signal too fast an appreciation in currency expectations. In this regard, Brazil’s recent move to “introduce a foreign stock purchase tax” has its merits in at least altering investor aspirations or animal spirits. This type of Tobin Tax is not uncommon in foreign exchange markets and of course has a history in Asia by the use of capital inflow and outflow controls (Malaysia in the 1990s is a good example). We highlighted the possible use of Tobin Taxes in a recent note, Hong Kong: Tobin taxes, liquidity seas and office politics, 7 October, 2009. China also has a history in using these principles through the increase or decrease in stamp duty.

How investors can implement our view We highlight in Exhibit 31 companies that would stand to benefit from an appreciation in the renminbi. There has also been an historical relationship between the movement in China renminbi currency forwards and the China A-share market. We would also highlight the benefits accruing to US-dollar based investors through the movement of the China toll road companies. Beneficiaries of an overall increase in Asian currencies would also include Telecoms and Banks.

Exhibit 1. US: net foreign purchases of US securities as % trade balance

0

50

100

150

200

Jun-

99

Jun-

00

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

(%)

Source: TIC, CEIC; Bloomberg; Nomura International (Hong Kong) Limited – Investment Strategy

Asian central banks have returned to buying US securities ...

Who stands to benefit?

No light thing to let Asian currencies rise



Exhibit 2. Global Trade (US, UK, Japan, EU and BRIC import)

400450500550600650700750800850

Aug-

04

Dec

-04

Apr-

05

Aug-

05

Dec

-05

Apr-

06

Aug-

06

Dec

-06

Apr-

07

Aug-

07

Dec

-07

Apr-

08

Aug-

08

Dec

-08

Apr-

09

Aug-

09

(US$bn)

Source: Bloomberg; Nomura International (Hong Kong) Limited – Investment Strategy

Exhibit 3. US: net foreign purchases of US Treasury bonds & notes (US$bn)

Note: 12 month moving average


Exhibit 4. Total major foreign holdings of US treasury

500

1000

1500

2000

2500

3000

3500

Aug-

00

Feb-

01

Aug-

01

Feb-

02

Aug-

02

Feb-

03

Aug-

03

Feb-

04

Aug-

04

Feb-

05

Aug-

05

Feb-

06

Aug-

06

Feb-

07

Aug-

07

Feb-

08

Aug-

08

Feb-

09

Aug-

09

(US$bn)


… as global trade has rebounded

The accumulation began after the Asian crisis in 1997-98 ...

… and increased even faster during the past year



Exhibit 5. US Treasury securities holdings: China

0100200300400500600700800900

Aug-

04

Dec

-04

Apr-

05

Aug-

05

Dec

-05

Apr-

06

Aug-

06

Dec

-06

Apr-

07

Aug-

07

Dec

-07

Apr-

08

Aug-

08

Dec

-08

Apr-

09

Aug-

09

10

1214

1618

20

2224

26Total (LHS)

% of total foreign holdings (RHS)

(US$bn) (%)


Exhibit 6. China capital account flow (semi annual)

-5000

50010001500200025003000350040004500

Jun-

01

Dec

-01

Jun-

02

Dec

-02

Jun-

03

Dec

-03

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

(US$ mn) China: Capital account - credit China: Capital account - debit

Source: CEIC; Bloomberg; Nomura International (Hong Kong) Limited – Investment Strategy

Exhibit 7. China: hot money flow (US$mn)

-80,000

-60,000

-40,000

-20,0000

20,000

40,000

60,000

80,000

Aug-

00

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

US$mn


In reality, China has accounted for the same proportion of ownership even as the US budget deficit widened

A major part of the problem is that China cannot recycle the capital account proceeds quickly enough. There are not many deep liquid bond markets

Recent cooling measures appear to have deterred hot money inflows



Exhibit 8. China: renminbi forward premium (discount) – onshore

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0O

ct-0

5

Jan-

06

Apr-

06

Jul-0

6

Oct

-06

Jan-

07

Apr-

07

Jul-0

7

Oct

-07

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

(%)


Exhibit 9. China: renminbi forward premium (discount) – offshore

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

Oct

-05

Jan-

06

Apr-

06

Jul-0

6

Oct

-06

Jan-

07

Apr-

07

Jul-0

7

Oct

-07

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

(%)


Exhibit 10. China: renminbi forward spread (onshore – offshore)

(50)(40)

(30)(20)(10)

01020

3040

Dec

-06

Feb-

07

Apr-

07

Jun-

07

Aug-

07

Oct

-07

Dec

-07

Feb-

08

Apr-

08

Jun-

08

Aug-

08

Oct

-08

Dec

-08

Feb-

09

Apr-

09

Jun-

09

Aug-

09

Oct

-09

Note: Chinese RMB forward spread: (Onshore - offshore forward RMB exchange rate) x 100; an increase in the onshore-offshore RMB forward spread indicates foreign investors expect the RMB to appreciate more against the US dollar


There has been a recent change in the direction of the currency forwards both onshore …

... and offshore



Exhibit 11. HSI vs renminbi 12M NDF premium (discount)

10,000

15,000

20,000

25,000

30,000

35,000Ja

n-05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

(12)(10)(8)(6)(4)(2)-246

HSI (LHS) RMB 12M NDF premium (discount) (RHS) (%)(index)


Exhibit 12. Correlation analysis: HSI vs renminbi 12M NDF premium (discount)

y = -2.4528x + 0.2913

(25)

(20)

(15)

(10)

(5)

0

5

10

15

(3.0) (2.0) (1.0) - 1.0 2.0 3.0

%w

-w c

hang

e of

HSI

w eekly change (%p) of RMB 12M NDF premium (discount)

Note: %w-w changes of HSI and weekly %p changes of RMB 12-month NDF are used


Exhibit 13. Correlation analysis: HSI vs renminbi 12M NDF premium (6 month rolling)

(1.0)

(0.8)

(0.6)

(0.4)

(0.2)

0.0

0.2

0.4

Aug-

05

Nov

-05

Feb-

06

May

-06

Aug-

06

Nov

-06

Feb-

07

May

-07

Aug-

07

Nov

-07

Feb-

08

May

-08

Aug-

08

Nov

-08

Feb-

09

May

-09

Aug-

09

Note: %w-w changes for HSI and %p weekly change of RMB 12M NDF premium are used


H shares have been negatively correlated to the China currency forwards premium



Exhibit 14. CSI300 vs renminbi 12M NDF premium

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000Ja

n-05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

(12)(10)(8)(6)(4)(2)-246

CSI300 (LHS) RMB 12M NDF premium (discount) (RHS) (%)(index)


Exhibit 15. Correlation analysis: CSI300 vs renminbi 12M NDF premium

y = -0.5579x + 0.6135

(15)

(10)

(5)

0

5

10

15

(3.0) (2.0) (1.0) - 1.0 2.0 3.0w eekly change (%p)of RMB 12M NDF

%w

-w c

hang

e of

CSI

300

Note: %w-w changes for CSI300 and RMB 12M NDF are used


Exhibit 16. Correlation analysis: CSI300 vs renminbi 12M NDF premium (6-month rolling)

(0.5)(0.4)(0.3)(0.2)(0.1)0.00.10.20.30.40.5

Aug-

05

Nov

-05

Feb-

06

May

-06

Aug-

06

Nov

-06

Feb-

07

May

-07

Aug-

07

Nov

-07

Feb-

08

May

-08

Aug-

08

Nov

-08

Feb-

09

May

-09

Aug-

09

Note: %w-w changes for CSI300 and RMB 12M NDF are used


Interestingly, the China 12-month currency forwards premium is correlated with China A shares



Exhibit 17. Correlation analysis: China toll road basket vs renminbi 12M NDFpremium (discount)

y = -1.5748x + 0.2469

(15)

(10)

(5)

-

5

10

15

20

(4.0) (3.0) (2.0) (1.0) - 1.0 2.0 3.0 4.0 5.0

Chinese RMB NDF premium weekly change (%p)

China Toll road basket (%w-w)

Source: CEIC; Bloomberg; Nomura International (Hong Kong ) Limited – Investment Strategy

Exhibit 18. Correlation analysis: China toll road basket vs renminbi 12M NDF premium (6-month rolling)

(0.6)(0.5)

(0.4)(0.3)(0.2)

(0.1)0.00.1

0.20.3

Oct

-03

Feb-

04

Jun-

04

Oct

-04

Feb-

05

Jun-

05

Oct

-05

Feb-

06

Jun-

06

Oct

-06

Feb-

07

Jun-

07

Oct

-07

Feb-

08

Jun-

08

Oct

-08

Feb-

09

Jun-

09

Oct

-09


Exhibit 19. Chinese renminbi forward spread* vs MSCI China A share

(50.0)(40.0)

(30.0)(20.0)(10.0)

0.010.020.0

30.040.0

Dec

-06

Feb-

07

Apr-

07

Jun-

07

Aug-

07

Oct

-07

Dec

-07

Feb-

08

Apr-

08

Jun-

08

Aug-

08

Oct

-08

Dec

-08

Feb-

09

Apr-

09

Jun-

09

Aug-

09

Oct

-09

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000CNY forw ard spread %, (LHS)MSCI China A share, US$ (RHS)

Note: Chinese RMB forward spread: Onshore - offshore forward RMB exchange rate; an increase in the onshore-offshore RMB forward spread indicates foreign investors expect the RMB to appreciate more against the US dollar


Our long-term baskets of China toll roads are good proxy to play future renminbi strength

Foreigners remain bullish



Exhibit 20. A50 China tracker: NAV premium (discount)

-20-15-10-505

1015202530

Jan-

05

Apr-

05

Jul-0

5

Oct

-05

Jan-

06

Apr-

06

Jul-0

6

Oct

-06

Jan-

07

Apr-

07

Jul-0

7

Oct

-07

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

(%)

Note: China A-share tracker (Bloomberg code: 2823 HK)

Source: CEIC; Bloomberg; Nomura International (Hong Kong) Limited – Quantitative strategy, Investment Strategy

Exhibit 21. A50 China tracker NAV premium (discount) vs China renminbi NDF premium (discount)

(20.0)(15.0)

(10.0)(5.0)-

5.010.0

15.020.0

Oct

-06

Dec

-06

Feb-

07

Apr-

07

Jun-

07

Aug-

07

Oct

-07

Dec

-07

Feb-

08

Apr-

08

Jun-

08

Aug-

08

Oct

-08

Dec

-08

Feb-

09

Apr-

09

Jun-

09

Aug-

09

Oct

-09

(%) (%)

(12)(10)(8)(6)(4)(2)0246

A50 China tracker NAV premium/(discount) (LHS)RMB NDF 12M premium/(discount) (RHS)

Note: for the past three years


Exhibit 22. China A share P/E vs renminbi 12M NDF premium (discount)

05

1015202530354045

Apr-

03

Oct

-03

Apr-

04

Oct

-04

Apr-

05

Oct

-05

Apr-

06

Oct

-06

Apr-

07

Oct

-07

Apr-

08

Oct

-08

Apr-

09

Oct

-09

(12)(10)(8)(6)(4)(2)02468

PE (LHS) China RMB NDF premium(discount) (RHS)(x) (%)

Note: CSI300 is used


Market multiple expansion is related inversely to forward currency expectations



Exhibit 23. China A share P/BV vs renminbi 12M NDF premium (discount)

0.0

1.0

2.0

3.04.0

5.0

6.0

7.0

8.0

Jan-

05

Apr-

05

Jul-0

5

Oct

-05

Jan-

06

Apr-

06

Jul-0

6

Oct

-06

Jan-

07

Apr-

07

Jul-0

7

Oct

-07

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

(12)(10)(8)(6)(4)(2)02468

P/BV (LHS) China RMB NDF premium(discount) (RHS)(x) (%)



Exhibit 24. China A share valuation: P/E band chart

0

1,000

2,000

3,000

4,000

5,000

6,000

Apr-

03

Aug-

03

Dec

-03

Apr-

04

Aug-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

Jun-

06

Oct

-06

Feb-

07

Jun-

07

Oct

-07

Mar

-08

Jul-0

8

Nov

-08

Mar

-09

Aug-

09

SHSZ300

10x

35x30x25x

15x20x

Current PE = 24.5xMean PE = 22.8x

High on 10/16/07 40.5xLow on 11/04/08 12.8x

Note: CSI300 is used, 12M forward looking (market cap. weighted)


Exhibit 25. China A-share valuation: P/BV

0.01.02.03.04.05.06.07.08.09.0

Jan-

05

Jul-0

5

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Rolling P/BV (x)

01,0002,0003,0004,0005,0006,0007,0008,000Index

+σ

-σ Price

P/BV

Current PBV = 3.17xMean PBV = 3.08x Low on 12/05/05

High on 10/16/07 7.27x

Note: CSI300 is used, Rolling forward calendar year


While Price-to-book value is at historical mean …



Exhibit 26. China A-share valuation: dividend yield

0.00.51.01.52.02.53.03.54.04.5

Apr-

03

Jul-0

3

Nov

-03

Mar

-04

Jul-0

4

Nov

-04

Mar

-05

Jul-0

5

Nov

-05

Mar

-06

Jul-0

6

Oct

-06

Feb-

07

Jun-

07

Oct

-07

Feb-

08

Jun-

08

Oct

-08

Feb-

09

Jun-

09

Oct

-09

Yield (%)

+s

+2s

-s

-2s

Mean DY = 2.7%



Exhibit 27. China A-share valuation: ROE

14

16

18

20

22

Jan-

05

Jul-0

5

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Rolling ROE (%)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000Index

+σ

-σ

Price

ROE

Current ROE = 19.73%Mean ROE = 17.89%

Note: CSI300 is used, rolling forward calendar year


Exhibit 28. China A-share valuation: implied risk premium

-3-2-10123456

Apr-

03

Jul-0

3

Nov

-03

Mar

-04

Jul-0

4

Nov

-04

Mar

-05

Jul-0

5

Oct

-05

Feb-

06

Jun-

06

Oct

-06

Feb-

07

Jun-

07

Oct

-07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Risk premium (%)

+2σ

-2σ

-σ

+σ

Mean RP = 1.6%



… dividend yield has slightly recovered

ROE continues to rise

Risk premium has narrowed approaching its historical mean



Exhibit 29. Historical discounts of B shares to A shares (Shanghai)

20

30

40

50

60

70

80

90D

ec-9

9

Jul-0

0

Jan-

01

Aug-

01

Feb-

02

Sep-

02

Mar

-03

Oct

-03

Apr-

04

Oct

-04

May

-05

Nov

-05

Jun-

06

Dec

-06

Jul-0

7

Jan-

08

Aug-

08

Feb-

09

Aug-

09

Dis

coun

t/(Pr

emiu

m) i

n %

EWA MCWA

Note: EWA – equally weighted average, MCWA – market cap weighted average


Exhibit 30. Historical discounts of B shares to A shares (Shenzhen)

010

2030

4050

6070

8090

Dec

-99

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Dis

coun

t/(Pr

emiu

m) i

n % EWA MCWA

Note: EWA – equally weighted average, MCWA – market cap weighted average


The discount of B shares remains wide



Exhibit 31. Companies that to benefit from appreciation in the renminbi (foreign debt ratio > 50%)

Code Name

Market Cap (US

$mn)

20D Avg Value

Traded (US $mn) GICS Industry

Total Bond and Loan(US $mn)

Foreign Debt Ratio

(%)

Sales from

China (%)

Operating Income

generated from China

(%)Nomura

Rating883 HK CNOOC 70645.56 130.77 Oil, Gas & Consumable

Fuels 1000.00 100.00 N/A N/A Neutral

688 HK CHINA OS.LD.& INV. 19577.81 49.67 Real Estate Management & Devel

1087.05 100.00 94.87 N/A Buy

1109 HK CHINA RESOURCES LAND 13364.55 29.06 Real Estate Management & Devel

709.63 100.00 N/A N/A Buy

836 HK CHINA RES.POWER HDG. 10846.67 19.92 Independent Power Producers &

305.48 100.00 N/A N/A Neutral

267 HK CITIC PACIFIC 9714.83 15.62 Industrial Conglomerates 3733.31 100.00 71.36 N/A Reduce

144 HK CHINA MRCH.HDG.INTL. 8554.45 22.69 Transportation Infrastructure

1000.00 100.00 N/A N/A Neutral

151 HK WANT WANT CHINA HOLDINGS 7428.96 9.40 Food Products 183.00 100.00 93.46 N/A Buy

392 HK BEIJING ENTERPRISES HDG. 6843.93 10.73 Industrial Conglomerates 616.25 100.00 N/A N/A Buy

992 HK LENOVO GROUP 5689.39 26.30 Computers & Peripherals 700.00 100.00 37.46 67.12 Reduce

363 HK SHANGHAI INDL.HDG. 5460.11 10.47 Industrial Conglomerates 1122.51 100.00 88.56 N/A Buy

1055 HK CHINA SOUTHERN AIRL.'H' 5171.46 4.44 Airlines 680.83 100.00 81.34 72.51 Reduce

135 HK CNPC HONG KONG 4595.92 23.52 Oil, Gas & Consumable Fuels

40.00 100.00 64.97 73.38 Not Rated

3368 HK PARKSON RETAIL GROUP 4575.50 7.18 Multiline Retail 200.00 100.00 N/A N/A Neutral

1068 HK CHINA YURUN FOOD GROUP 3641.80 15.80 Food Products 139.06 100.00 100.00 100.00 Buy

297 HK SINOFERT HOLDINGS 3601.76 7.35 Chemicals 80.19 100.00 N/A N/A Neutral

1199 HK COSCO PACIFIC 3549.04 9.91 Transportation Infrastructure

1005.00 100.00 N/A N/A Neutral

3308 HK GOLDEN EAGLE RETAIL GP. 3415.60 6.12 Multiline Retail 129.02 100.00 N/A N/A Reduce

272 HK SHUI ON LAND 3297.90 7.09 Real Estate Management & Devel

446.17 100.00 N/A N/A Not Rated

1313 HK CHINA RESOURCES CMT.HDG. 3188.36 N/A Construction Materials 154.83 100.00 N/A N/A Not Rated

349 HK INDL.&.CMLBK.OF CHIN.AI. 3132.59 2.42 Commercial Banks 366.44 100.00 N/A N/A Buy

410 HK SOHO CHINA 3024.79 5.05 Real Estate Management & Devel

361.27 100.00 N/A N/A Buy

1812 HK SHANDONG CHENMING PAPER HOLDINGS 'H'

1980.32 0.83 Paper & Forest Products 181.15 100.00 87.50 N/A Not Rated

1205 HK CITIC RESOURCES HDG. 1842.02 2.89 Trading Companies & Distributo

1280.00 100.00 38.25 N/A Not Rated

604 HK SHENZHEN INVESTMENT 1597.36 7.58 Real Estate Management & Devel

465.00 100.00 N/A N/A Not Rated

697 HK SHOUGANG CCRD.INTL.ENTS. 1465.92 4.05 Metals & Mining 320.00 100.00 72.37 N/A Not Rated

1193 HK CHINA RESOURCES GAS GP. 1350.19 1.28 Gas Utilities 399.97 100.00 79.87 N/A Buy

308 HK CHINA TRVL.INTL.INV.HK. 1219.59 3.55 Hotels Restaurants & Leisure

496.74 100.00 52.20 N/A Buy

981 HK SEMICONDUCTOR MNFG.INTL. 1096.38 1.25 Semiconductors & Semiconductor

413.94 100.00 N/A N/A Reduce

2380 HK CHINA POWER INTL.DEV. 1069.78 1.55 Independent Power Producers &

100.00 100.00 100.00 100.00 Buy

152 HK SHENZHEN INTL.HDG. 1031.71 3.99 Air Freight & Logistics 172.89 100.00 100.00 100.00 Not Rated

1886 HK CHINA HUIYUAN JUICE GP. 1011.80 2.95 Food Products 200.00 100.00 N/A N/A Not Rated

291 HK CHINA RES.ENTERPRISE 7928.94 12.54 Distributors 830.12 96.37 N/A N/A Buy

763 HK ZTE 'H' 10442.94 9.00 Communications Equipment 15656.51 96.26 39.43 N/A Neutral

123 HK GUANGZHOU INV. 1563.38 5.36 Real Estate Management & Devel

547.42 89.56 96.86 N/A Not Rated

2883 HK CHINA OILFIELD SVS.'H' 8246.81 13.45 Energy Equipment & Services

1608.85 86.34 74.94 N/A Not Rated

3377 HK SINO-OCEAN LAND HOLDINGS 5154.13 24.41 Real Estate Management & Devel

1080.84 64.76 N/A N/A Buy

2688 HK XINAO GAS HOLDINGS 2427.59 3.92 Gas Utilities 322.18 63.63 N/A N/A Buy

753 HK AIR CHINA 'H' 11875.29 7.22 Airlines 3574.09 63.12 51.55 N/A Buy

2866 HK CHINA SHIP.CTNR.LIN.'H' 6890.54 20.72 Marine 616.94 57.26 15.95 N/A Reduce

Note: Stock Universe - Hong Kong Listing China Related Stocks (included all H-shares and Red Chips), Criteria – foreign debt ratio > 50%, market capitalisation > US$1bn, As of 20 October, 2009

Source: Bloomberg, Thomson Reuters Datastream, Nomura International (Hong Kong) Limited – Quantitative Research, Investment Strategy



Exhibit 32. Asian telecoms: historical price performance Absolute change (%)

Price (lc)Inception

date 1D 1W 1M 3M 6M 1Y YTDChina Telecom Corp Ltd-H 728 HK 3.82 7-Oct-09 0.5 1.1 (2.6) (5.7) 6.7 33.6 32.2 SK Telecom 017670 KS 187,500 7-Oct-09 (0.8) 2.2 7.4 5.9 1.4 (16.1) (10.3)Taiwan Mobile Co 3045 TT 59.90 7-Oct-09 - 0.8 7.7 13.9 19.9 40.1 23.0 Reliance Communications Ltd RCOM IN 231.60 7-Oct-09 (2.8) (6.4) (24.4) (14.2) 7.3 0.0 (5.8)Digi.Com DIGI MK 21.50 7-Oct-09 0.3 0.4 (0.6) (3.6) (2.7) (4.0) (1.4)Philippine Long Distance Tel TEL PM 2,580 7-Oct-09 0.6 (1.1) 11.0 7.7 19.2 14.2 22.0 Singapore Telecommunications ST SP 3.15 7-Oct-09 (0.6) 0.6 0.6 (4.0) 23.5 20.7 23.5 Advanced Info Service ADVANC TB 90.50 7-Oct-09 (1.9) (1.1) (6.7) (2.7) 19.1 13.1 13.8


Exhibit 33. Asian telecoms: valuation P/E (x) P/BR (x) Dividend yield (%) ROE (%) FY1F FY2F FY1F FY2F FY1F FY2F FY1F FY2FChina Telecom Corp Ltd-H 728 HK 18.2 15.5 1.2 1.1 2.0 2.2 6.7 7.7 SK Telecom 017670 KS na na 1.8 1.6 5.1 5.3 12.5 15.2 Taiwan Mobile Co 3045 TT 13.8 12.5 3.7 3.3 6.7 7.0 26.5 27.5 Reliance Communications Ltd RCOM IN 10.4 10.0 1.2 1.1 0.6 0.8 12.6 11.3 Digi.Com DIGI MK 15.7 14.9 8.8 8.8 6.2 6.4 54.5 58.0 Philippine Long Distance Tel TEL PM 11.9 11.1 4.4 4.1 7.3 7.5 38.5 38.9 Singapore Telecommunications ST SP 13.2 12.2 2.2 2.1 4.3 4.6 17.6 17.4 Advanced Info Service ADVANC TB 15.9 15.2 3.8 3.8 6.9 7.0 23.2 24.7


Exhibit 34. China toll road basket : historical price performance Absolute change (%) Inception date 1D 1W 1M 3M 6M 1Y YTDJiangsu Expressway 177 HK 19-Jul-07 0.9 0.9 (5.2) 2.6 16.5 8.3 12.6 Shenzhen Expressway 548 HK 19-Jul-07 0.8 1.0 (1.0) (1.3) 25.0 39.5 42.1 Sichuan Expressway 107 HK 19-Jul-07 - (0.3) 3.1 1.2 83.2 150.4 123.1 Anhui Expressway 995 HK 19-Jul-07 2.5 3.6 4.5 6.6 38.7 43.7 73.9

Source: Bloomberg; Nomura International (Hong Kong) Limited –Investment Strategy

Exhibit 35. China toll road basket : valuation P/E (x) PBR (x) Dividend yield (%) ROE (%) FY1F FY2F FY1F FY2F FY1F FY2F FY1F FY2FJiangsu Expressway 177 HK 15.4 14.2 1.8 1.8 5.3 5.7 12.3 13.1 Shenzhen Expressway 548 HK 13.6 11.2 1.0 0.9 3.7 4.5 7.4 8.6 Sichuan Expressway 107 HK 10.5 9.1 1.2 1.3 5.1 4.6 10.9 12.7 Anhui Expressway 995 HK 10.5 10.3 1.3 1.2 5.3 5.5 12.7 12.4

Source: Bloomberg; Nomura International (Hong Kong) Limited –I nvestment Strategy

Exhibit 36. Asia REIT convertible bond basket

CB Bond Price

Years to Maturity

Yield to maturity (%)

Notional Outstanding (S$mn) Equity Ticker ISIN

Yanlord land 0% 06 Feb 12 112.88 2.29 3.28 338,300 YLLG SP XS0285910120 Capitacommercial Trust 2% 06 May 2013

103.03 3.54 3.81 370,000 CCT SP XS0355505347

Capitamall Trust 1% 02 Jul 2013

100.85 3.70 3.02 650,000 CT SP XS0366023090

Note: as of 16 October, 2009

Source: Bloomberg, Nomura International (Hong Kong) Limited – Investment Strategy



Exhibit 37. Recent strategy reports Date Title 19-Oct-09 Chinese forward renminbi-to-oil ratio, DRAM-to-oil ratio and the price of a cup of tea

http://www.nomura.com/research/GetPub.aspx?pid=343231 15-Oct-09 Resistance is futile (II)

http://www.nomura.com/research/GetPub.aspx?pid=342889 15-Oct-09 The return of the new spice route (V)

http://www.nomura.com/research/GetPub.aspx?pid=342801 13-Oct-09 Ebb tide (II)

http://www.nomura.com/research/GetPub.aspx?pid=342538 9-Oct-09 Earnings revision turning point (V)

http://www.nomura.com/research/GetPub.aspx?pid=342053 7-Oct-09 Ebb tide

http://www.nomura.com/research/GetPub.aspx?spid=2510 7-Oct-09 Hong Kong: Tobin taxes, liquidity seas and office politics

http://www.nomura.com/research/GetPub.aspx?pid=341699 1-Oct-09 Korea: from the bottom to the top (III)

http://www.nomura.com/research/GetPub.aspx?spid=2455 25-Sep-09 Gold to oil ratio, gold to corn ratio, the earnings yield barometer and the last pain trade

http://www.nomura.com/research/GetPub.aspx?pid=340448

23-Sep-09 Taiwan politics and liquidity: when it rains, it pours (II) http://www.nomura.com/research/GetPub.aspx?spid=2376

18-Sep-09 The Launch of the conviction list http://www.nomura.com/research/GetPub.aspx?pid=339747

17-Sep-09 The end of summer! Time for autumn! http://www.nomura.com/research/GetPub.aspx?spid=2320

11-Sep-09 Greater China Inc.: HK-Fujian-Taiwan triangle (II) http://www.nomura.com/research/GetPub.aspx?pid=338892

10-Sep-09 Taiwan politics and liquidity: when it rains, it pours http://www.nomura.com/research/GetPub.aspx?spid=2255

09-Sep-09 Pegged to last (IX) http://www.nomura.com/research/GetPub.aspx?pid=338566

07-Sep-09 Earnings revisions turning point (IV) and market rotation (II) http://www.nomura.com/research/GetPub.aspx?pid=338385

3-Sep-09 Korea: from the bottom to the top (II) http://www.nomura.com/research/GetPub.aspx?spid=2158

31-Aug-09 Macau, greenback hung out to dry (VIII) and pegged to last (VI) http://www.nomura.com/research/GetPub.aspx?pid=337526

29-Aug-09 Medici money, the greenback and the Greater China Inc. rotation http://www.nomura.com/research/GetPub.aspx?pid=337296

Source: Nomura International (Hong Kong) Limited – Investment Strategy



ANALYST CERTIFICATIONS Each of the research analysts referenced on page 1 hereof with regard to the section of this research report for which he or she is responsible certifies that all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers discussed herein. In addition, each of the research analysts referenced on page 1 hereof hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or by any other Nomura Group company or affiliates thereof.

ISSUER SPECIFIC REGULATORY DISCLOSURES Conflict-of-interest disclosures Important disclosures may be accessed through the following website: http://www.nomura.com/research/Disclosures/public/main.asp. 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.

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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 1724 companies under coverage. 41% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 42% of companies with this rating are investment banking clients of the Nomura Group*. 40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 50% of companies with this rating are investment banking clients of the Nomura Group*. 19% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 8% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2009.

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

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. 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.

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