greater china outlook 2014: mix and match into the...

Equity Research13 December 2013

Barclays Capital Inc. and/or one of its affiliates 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.

This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA.

PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 108.

Greater China Outlook 2014

Mix and match into the volatility 2014 will herald increasing uncertainty and heightened volatility among risk assets, in our view. Collectively, Barclays Research calls for a deceleration of China GDP growth, 30% downside in Hong Kong property prices, a rising risk of Fed tapering and event risks around reform policies in China – all of which could add to the volatility. In our Greater China Outlook, we recommend positioning around these rising risks.

Greater China equity strategy – prefer Taiwan over China over Hong Kong: The greatest risk at the global level would appear to be a stronger US recovery and, thus, faster tapering off of US quantitative easing than currently expected, which would likely favour stocks of Taiwan’s rate sensitive companies but negatively affect property and asset plays, with the impact likely most negative on Hong Kong. Amid our theme of “Damned if You Do, Damned if You Don’t” regarding reforms in China, we expect policy and reform announcements to disappoint either foreign investors or local investors; thus, we prefer value, secular stories, consumer discretionary and rail in China while we would underweight materials, transport, real estate and telecoms. Our cautious stance on Hong Kong is driven by our analyst team’s call for a 30% fall in property values combined with our economics team’s forecast for a deceleration of China’s GDP growth rate for 2014 to 7.2% from 7.7% for 2013.

Taiwan equity strategy: In our “Revenge of the Nerds” theme, we recommend moving from non-tech to tech, especially into semiconductors and servers, while trading the Apple build in 1H14, but our biggest positions in Taiwan remain financials and property.

Economics: For China, our economics team looks for slowing investment growth and rising consumption share. The government will likely maintain its GDP growth target of 7.5% and M2 growth target of 13% for 2014, which implies tighter liquidity and slower growth. For Taiwan, after the disappointment so far in 2013, our economics team has turned more constructive on 2014 and 2015, expecting growth to re-accelerate.

Voting will begin soon for the 2014 Institutional Investor All-Asia Equity Research Team survey. Barclays welcomes your support.

Greater China – top stock picks

Pot'l upside/

downside Pot'l upside/

downside

Company Price PT (%) Company Price PT (%)

ASE (2311.TW) 29.75 35.00 17% Galaxy (0027.HK) 63.95 66.70 4%BOC (3988.HK) 3.72 4.60 23% HSB (0011.HK) 126.60 153.00 20%Cathay (2882.TW) 46.40 50.70 9% MediaTek (2454.TW) 428.00 445.00 3%China Shenhua Energy (1088.HK) 25.70 33.00 28% Merida (9914.TW) 232.00 243.70 5%Chow Tai Fook (1929.HK) 11.80 14.00 18% Nan Ya Plastics (1303.TW) 68.40 77.60 13%CSR (1766.HK) 7.05 8.20 16% PetroChina (857.HK) 9.08 11.50 26%CTBC (2891.TW) 19.45 22.00 13% PICC (2328.HK) 12.94 14.60 12%Delta (2308.TW) 158.00 175.00 10% Tencent (0700.HK) 462.40 450.00 -2% TSMC (2330.TW) 105.00 139.00 32%Notes: Prices as of 9 December 2013; prices and price targets are in local currency. Source: Barclays Research

MACRO STRATEGY

China Equity Strategy

EQUITY RESEARCH Greater China Equity Strategy Kent Chan +886 2 663 84688 [email protected] BCSTW, Taiwan

Emily Huang +886 2 663 84692 [email protected] BCSTW, Taiwan

EQUITY RESEARCH TEAM Noel Chan Clement Chen Ada Dai Dale Gai Sebastian Hou Candy Huang William Huang Grace Li Paul Louie Andrew Lu Anand Ramachandran, CFA Ephrem Ravi Vineet Sharma, CFA Somshankar Sinha Yang Song Phoebe Tse Jon Windham, CFA Alvin Wong Sharnie Wong, CA Patrick Xu, CFA May Yan Kirk Yang Alicia Yap, CFA Jamie Yeh Sidney Yeh

ECONOMICS RESEARCH Jian Chang * Wai Ho Leong *

*These authors are members of the Fixed Income, Commodities and Currencies Research department and are not equity analysts.

Barclays | Greater China Outlook 2014

13 December 2013 2

CONTENTS

EQUITY STRATEGY RESEARCH: GREATER CHINA OUTLOOK 2014 .... 3

CHINA FIXED INCOME RESEARCH ................................................................ 9

CHINA/HONG KONG: EQUITY RESEARCH ................................................ 13

CHINA EQUITY STRATEGY ....................................................................... 14

ANALYSTS’ CHINA STOCK PICKS ........................................................... 21

CHINA AND HONG KONG BANKS .......................................................... 23

CHINA BASIC MATERIALS ........................................................................ 27

CHINA CAPITAL GOODS ........................................................................... 30

CHINA INFRASTRUCTURE & TRANSPORT ........................................... 34

CHINA AND HONG KONG INSURANCE ................................................. 37

CHINA INTERNET & MEDIA ...................................................................... 39

CHINA OIL & GAS ........................................................................................ 42

CHINA AND HONG KONG PROPERTY ................................................... 46

CHINA RETAIL .............................................................................................. 50

CHINA STAPLES .......................................................................................... 52

CHINA TELECOM SERVICES ..................................................................... 54

MACAU GAMING ........................................................................................ 58

TAIWAN FIXED INCOME RESEARCH .......................................................... 61

TAIWAN: EQUITY RESEARCH ....................................................................... 65

TAIWAN EQUITY STRATEGY ................................................................... 66

ANALYSTS’ TAIWAN STOCK PICKS ........................................................ 77

TAIWAN FINANCIALS ................................................................................ 78

CHINA AND TAIWAN IT HARDWARE .................................................... 81

TAIWAN LCD DISPLAYS ............................................................................ 83

TAIWAN NON-TECH MID-CAPS ............................................................. 85

TAIWAN PETROCHEMICALS .................................................................... 88

TAIWAN PROPERTY ................................................................................... 90

TAIWAN SEMICONDUCTORS .................................................................. 92

TAIWAN TELECOM SERVICES ................................................................. 94

CHINA AND TAIWAN WIRELESS EQUIPMENT .................................... 96

APPENDIX .......................................................................................................... 98

GREATER CHINA COVERAGE UNIVERSE ................................................... 99

TAIWAN EQUITY MODEL PORTFOLIO METHODOLOGY .................. 106


13 December 2013 3

EQUITY STRATEGY RESEARCH: GREATER CHINA OUTLOOK 2014

Mix and match selectively into the volatility • For Greater China, we favour value and growth, and in line with our global equity

strategy, we highlight the financial and energy sectors along with continuing to favour Internet/tech, select consumer and late cyclicals.

• China’s uncertain economic growth outlook and a lack of consensus and guidance around reform are likely to lead to heightened equity market volatility but the relatively low valuations already reflect uncertainty and limited expectations.

• Hong Kong faces headwinds as our property analyst calls for 30% downside to property prices in 2014, which combined with slowing China growth and a likely levelling off of the US economic growth rate, leads to more risk than reward opportunities for the city, in our view.

• Taiwan’s safe-haven characteristics given its high current account surplus, excess free cash generation and exposure to US and China growth positions the TAIEX well, in our view, which could result in another year of outperformance.

• Our top picks for Greater China represent the best of our analysts’ ideas wherein China value/laggards combined with secular are a focus, while Taiwan leans on tapering winners, upstream tech and select industrial and materials single stock ideas.

FIGURE 1 Barclays Research Equity Strategy – Greater China Top Stock Picks

Pot'l up/

downside P/E P/B ROE (%) Company name Ticker Price PT to PT (%) 2013E 2014E 2013E 2014E 2013E 2014E

ASE 2311.TW 29.75 35.00 17% 15.0 12.3 1.9 1.8 13.2% 15.3%Bank of China (BOC) 3988.HK 3.72 4.60 23% 5.3 5.1 0.9 0.8 17.4% 16.4%Cathay 2882.TW 46.40 50.70 9% 18.4 17.1 2.0 1.9 11.5% 11.6%China Shenhua Energy 1088.HK 25.70 33.00 28% 8.8 9.0 1.5 1.4 17.8% 17.0%Chow Tai Fook 1929.HK 11.80 14.00 18% 21.4 15.8 3.6 3.2 17.8% 21.3%CSR 1766.HK 7.05 8.20 16% 18.0 12.9 2.1 1.9 11.9% 14.4%CTBC 2891.TW 19.45 22.00 13% 13.4 10.4 1.4 1.3 11.9% 13.4%Delta 2308.TW 158.00 175.00 10% 22.0 17.2 4.8 4.4 21.3% 26.8%Galaxy 0027.HK 63.95 66.70 4% 25.7 20.3 8.3 5.9 47.9% 41.0%Hang Seng Bank 0011.HK 126.60 153.00 20% 8.8 13.7 2.3 2.1 29.8% 16.8%MediaTek 2454.TW 428.00 445.00 3% 21.8 18.0 3.5 3.2 14.5% 18.6%Merida 9914.TW 232.00 243.70 5% 22.5 20.0 6.5 5.8 31.1% 30.6%Nan Ya Plastics 1303.TW 68.40 77.60 13% 22.8 18.5 1.9 1.9 8.8% 10.2%PetroChina 857.HK 9.08 11.50 26% 10.5 9.7 1.2 1.1 9.6% 11.4%PICC 2328.HK 12.94 14.60 12% 10.9 9.4 2.2 1.9 22.5% 21.5%Tencent 0700.HK 462.40 450.00 -2% 45.1 33.4 13.9 11.7 33.8% 38.1%TSMC 2330.TW 105.00 139.00 32% 14.9 13.2 3.3 2.8 23.4% 23.0%Notes: Prices as of 9 December 2013; prices and price targets are in local currency. Source: Barclays Research estimates

Prefer equities, emerging markets and North Asia Our global view has a preference for equities and favours emerging markets over those of developed markets, and North Asia over South Asia. Within Greater China, we prefer China over Hong Kong but believe Taiwan may continue to represent the safer market of the three to ride out the uncertainty as global growth decelerates with the risk of tighter monetary policy, and to wait out the policy and reform risks expected for China in 2014. The views of Barclays global head of research, Larry Kantor, are highlighted in Figure 2 (click here for his Global Outlook Overview: Window for risk assets narrowing of 9 December 2013).

EQUITY RESEARCH

China and Taiwan Equity Strategy Kent Chan +886 2 663 84688 [email protected] BCSTW, Taiwan Emily Huang +886 2 663 84692 [email protected]

BCSTW, Taiwan

https://live.barcap.com/go/publications/content?contentPubID=FC1990966�


13 December 2013 4

FIGURE 2 Global Outlook Overview: Window for risk assets narrowing

• We maintain our major asset allocation recommendation to stay modestly overweight equities and underweight fixed income over the next few months. The plunge in bond prices this year, along with the persistent and rapid rise in equity prices, suggests a shift toward a more even balance.

• Our recommended allocation is premised on a continued environment of modest US growth and tame inflation, allowing the Fed to maintain extraordinary monetary support and keep investors convinced that rate hikes are not imminent.

• The biggest risk to the near-term outlook is stronger-than-expected US GDP growth, which could lead investors to anticipate a quicker start to rate hikes and challenge current equity and especially fixed income valuations.

• We are more cautious on equities and other risk assets beyond the next few months, since we believe there is considerably less slack in the US economy than commonly believed. With US growth expected to pick up and inflation move higher, rate hikes are likely to be in the sights of investors by the end of next year.

Source: Barclays Research (“Global Outlook Overview: Window for risk assets narrowing”, 9 December 2013)

Into the seemingly rising risk of a stronger-than-expected US recovery in late 2013 and early 2014, Taiwan may appear to be better positioned to benefit not only from rising exports to the US but also Fed tapering as Taiwan financials and asset plays have a positive bias toward rising rates. Conversely, rising rates for Hong Kong present a significant risk, while an improving external economy may empower policy makers within China the flexibility to introduce the reforms, especially in the financials sectors, needed to avert further over-extension of the excessive leverage in the economy.

FIGURE 3 Barclays Research Equity Strategy – Greater China sector performances ytd vs HSI, HSCEI, CSI 300 and TWSE

Note: Performances for 28 December 2012-9 December 2013. Source: Bloomberg, Barclays Research

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13 December 2013 5

Greater China market and sector preferences Within Greater China, we prefer Taiwan over China and China over Hong Kong. On a sectoral basis, we continue to like financials, especially in Taiwan, but also the large China banks on valuations and selected Hong Kong banks on our expectations of continued consolidation. We remain more selective in China Insurance after the rally in the shares, but we continue to like Taiwan insurers. For both China and Taiwan, we like the energy sector as well as the downstream companies in Taiwan. We are neutral to underweight telecoms, industrials and staples and selective technology (with our preference of China over Taiwan tech) as well as in consumer staples and discretionary. For discretionary, earnings momentum is rebounding. Finally, we remain cautious on materials, shipping, Hong Kong property and China property, preferring Taiwan property and construction. Please see our strategy top picks by sector in Figure 4.


13 December 2013 6

FIGURE 4 China, Hong Kong and Taiwan Equity Strategy Research – top stock picks

CONTINUED ON NEXT PAGE

Notes: Prices as of 9 December 2013. Stock ratings: OW = Overweight; EW = Equal Weight; UW = Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Company data, Bloomberg, Barclays Research estimates

Price PTPot’l up/ downside

Sector Stock picks Ticker Rating (local curr.) (local curr.) to PT (%) FY13E FY14E FY13E FY14E FY13E FY14E

Technology ASE 2311.TW OW 29.75 35 17.0% 15.0 12.3 1.9 1.8 13% 15%

Banks Bank of China (BOC) 3988.HK OW 3.7 4.6 23% 5.3 5.1 0.9 0.8 17% 16%

Financials Cathay 2882.TW OW 46.4 50.7 9.0% 18.4 17.1 2.0 1.9 12% 12%

Metals & Mining China Shenhua Energy 1088.HK OW 25.7 33.0 28% 8.8 9.0 1.5 1.4 18% 17%

Discretionary Chow Tai Fook 1929.HK OW 11.8 14.0 18% 21.4 15.8 3.6 3.2 18% 21%

Capital Goods CSR 1766.HK OW 7.1 8.2 16% 18.0 12.9 2.1 1.9 12% 14%

Financials CTBC 2891.TW OW 19.45 22 13.0% 13.4 10.4 1.4 1.3 12% 13%

Technology Delta 2308.TW OW 158 175 10.0% 22.0 17.2 4.8 4.4 21% 27%

Gaming Galaxy 0027.HK OW 64.0 66.7 4% 25.7 20.3 8.3 5.9 48% 41%

Banks Hang Seng Bank 0011.HK OW 126.6 153.0 20% 8.8 13.7 2.3 2.1 30% 17%

P/E P/B ROE%

Stock view: China Shenhua operates a portfolio of market-leading coal businesses covering mining, rail, ports, shipping and power generation that captures the most significant value from the coal supply chain. The combination of low-cost operations, strong operating cash flow and diversification into non-mining businesses makes Shenhua a low-risk growth play on the Chinese coal market, given the growth potential from its coal mining and railway businesses.

Stock view: We expect strong growth at Galaxy and look for 21% EBITDA CAGR over 2013-15E, with Galaxy Macau Phase 1 continuing to drive growth, as well as Phase 2 potentially opening early 2015. A potential stock price catalyst could be when Galaxy receives its construction permit for its phases 3 and 4 some time in 2014. Our 2014E EBITDA estimate is 4% above consensus.

Stock view: Delta is the world’s leading power supply maker and a rising star of data centre infrastructure and industrial automation (IA). This cloud capability appears to be overlooked by the market, and we expect its strong growth potential on cloud and IA to drivea solid 19-20% EBIT CAGR for 2012-15E.

Stock view: We like Chinatrust due to its leverage to Taiwan’s foreign currency lending business. The bank announced two acquisitions recently. Our analysis suggests that the deals will be ROE and EPS accretive for Chinatrust, which we believe the market may not be factoring in. By leveraging its newly acquired life insurance arm, we believe Chinatrust can improve its ROE in the near to medium term in a rising yield environment. Chinatrust is now trading at 1.3x 2014E P/B against a sustainable ROE of 13.5% and a dyield of 3-4% for 2013E-14E. We consider it attractively valued at current levels.

Stock view: By expanding its fingerprint system in package (SiP) and application processor flip-chip chip-scale packaging (FC-CSP) with WiFi module business, we expect Apple to account for 34-35% of ASE’s sales in 1-2 years, from 10% in 1H13E.

Stock view: We forecast strong earnings growth for the railway equipment companies in 2013-15E, which we do not expect for the other industrial subsectors – estimating an earnings CAGR of 23% for CSR. This is driven by: 1) top line growing at a CAGR of 21%/14% on strong MU demand of 400/500 sets in 2014/15E, +48%/+25% y/y, from 270 sets in 2012; 2) OP margin expansion of 1.2ppt for CSR in 2013-15E.

Stock view: Chow Tai Fook is our top pick within the China discretionary sector because of its: 1) great brand equity with the largest jewellery market share of 14% and 21% in the China and Hong Kong markets, respectively; 2) an extensive retail network of 1,954 stores and well-established e-commerce platform with a high degree of penetration; 3) stable teens percentage growth in EPS for FY15-16E; and 4) undemanding valuation at a discount to other big-cap Hong Kong/China discretionary stocks.

Stock view: We think Bank of China’s (BOC) high dividend yield (6.9% in 2014E, the highest among peers) and attractive valuation (0.8x 2014E P/B) among large China bank peers should provide good support to its share price. With its higher-than-peers exposure to overseas operations (18% of average interest-earning assets), BOC should see a less negative NIM impact from the continued interest rate deregulation process in China. It is in a good position to take advantage of RMB globalization and growing cross-bortrade in the future, especially through its majority-owned overseas operation Bank of China (Hong Kong).

Stock view: We think the market has underappreciated HSB’s core business which should generate an attractive ROE of 20.5% for 2014E, and will improve as interest rates normalize, in our view. Hang Seng Bank is most defensive among its Hong Kong banking peers to liquidity tightness in the event of tapering and is most positively geared to rising benchmark interest rates in the medium term. The potential disposal of its 10.9% stake in Industrial Bank would remove the drag on capital and dividends. HSB is ntop picks among the local Hong Kong banks.

Stock view: We believe Cathay FHC will continue to benefit from a steepening yield curve, helping its life insurance subsidiary to gradually turn its back-book profitable with upward re-pricing asset yields while the average cost of liabilities should continue to comedown on underwriting new policies.


13 December 2013 7

FIGURE 4 (CONTINUED) China, Hong Kong and Taiwan Equity Strategy Research – top stock picks


Price PT Pot’l up/ downside


Technology MediaTek 2454.TW OW 428 445 3.0% 21.8 18.0 3.5 3.2 14% 19%

Staples Merida 9914.TW OW 232 243.7 5.0% 22.5 20.0 6.5 5.8 31% 31%

Petrochem Nan Ya Plastics 1303.TW OW 68.4 77.6 13.0% 22.8 18.5 1.9 1.9 9% 10%

Oil & Gas PetroChina 0857.HK OW 9.1 11.5 26% 10.5 9.7 1.2 1.1 10% 11%

Insurance PICC 2328.HK OW 12.9 14.6 12% 10.9 9.4 2.2 1.9 23% 22%

Internet Tencent 0700.HK OW 462.4 450.0 -2% 45.1 33.4 13.9 11.7 34% 38%

Technology TSMC 2330.TW OW 105 139 32.0% 14.9 13.2 3.3 2.8 23% 23%

Stock view: We are OW on TSMC and forecast 2014-2016E sales CAGR of >10% for TSMC, with three key catalysts: 1) application processor (AP) wafer starts for Apple should start in 1Q14E to account for 6%/10% of 2014/2015E TSMC sales; 2) apart from global smartphone unit sales of 30%/17% y/y in 2014/2015E, we see good opportunities in fingerprint sensors, wearable devices, and 64bit ARM CPU for cloud storage and front-end environment; and 3) a structural profitability improvement on lower 20/16nm capex.

Stock view: PetroChina stands to gain the most from China’s regulatory tailwinds, in our view, and we estimate a US$1/mcf change in natural gas prices lifts 2014E EPS by 13.8%, as E&P EBIT expands and import losses fall. With higher refining EBIT, we expect a 16.6% EPS CAGR over 2013-15E, one of the highest among the global large-cap energy companies. Valuations are also supportive at a 7-9% discount to its own history and global large-cap integrated players.

Stock view: PICC P&C is the only pure China P&C insurer listed in Hong Kong. We believe the company should continue to record mid-teens premium growth in the mediumterm due to the underpenetrated nature of the auto and non-auto markets (commercial, liabilities, and agriculture) in China. In addition, we believe the auto insurance underwriting cycle may be close to the bottom as the government is currently mulling premium reform which should be a positive for margins in the medium-term.

Stock view: We like Tencent because of its integrated platform strategy and resilient revenue stream with its: 1) dominant market share in online gaming; 2) open platform growth potential, leveraging faster growth of the social/web games industry; 3) market share gains in the online advertising business with a diversified, solid pipeline; and 4) growth potential in its mobile Internet and eCommerce platforms – we believe WeChat has significant potential to monetize through mobile games, O2O/LBS and mobile advertising, and that eCommerce is progressing well with an increasing contribution to Tencent’s top line.

Stock view: We like Merida for its: 1) growing own-brand penetration with a high-end focus in China, positioning it favourably to ride the trade-up demand; 2) capacity expansion in Jiangsu, scheduled to start contributing to revenue in 1Q14, which should boost sales/profits into 2014-15E; and 3) a solid net cash position and cash flows. Despite seasonal weakness in 4Q13, we are constructive on the 2014 growth outlook, mainly led by continued strength from China and recovery in the European/US markets.

Stock view: We believe the growth outlook for Nan Ya Plastics remains bright into 2014 following a strong recovery in 2013. We forecast EPS growth of 23% y/y in 2014, with the key profit drivers being MEG and DRAM investment. We also forecast profit for the plastic and fibre business to grow 14-30% y/y due to the improving macro environment.

Stock view: We like MediaTek for new products such as its MT6592 octa-core SoC, MT6290 4G LTE baseband 4G SoC and 64bit AP on 20nm for developed markets, as well as ex-China emerging markets expansion. By leveraging strong sales, MediaTek should return to a three-year OPM high of 20% or more. In addition, if Qualcomm is required by China’s government to lower its licensing fee as a percentage of FOB prices to a fixed US$ amount per smartphone, we estimate this could result in lower costs for MediaTek customers.

P/E P/B ROE%


13 December 2013 8

China: Fixed Income Research


13 December 2013 9

CHINA FIXED INCOME RESEARCH

Softening momentum amid steady reforms This is an excerpt from The Emerging Markets Quarterly, published 10 December 2013. For analyst certifications and important disclosures, please refer to the full report. To view the report, please click title for link to Barclays Live.

We raised our 2013 and 2014 GDP forecasts 10bp, to 7.7% and 7.2%, respectively, but continue to look for economic growth to soften modestly. The government likely will maintain its targets of 7.5% for GDP growth, 3.5% for inflation, and 13% for M2 growth for 2014. This would imply tighter liquidity, higher interest rates, and slower economic growth.

Key recommendations • Rates: The PBoC is likely to keep liquidity relatively tight to encourage banks to deleverage.

That stance and seasonal liquidity tightness at year-end should push rates higher, in our view. However, we suggest looking for spikes in rates, perhaps ahead of Chinese New Year, to enter receivers, in the view that tighter credit will slow growth, resulting in lower rates.

• FX: CNY offers attractive carry in a global environment of still-low yields, framed by China’s hawkish monetary policy stance that aims to deliver a domestic demand rebalancing and to deflate a credit bubble. Financial reform, including a USD/CNY band widening, will likely drive additional inflows, supporting further currency appreciation, in our view. We recommend being short AUD/CNH.

Economic data since September have been mixed. Strength in industrial production was sustained by improving exports. IP growth rose to 10.3% y/y in October from 10.1% in Q3, and export growth improved to 5.6% from 3.9% (November: 12.7%). On the other hand, softening fixed asset investment and imports suggests decelerating momentum in demand. FAI growth moderated to 20.1% y/y, YTD through October from 20.3% in August, led by weaker growth in infrastructure and property investment (Figure 1). Import growth slowed to 5.3% in November from 7.6% in October. Although the headline NBS PMI held at 51.4 in October-November, the new orders component edged down for the third month.

We have raised our 2013 and 2014 GDP forecasts 0.1pp, to 7.7% and 7.2%, respectively. The fine-tuning reflects strong IP growth in October, but we have not changed our view of modest softening, rather than accelerating, growth in the coming quarters. We forecast q/q growth will slow from 9.6% saar in Q3 to 7.0% in Q4 and 6.6% in Q1 14. However, y/y growth will be relatively stable at 7.6% in Q4 and Q1, compared with 7.8% in Q3. We expect some rebalancing in domestic demand in 2014, with slower investment growth (Figure 5). Consumption growth will also edge lower, but its share of GDP will increase. We retain our 3.1% CPI inflation forecast in 2014, and note upside risks from the pork-price cycle.

FIGURE 5 Slower infrastructure and property investment growth

FIGURE 6 Growth tends to slow after major Third Plenums

Source: CEIC, Barclays Research Source: CEIC, Barclays Research

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the 11th Third Plenum in 1978

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Join WTOin 2001

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ECONOMICS RESEARCH Jian Chang* +852 2903 2654 [email protected] Serena Xue Zhou* +852 2903 2653 [email protected] RATES STRATEGY Igor Arsenin* +65 6308 2801 [email protected] FX STRATEGY Nick Verdi* +65 6308 3093 [email protected] * These authors are members of the Fixed Income, Currencies and Commodities Research department and are not equity research analysts

Strong export and IP versus softening domestic demand

Growth will soften modestly in the next two quarters



13 December 2013 10

Our moderate growth profile factors in the need for the government to reduce overcapacity, control local government debt, tighten regulations on the shadow banking business and contain the property bubble (see China: The new norm - 'No pain, no gain', 18 September 2013). Combined with the PBoC’s concerns on upward pressures to inflation and property prices, we believe this means tighter liquidity, higher interest rates and slower growth. We expect the government to shift its focus from “stabilising growth” to “adjusting structure and promoting reforms” in 2014. Figure 6 shows that structural reforms tend to slow growth before their longer-term benefits for potential growth can be felt.

We believe, monetary policy, in practice, already shifted towards tightening liquidity (see China: A subtle shift to monetary tightening, 25 October 2013). The PBoC’s Q3 Monetary Policy Report, published on 5 November, reconfirmed its hawkish stance. The central bank highlighted concerns about rapid credit growth amid capital inflows. It also said for the first time that “the economy is set for a long period of deleveraging and eliminating excess capacity”. Since then, it has guided the reverse repo auction rate up 20bp, to 4.1%. The average 7d interbank repo rate increased to 4.5% in November from 4.3% and 3.8% in October and September. The tightening has also triggered a jump in government and corporate bond yields (Figure 7 and 8), resulting in a drop in bond issuance (Figure 9 and 10). Higher costs and reduced total financing, if sustained, will weigh on growth.

In November, the Communist Party’s much anticipated Third Plenum meeting approved a comprehensive reform agenda (see China: The Third Plenum - Mind the priorities, 17 November 2013). The meeting highlighted the “decisive” role of the market in resource allocation. But it also reiterated that the state sector remains the dominant pillar of the economy, while private business will be encouraged. While implementation will be the key, we think the government is heading in the right direction in terms of its reform priorities and its commitment to tackling complex issues, including land and rural reform, fiscal relations between the central and local governments, private and foreign capital entry into monopolised and service sectors, and diversified corporate structures for SOEs. This will improve income distribution, reduce fiscal and financial risks, and unleash growth potential.

We expect gradual but steady progress in financial liberalisation, such as freer cross-border capital flows and a more liberalised interest rate environment. This is reflected in the PBoC’s announcing new financial services permitted for companies and individuals in the Shanghai free trade zone as it follows the strategy of “forcing domestic reforms through opening up” (China: PBoC releases 'Guideline for Financial Support for Shanghai Free Trade Zone', 2 December 2013). Investments in overseas securities by qualified individual investors, free fund transfers between FTZ accounts and foreign accounts, and offshore borrowing and

Our outlook factors in the need for the government to address cyclical and structural challenges

Monetary tightening has led to higher interest rates and reduced bond issuance

The Third Plenum laid out a comprehensive reform agenda

FIGURE 7 The PBoC has tightened liquidity and guided rates higher

FIGURE 8 Government bond yields jumped to a nine-year high

*1y deposit rate X1.1 since June 2012. Source: CEIC, Barclays Research Source: CEIC, Barclays Research

Gradual and steady financial liberalisation is expected

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13 December 2013 11

CNY bond issues by qualified companies are now allowed in the FTZ. That said, we expect gradual financial liberalisation because financial stability remains key. We look for further CNY appreciation as the PBoC tries to reduce the buildup of FX reserves amid capital inflows (see China Focus: Financial reform - the priority and the inevitable, 20 November 2013).

The annual Central Economic Work Conference (CEWC), which sets the tone for economic policy for the following year, is due to be held on 10-12 December, followed by the much discussed Urbanisation Conference. The CEWC usually agrees on major economic targets for the next year, which will be officially announced the following March. Our moderate growth outlook assumes that the government will tolerate lower growth of 7.0-7.5% versus the 7.5-8.0% of the past two years. Therefore, it is crucial to see what the 2014 growth target will be. Meanwhile, we believe urbanisation is a natural process, involving complex reforms, including to the social security, fiscal and hukou systems, and land ownership, and therefore can only occur gradually. The Urbanisation Conference may help to clarify the kind of cities (eg, city clusters) to build to achieve the so-called, people-centric urbanisation.

Our latest discussions with officials and think tanks suggest a higher probability that the 7.5% growth target will be kept. The government will likely maintain the 3.5% target for inflation, increase the budget deficit from CNY1.2trn, and lower the trade growth target from 8%. In our view, the GDP growth target could be an indication of the government’s commitment to rebalancing the economy. We think economic developments point to slower growth; hence, lowering the growth target to 7% would be more appropriate. That would also help to leave room for reforms and guide the expectations of local governments, though the initial response from global investors could be negative. We believe with slowing working-age population growth, China no longer needs 7.2% growth, as argued by Premier Li, to create enough jobs. While a target range of 7-7.5% could be a compromise, it would complicate budget planning. A 7% target, if announced, would mean that is the premier’s absolute bottom line for growth.

Overall, we see both downside and upside risks to our 7.2% 2014 growth forecast, but the balance of risks is titled to the upside. The downside risks come from greater-than-expected policy-led deleveraging of the economy, higher and volatile interest rates, and the government's push for reforms and reduction of overcapacity. These could lead to a sharper-than-expected slowdown in investment growth. On the other hand, there are upside risks coming from policy being more supportive than we currently assume – ie, that the government does not tolerate growth as slow as we currently expect, given its concerns about employment, social stability and market confidence. External demand, on the back of a possible stronger-than-expected recovery in the US and EU, could also pose upside risks.

FIGURE 9 Short-term financing bill yield by credit rating

FIGURE 10 Bond issuance slowed on higher borrowing costs


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Risks to our 2014 forecast are tilted slightly to the upside



13 December 2013 12

FIGURE 11 Total financing, including off-balance-sheet lending, slowed

FIGURE 12 CNY faces upward pressure on resumed capital inflows

Source: CEIC, Barclays Research Note: *Estimated portfolio capital inflow = Change in PBoC FX purchase – Trade surplus – FDI inflow. Source: CEIC, Barclays Research

FIGURE 13 China macroeconomic forecasts

2010 2011 2012 2013F 2014F 2015F

Activity

Real GDP (% y/y) 10.4 9.3 7.7 7.7 7.2 7.4

Domestic demand contribution (pp) 10.0 9.7 7.9 7.7 7.2 7.2

Final consumption (% y/y) 9.2 10.9 8.6 7.3 7.1 7.2

Gross capital formation (% y/y) 12.0 9.5 7.7 8.7 7.9 7.7

External demand contribution (pp) 0.4 -0.4 -0.2 0.0 0.0 0.2

Nominal exports (% y/y) 31.3 20.3 7.9 8.0 9.3 9.6

Nominal imports (% y/y) 38.8 24.9 4.3 6.7 8.2 9.4

Nominal GDP (USD bn) 5,943 7,336 8,233 9,267 10,538 11,950

External sector

Current account (USD bn) 238 136 193 208 208 245

CA (% GDP) 4.0 1.9 2.3 2.2 2.0 2.0

Customs trade balance (USD bn) 182 155 230 273 288 318

Utilised FDI (USD bn) 106 116 112 116 120 136

Gross external debt (USD bn) 549 695 737 804 864 932

International reserves (USD bn) 2847 3181 3312 3784 4146 4563

Public sector

Public sector balance (% GDP) -1.7 -1.1 -1.7 -2.1 -2.0 -2.0

Central government debt (% GDP) 16.8 15.2 14.9 15.6 15.8 15.8

Prices

CPI (% Dec/Dec) 4.6 4.1 2.5 2.8 2.9 4.1

FX (USD/CNY, eop) 6.59 6.32 6.23 6.08 5.95 5.95

1y ago Last Q4 13F Q1 14F Q2 14F Q3 14F

Real GDP (% y/y) 7.9 7.8 7.6 7.6 7.5 7.0

CPI (% y/y, eop) 2.5 3.1 2.8 3.4 3.3 2.8

FX (USD/CNY, eop) 6.23 6.12 6.08 6.05 6.02 6.00

Monetary policy benchmark rate (%, eop) 6.00 6.00 6.00 6.00 6.00 6.00

Source: CEIC, Barclays Research

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13 December 2013 13

China/Hong Kong: Equity Research

CHINA/HONG KONG: EQUITY RESEARCH


13 December 2013 14

CHINA EQUITY STRATEGY

Reform…damned if they do, damned if they don’t; prefer agnostic strategy • Uncertainty reigns in 2014, with the big issue being reform and its impact on

equities, and then adding slowing China economic growth, Fed tapering and levelling of US growth into the mix, leading to a challenging market environment.

• Barclays global equity strategy preference is for emerging markets over developed markets; in Asia we prefer North Asia to ASEAN, but in China we prefer a “policy agnostic” strategy.

• Sector views: Overweight on energy, consumer discretionary, and Internet & tech; neutral on financials (prefer larger banks) and industrials/capital equipment; and underweight on telecoms, materials.

• Top picks: PetroChina, Bank of China, PICC, Tencent, Lenovo, Sands China, Chow Tai Fook, CSR Corp and China Shenhua Energy (all rated OW).

Damned if they do, damned if they don’t…reform Since publishing our last China Equity Strategy report, “No Pain, No Gain”, a quarter ago (link) making a tactical call on selective sectors (banks, materials, transport, consumer and Internet), we turn more cautious on China equities and recommend positioning in value and secular growth going into 2014, as we expect uncertainty around economic deceleration and reform policies to impact confidence in equities, sustain market uncertainty and heighten volatility. Our sector analysts maintain mixed views again due to uncertainty over reform policy and the potential impact on the banks, SOEs and industrials.

The market awaits a timeline and detail on the introduction of various reforms, which remains a concern. Although the longer-term anticipation of reform, especially in the financial, SOE and consumer sectors, remains welcome, the lack of details and timing leaves us uncertain on the equity reaction to policy in 2014. And although our economics team generally sees a positive longer-term outcome, we continue to expect equity investors to position around policy risks. On 9 December Barclays China economist Jian Chang in her report entitled Economic Outlook: Towards a firmer economy wrote:

“The Chinese Communist Party’s Third Plenum approved a comprehensive reform agenda for the next decade (see China: The Third Plenum - Mind the priorities, 17 November 2013). While implementation will be key, we think the government is at least heading in the right direction in terms of its reform priorities. It appears committed to tackling complicated issues, such as land reform, relations between the central and local government, increased private and foreign participation in markets, and more diversified corporate structures for SOEs. The meeting highlighted the ‘decisive’ role of the market in resource allocation and reiterated the ‘push for domestic reforms through further opening-up’. But it also underlined that the state sector remains the dominant pillar of the economy, while private business will be encouraged.

“We expect steady progress in financial reforms, such as freer cross-border capital flows and a more liberalised interest rate environment, as the PBoC follows its strategy of ‘forcing domestic reforms through opening up’. This is reflected in the latest guidelines on financial services to be permitted in the Shanghai free trade zone (China: PBoC releases 'Guideline for Financial Support for Shanghai Free Trade Zone', 2 December 2013). That said, we continue to believe the main objective of financial reforms at this juncture is to support the real economy and reduce systemic financial risks. We do not expect any acceleration in the

EQUITY RESEARCH

China Equity Strategy Kent Chan +886 2 6638 4688 [email protected] BCSTW, Taiwan Emily Huang +886 2 6638 4692 [email protected]

BCSTW, Taiwan




13 December 2013 15

liberalisation of rates, FX or the capital account, since financial stability remains key (see China Focus: Financial reform - the priority and the inevitable, 20 November 2013).”

In summary, Chinese equities will continue to react to news, and we continue to expect A-share investors to hold a more pessimistic view around reform, while H-share investors should be more positive and attracted to historically low valuations, especially in the banks.

Similar sector bias in 2014 likely As a result of this uncertainty, we expect investors to remain supportive of growth sectors including Internet, tech, consumer discretionary, railways, and select financials where we believe investors will continue to concentrate positions and/or bottom fish low valuation sectors such as the large cap banks. Finally, our analysis of A-share balance sheets is less conclusive as returns on equity and assets and working capital ratios appear to be bottoming, but without a clear sign of improvement as yet. This appears to be reflected in the earnings estimates amongst our China team where our analysts expect only 9.4% earnings growth in 2014E vs the street at 10.0%, and expect 9.0% growth in 2015E vs the street at 10.9%. Also if we look at expectations for H shares vs A shares, for the HSCEI index, consensus expects 8.9% and 10.1% y/y EPS growth for 2014E and 2015E, respectively, vs 17.4% and 15.7% growth for CSI 300.

In conclusion, with slower economic growth, 9-11% earnings growth and sustained policy uncertainty, we expect a volatile year ahead for Chinese equities regardless of whether it’s H shares, A shares or the Hang Seng Index, and the challenge will be to identify earnings predictability and stability.

Greatest risk to global and China equities Although our Barclays global strategy and asset allocation teams maintain their view to overweight equities relative to fixed income, and particularly EM over developed market equities on a better-than-expected macro outlook, they are recommending a shift towards a more balanced portfolio. The greatest risk we see in China and all equities is the pick-up in US economic growth as Barclays economists and strategists argue that this could cause inflation to move higher and increase the likelihood of rate hikes, which could challenge equities’ current valuations, especially for the sectors and stocks that have rich valuations. In addition, reform risks remain heightened and we argue a “damned if you do and damned if you don’t” scenario in Chinese equities will leave market participants reacting to news and events.

FIGURE 14 CSI 300 and sub-sector performance, year-to-date 2013 and rel. CSI 300

CSI 300 Sector YTD Performance

Relative Performance vs CSI 300

IT 40.20% 41.3% Consumer Discretionary 26.83% 27.9% Industrial -0.30% 0.8% CSI 300 -1.12% Financial -2.41% -1.3% Consumer Staples -2.94% -1.8% Utilities -3.02% -1.9% Real Estate -12.13% -11.0% Material -22.94% -21.8% Energy -26.19% -25.1%

Note: Performance for 28 December 2012 to 9 December 2013 Source: Bloomberg, Barclays Research

Expect a volatile year ahead for Chinese equities regardless of H shares, A shares or the HSI


13 December 2013 16

As we head into 2014, our strategy and analysts’ calls are to look for sectors and stocks with stable operating trends, lower risks and undemanding valuations, such as the China banks with the sector on average trading at 0.9x FY14E P/B and 5.1x FY14E P/E; transportation, especially airlines which are trading near post-GFC P/B lows; and oil & gas names which appear poised for an earnings rebound in 2014 due to energy price reform. On the flipside, our analysts are negative on Hong Kong property as we believe the Hong Kong market is about to enter its first real downturn since 1998 and they see home prices dropping by at least 30%.

Subdued growth profile on continue government reforms While our economist Jian Chang raised her 2013 and 2014 GDP forecasts to 7.7% and 7.2% to reflect stronger-than-expected industrial production growth, we continue to expect economic growth to decelerate rather than to accelerate as the government faces the need to reduce industry overcapacity, local government debt and shadow banking risks. Jian expects China to see some rebalancing in domestic demand with rising consumption offsetting a slowdown in investment growth.

FIGURE 15 Table of key China economic forecasts

2012 2013F 2014F 2015F

Activity Real GDP (% y/y) 7.7 7.7 7.2 7.4 Nominal exports (% y/y) 7.9 8 9.3 9.6 Nominal imports (% y/y) 4.3 6.7 8.2 9.4 Nominal GDP (USD bn) 8,233 9,267 10,538 11,950 External sector Current account (USD bn) 193 208 208 245 CA (% GDP) 2.3 2.2 2 2 Utilised FDI (USD bn) 112 116 120 136 Gross external debt (USD bn) 737 804 864 932 Public sector Public sector balance (% GDP) -1.7 -2.1 -2 -2 Central government debt (% GDP) 14.9 15.6 15.8 15.8 Prices CPI (% Dec/Dec) 2.5 2.8 2.9 4.1 FX (USD/CNY, eop) 6.23 6.08 5.95 5.95 Q4 13F Q1 14F Q2 14F Q3 14F

Real GDP (% y/y) 7.6 7.6 7.5 7 CPI (% y/y, eop) 2.8 3.4 3.3 2.8 FX (USD/CNY, eop) 6.08 6.05 6.02 6 Monetary policy benchmark rate (%, eop) 6 6 6 6

Source: CEIC, Barclays Research estimates

Impact of the Third Plenum We see the Third Plenum held in November 2013 as helping sentiment and positively impacting sectors, including China banks, basic materials, capital goods, transportation and oil & gas sectors. Our banks analyst, May Yan, highlights that the Plenum laid out the reform blueprint for the next 5-10 years, in which we expect China to enhance financial regulatory supervision over shadow banking businesses, and we expect total social financing amounts to come down next year while monetary policy should remain tight. For basic materials, Ephrem Ravi sees the Plenum as emphasizing growth, which is a key stock driver for the sector. Our capital goods analyst, Yang Song, has a positive read-through on the railway equipment sector from the Plenum as it emphasized industry reform and trade liberalization. Moreover, our analysts believe the Plenum suggests China will continue to reform resource pricing, which is positive for the oil and gas sector.


13 December 2013 17

Although the relaxation of China’s one-child policy is positive for sentiment, our analysts believe the impacts from this relaxation are exaggerated and do not see any changes to fundamentals. For the IT industry, Kirk Yang sees the IT industry as benefitting from the reform with the country’s promotion of information security, educational/military informatization and intellectual property protection. While sectors less impacted by the Third Plenum include China and Hong Kong insurance, Internet, China property, gaming and Taiwan non-tech.

Valuations undemanding for A and H shares Valuations for both A and H shares on a trailing price to book basis remain undemanding, in our view, despite averting a hard landing. However, the risks of higher rates, outperformance for China equities year-to-date, slower GDP growth and flattening of A-share financial datapoints lead us to believe that further expansion in equity performance would require a new catalyst in the form of stronger-than-expected economic growth, which would filter into profit expansion, leading to an expansion in P/E ratios.

FIGURE 16 CSI 300 index trailing P/B

FIGURE 17 HSCEI index trailing P/B

Source: Bloomberg, Barclays Research Source: Bloomberg, Barclays Research

FIGURE 18 P/E for CSI 300 index

FIGURE 19 P/B for CSI 300 index


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13 December 2013 18

Earnings revisions have bottomed, now trending upwards The China earnings revision index is well off its historical lows, and although we believe revisions may flatten into 2014 on slower growth, and Barclays analysts’ EPS forecasts vs Bloomberg consensus forecasts show EPS downside for consensus for 2014 but upside to 2015 numbers, better domestic demand should support earnings in 2014. For the key sectors we track energy, materials, industrials, staples and consumer discretionary all show signs of fewer negative revisions, while financials and utilities sectors both continue to see positive revisions.

FIGURE 20 China earnings revision index – 6M avg. vs CSI 300 index

Source: Datastream, Bloomberg, Barclays Research

FIGURE 21 Barclays vs consensus EPS estimates

Barclays EPS Consensus EPS Difference

2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Basic Industries 1.04 1.17 1.41 1.08 1.19 1.35 - 0.04 - 0.01 0.06 y/y change 13.0% 20.5% 9.7% 13.8% Consumer retail and staples 0.70 0.89 1.02 0.72 0.87 1.02 - 0.02 0.02 0.00 y/y change 27.0% 15.6% 20.4% 17.9% Financial Services 2.84 3.06 3.26 2.80 3.04 3.34 0.04 0.03 - 0.08 y/y change 7.9% 6.4% 8.3% 10.0% Real Estate 1.55 1.74 2.01 1.60 1.83 2.07 - 0.05 - 0.09 - 0.06 y/y change 12.8% 15.3% 14.8% 12.9% Industrials 1.17 1.37 1.66 0.94 1.28 1.58 0.23 0.09 0.09 y/y change 16.6% 21.6% 35.5% 23.3% Internet & media and telecom 3.07 3.29 3.61 3.14 3.35 3.71 - 0.07 - 0.06 - 0.10 y/y change 7.1% 9.7% 6.6% 10.8% Energy 2.59 2.77 2.99 2.67 2.86 3.03 - 0.07 - 0.09 - 0.04 y/y change 7.0% 7.6% 7.3% 5.8% Technology 0.58 0.72 0.81 0.48 0.65 0.76 0.10 0.07 0.05 y/y change 22.9% 12.2% 35.4% 16.1% Capital goods 1.10 1.21 1.40 1.14 1.32 1.52 - 0.04 - 0.10 - 0.13 y/y change 10.0% 15.1% 14.9% 15.7% Total China 2.15 2.35 2.56 2.14 2.35 2.60 0.01 - 0.00 - 0.04 y/y change 9.4% 9.0% 10.0% 10.9%

Source: Bloomberg, Barclays Research estimates

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13 December 2013 19

Financial datapoints failing to turn more positive After analyzing financial data for over 2,400 A shares listed in Shenzhen and Shanghai excluding financials, we are turning more cautious as we see financial datapoints failing to turn more positive. We believe recent expansion in China equities is a result of earnings expansion; our charts show that sales growth accelerated modestly in 1Q13, while failing to recover sharply from a low base, and pre-tax margins improved for A shares ex-financials. However, while the cash conversion cycle (CCC) is lower than 2001-02 and 2008-09 peaks, receivables and inventory days spiked in 3Q13 due to excess capacity, although helped by extension of payables to suppliers – indicating a deterioration in earnings quality.

FIGURE 22 Pre-tax margin % (A shares ex-financials)

FIGURE 23 Quarterly sales growth (A shares ex-financials) vs CSI 300 index

Source: WIND, Barclays Research Source: WIND, Barclays Research

By sector, industrials and consumer sectors saw AR days increase from the last quarter, while utilities, materials and energy saw a decrease. In terms of inventory days, industrials and discretionary sectors worsened from last quarter, while staples and utilities improved in 3Q.

FIGURE 24 Accounts receivable days (A shares ex-financials)

FIGURE 25 Accounts payable days (A shares ex-financials)

Source: WIND, Bloomberg, Barclays Research Source: WIND, Bloomberg, Barclays Research

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13 December 2013 20

FIGURE 26 Inventory days (A shares ex-financials)

FIGURE 27 Cash conversion cycle (A shares ex-financials)


ROE and ROA As margins normalize, returns on assets and equity have reached an inflection point, but clear signs of improvement are not apparent yet. This appears to be reflected in the earnings estimates amongst our China team where we expect only 9.4% earnings growth in 2014E vs the street at 10.0% and expect 9.0% growth in 2015E vs the street at 10.9%. We think a risk to the return profile for China equities is undisciplined capex, hindering excess capacity and lowering working capital. With slower economic growth forecast for next year, 9-11% y/y EPS growth, and policy uncertainty, we expect a volatile year ahead for Chinese equities.

FIGURE 28 Return on asset (A shares ex-financials)

FIGURE 29 Return on equity (A shares ex-financials)


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13 December 2013 21

ANALYSTS’ CHINA STOCK PICKS

FIGURE 30 China Equity Research – analysts’ stock picks



Price PT Pot’l up/ downside


Chow Tai Fook 1929.HK OW 11.8 14 18% 21.4 15.8 3.6 3.2 18% 21%

Belle 1880.HK OW 9.3 15.1 62% 13.5 11.9 2.4 2.1 19% 19%

Parkson 3368.HK UW 2.5 2.1 -15% 12.1 11.6 1.0 1.0 8% 8%

Want Want 0151.HK OW 11.5 13.3 15% 27.6 23.4 11.0 9.9 42% 45%

Hengan 1044.HK OW 96.6 97 0% 29.1 24.8 7.5 6.8 26% 28%

Tencent 0700.HK OW 462.4 450 -2% 45.1 33.4 13.9 11.7 34% 38%

Baidu BIDU OW 168.7 198 17% 34.7 27.2 7.5 5.5 23% 21%

Qihoo QIHU OW 82.8 95 14% 86.4 47.8 16.0 10.3 28% 30%

Ctrip CTRP OW 47.4 62 30% 46.1 36.9 3.4 3.3 11% 13%

Shanda Games GAME UW 4.1 3.5 -13% 4.7 5.1 3.5 3.5 80% 74%

Galaxy 0027.HK OW 63.95 66.7 4% 25.7 20.3 8.3 5.9 48% 41%

Sands China 1928.HK OW 62.9 60.3 -4% 29.6 21.6 10.2 8.3 39% 47%

MGM 2282.HK OW 29.2 32.2 10% 21.7 18.3 15.5 11.5 86% 85%

Bank of China 3988.HK OW 3.72 4.6 23% 5.3 5.1 0.9 0.8 17% 16%

Hang Seng Bank 0011.HK OW 126.6 153.0 20% 8.8 13.7 2.3 2.1 30% 17%

Chongqing Rural Commercial Bank 3618.HK UW 3.88 4.3 9% 4.6 4.2 0.8 0.7 18% 17%

Bank of East Asia 0023.HK UW 33.7 28.0 -16% 12.6 13.4 1.2 1.2 11% 10%

Shimao Property 0813.HK OW 18.22 22.6 24% 8.3 6 1.2 1.1 16% 19%

KWG 1813.HK OW 4.54 6.3 38% 4.8 4.2 0.6 0.5 13% 14%

Hang Lung Properties 0101.HK OW 25.25 28.0 10% 28.7 16 0.9 0.9 3% 6%

New World Development 0017.HK UW 10.12 8.5 -15% 4.4 8.6 0.5 0.4 5% 5%

Sector view: Within the China and HK banking sector, we prefer China banks with stable operating trends and fewer risks, as they are likely to be less negatively impacted by potential regulatory tightening on interbank business. We believe H-share China banks will conttrade with mixed drivers in 2014, while we maintain our neutral stance on Hong Kong banks.

Property

Sector view: We are negative on Hong Kong and neutral in China. While we view both property markets as approaching crossroads in 2014, their paths are very different. In Hong Kong, after rising for 10 years, we believe the local property market is about to enter its fisince 1998 and we expect home prices to drop by at least 30%. Against this backdrop, we expect the Hong Kong property stocks to underperform their Chinese peers as returns are more likely to be beta driven.

Banks

P/E P/B ROE%

Retail

Sector view: Into 2014, we do not see incremental negatives in companies’ fundamentals. However, we remain selective in retail, and favour retailers with a) retail-focused, multi-branded, omni-channelled and franchisee-free business models for better inventory control;brand equity and solid balance sheets to withstand increasing competition from e-commerce.

Staples

Sector view: Into 2014, we believe that staples companies’ growth story remains intact, with an average earnings growth rate of 24% y/y on our estimates. We think the official announcement of one-child policy bodes well for market sentiment, but not so much for compafundamentals.

Internet & Media

Sector view: We see five key trends for the sector in 2014: 1) increased competition & monetization of smartphone games; 2) rising consumption benefiting transaction-based models (online travel booking, eCommerce, LBS-based O2O business opportunities); 3) competition bonline video players extending to the home entertainment/smart-TV arena; 4) transition to mobile advertising remaining challenging and disruptive; and 5) continued fight for user traffic/mobile access points via individual apps, integrated platform and app

Gaming

Sector view: Expect 13% GGR growth in 2014: We are forecasting 13% overall GGR growth for full year 2014, before further acceleration to at least 16% growth in 2015. For 2014, we expect mass table revenues to be a main driver with 26% GGR growth, but expect VIP table rgrowth to be slower at +7% y/y. With a 13% GGR growth, this would imply still a high teens percentage growth in profits for casinos due to the higher margin mass market growing faster.


13 December 2013 22

FIGURE 30 (CONTINUED) China Equity Research – Analysts’ stock picks


Price PTPot’l up/

downside Sector Stock picks Ticker Rating (local curr.) (local curr.) to PT (%) FY13E FY14E FY13E FY14E FY13E FY14E

China Southern Airlines 1055.HK OW 3.33 4.2 27% 13.1 10.6 0.7 0.7 6% 7%

COSCO Pacific 1199.HK OW 11.08 15.2 36% 5.7 11.7 0.9 0.9 17% 8%

Yangzijiang Shipbuilding YAZG.SI OW 1.16 1.5 29% 6.1 5.7 2.0 1.7 20% 19%

CRCC 1186.HK OW 8.66 11.9 36% 8.5 7.2 1.0 0.9 13% 14%

Beijing Airport 0694.HK OW 6.75 7.0 3% 14.8 13.5 1.4 1.3 10% 10%

Jiangsu Expressway 0177.HK OW 9.89 10.5 6% 14.5 12.5 2.0 1.9 14% 16%

PetroChina 0857.HK OW 9.08 11.5 26% 10.5 9.7 1.2 1.1 10% 11%

CNOOC 0883.HK OW 15.56 20 28% 8.7 8.1 1.5 1.3 19% 18%

Anton Oil 3337.HK OW 4.88 6.3 29% 22.2 15 3.6 3.1 17% 21%

Zoomlion 1157.HK OW 7.66 9.1 18% 11 9.3 1.1 1.0 10% 11%

Zhuzhou CSR 3898.HK OW 28.7 35.2 22% 18.1 13.8 3.2 2.9 20% 23%

CSR 1766.HK OW 7.05 8.2 16% 18 12.9 2.1 1.9 12% 14%

Sany 0631.HK UW 2.65 1.9 -28% 12.2 14.9 1.1 1.0 9% 7%

China Shenhua 1088.HK OW 25.7 33.0 28% 8.8 9 1.5 1.4 18% 17%

China Hongqiao 1378.HK OW 4.75 6.0 26% 4.1 3.3 0.9 0.7 24% 25%

Anhui Conch 0914.HK OW 30.25 29.5 -2% 15.1 11.9 2.3 1.9 17% 19%

Chalco 2600.HK UW 2.83 2.3 -18% -9.2 -21 0.7 0.8 -7% -4%

China Unicom 0762.HK EW 11.96 14.0 17% 21.0 15.2 1.0 1.0 5% 7%

China Mobile 0941.HK UW 84.65 76.0 -10% 11.0 11.3 1.7 1.6 18% 16%

AIA 1299.HK OW 38.75 41.6 7% 20.2 17.2 2.0 1.8 11% 12%

Ping An 2318.HK OW 76 87.9 15% 14.8 13.1 2.5 2.1 23% 22%

PICC 2328.HK OW 12.94 14.6 12% 10.9 9.4 2.2 1.9 18% 16%

P/E P/B ROE%

Sector view: After two tough years when earnings fell 14% y/y, China’s three oil and gas majors are poised for an earnings rebound in 2014 helped by energy price reform. While we expect overall capex by China’s oil majors to moderate, upstream E&P capex will hold steady with a greater focus on efficiencies and more transparent award processes; this is likely to be positive for China’s independent oilfield service providers.

Capital Goods

Sector view: We expect most of China Capital Goods sector to remain lacklustre in CNY 2014E, as we see low utilization of the installed base to continue weighing down on equipment demand. The bright spots we see are (1) rolling stock makers, as we estimate MU utilization has reached 80% in 2013E, becoming a bottle neck for HSR passenger growth; and (2) Zoomlion, we expect Zoomlion to write off its bad debts in the coming quarterly and setting up the path for earnings recovery in as early as 2Q14.

Basic Materials

Telecom

Sector view: We are cautious in our outlook as we see no incentive for operators to focus on profit growth for now - 4G comes with all the excuses to do just that. We think China Mobile is incentivized to aggressively push TD-LTE at the cost of (than with) profits – this is bad for sector margins. Valuations are cheap and imply limited downside risk. That said, with clear and visible overhang to worsening competitive stress and consequently overhangs to profits estimates into 2014, we struggle to see the stocks performing on a 12-month view.

Sector view: We don’t see any significant improvement in fundamentals for the China life insurance sector and believe the structural growth story for protection demand may not play out in the near to medium term as over 80% of sector’s premiums remain saving and investment-type products. Therefore, we believe 2014 will be another year of ups and downs for the China life insurers, in tandem with the A-share market’s performance.

Insurance

Sector view: Commodity prices more than volumes drives earnings, and in the medium term supply matters more than demand for prices. Demand has been robust - 2013 demand growth rate for both coal and steel; however with around 300mn tonnes of overcapacity in coal mining in China and c.180mn tonnes of overcapacity in steel, pricing was going to be range-bound. Unless demand decelerates sharply (our economists forecast a healthy 7.2%y/y GDP growth rate, which should translate to around 5-7% underlying demand growth rate for steel and coal everything else being equal) 2014 will see the fundamentals continue to improve.

Infrastructure & Transport

Sector view: The Chinese transport industry remains broadly over supplied five years after the GFC. As a result, we remain demanding on inexpensive valuations to invest; which we see in the Chinese airlines trading near post-GFC P/B lows. We expect rising consumption to enable Chinese airlines’ Revenue Passenger-Km to accelerate +14% y/y in 14E from +13% y/y in 13E despite a slowing economy. We are broadly more positive on infrastructure and like E&C names with 12-26% EPS 14E growth.

Oil & Gas


13 December 2013 23

CHINA AND HONG KONG BANKS

2014 a year of reform: No pain, no gain – prefer China banks with less risk, neutral on Hong Kong banks The Third Plenum of the 18th Central Committee of the Communist Party of China held in November 2013 laid out the reform blueprint for the next 5-10 years. With the Chinese government’s efforts to deepen economic structural reform, we expect total social financing (TSF) amounts to come down next year and monetary policy in China to remain tight. We also expect China to enhance financial regulatory supervision over shadow banking businesses soon (including irregular interbank businesses, especially trust beneficiary rights collateralized reverse repos). We prefer China banks with stable operating trends and fewer risks, as they are likely to be less negatively impacted by potential regulatory tightening on interbank business.

• We believe H-share China banks will remain range-bound in 2014 while the near-term positive momentum may carry into 1Q14: The 18th Third Plenum in November offered hopes for long-term structural reform in China, which led to market sentiment improvement in recent weeks. This positive momentum could carry bank stocks even higher ahead of the March 2014 People’s Congress. However, we believe long-term gain would be contingent on near-term pain if “overcapacity” is cut and “deleverage” happens. We believe there is risk in 2Q-3Q14 of negative headlines on corporate bankruptcies affecting bank share prices.

• Drivers and catalysts for China banks: Range-trading in 2014 will be driven by mixed drivers, we believe, including on the positive side: 1) undemanding valuation (sector average: 0.9x FY14E P/B and 5.1x FY14E P/E) and high dividend yield (average 6.3% in FY14E); 2) global fund flows into equity markets and the China market; 3) the Central Economic Work Conference being held in December 2013, which might see the announcement of more bullish growth targets than the market anticipates; and 4) detailed discussion on the execution plan for reforms to be announced during the People’s Congress in March 2014. However, we also expect near-term negative catalysts to weigh on the sector: 1) the soon-to-be-announced LGFV debt amount could be larger than expected; 2) regulatory tightening on interbank and shadow banking business may lead to credit tightening; and 3) margin pressure could come from more deposit rate liberalization, such as the setting up of a deposit insurance scheme and allowing banks to issue negotiable certificates of deposit (NCDs) to corporate and retail customers.

• We maintain our neutral stance on Hong Kong banks: While we expect a stable earnings outlook driven by steady margins and sustained cross-border loan demand from China due to the lower cost of borrowing in Hong Kong compared to onshore, the key risk in our view is the potential impact of US QE tapering on system liquidity, which may result in margin pressure and a slowdown in loan growth. Credit costs will likely remain low in FY14E with no signs of systemic stress in Hong Kong.

• Our stock picks among China and Hong Kong banks include OW-rated Bank of China and Hang Seng Bank, and UW-rated Chongqing Rural Commercial Bank and Bank of East Asia.

EQUITY RESEARCH

Asia ex-Japan Banks

Industry view: Neutral

May Yan +852 2903 4756 [email protected] Barclays Bank, Hong Kong Sharnie Wong +852 2903 3457 [email protected]

Barclays Bank, Hong Kong

Mimi Kong +852 2903 4671 [email protected]


Sean Hung, CFA +852 2903 4799 [email protected] Barclays Bank, Hong Kong Chen Wang +852 2903 3994 [email protected] Barclays Bank, Hong Kong


13 December 2013 24

China banks 2014 outlook: the year of reform

Impact from the Third Plenum: Long-term gain, short-term pain After the Communist Party’s Third Plenum reform plan announced in November 2013, we expect the year of 2014 to be a key year of implementation. We believe the reform plan, if delivered, will benefit China’s banking sector in the long run. However, with the central government’s efforts to push forward the structural economic reforms, we expect the following negative impacts on China banks in the near to medium term: 1) total social financing (TSF) for 2014 to come down after two years of large credit expansion (RMB15.76tn in 2012 and RMB14.8tn in 10M13); 2) as China aims to build an open and orderly market system, we also see rising inflation pressure in 2014, further triggering a tightening of monetary policy; 3) narrowing NIM as PBOC pushes forward the interest rate deregulation progress; and 4) deteriorating asset quality amid industry reforms, a tight liquidity environment, and regulatory tightening on shadow banking businesses.

Mixed catalysts; expect range-trading pattern to be repeated in 2014 The reform plan announced after the Communist Party’s Third Plenum in November clearly offered hope for structural reforms in China, which led to a recovery in market sentiment. Going into 2014, we maintain our neutral view on H-share China banks as we see mixed catalysts ahead: we think bank shares will therefore likely remain range-trading with opportunities to accumulate in periods of negative news flow.

In our view, positive drivers include: 1) the undemanding valuation of the sector (average 0.9x FY14E P/B and 5.1x FY14E P/E) and high dividend yield (avg. 6.3% in FY14E); 2) global fund flows into equity markets; 3) the Central Economic Work Conference being held in December 2013; and 4) detailed execution plan for reforms to be rolled out during the People’s Congress in March 2014.

Conversely, we expect the following near-term negative catalysts to weigh on the sector: 1) regulatory tightening on interbank and shadow banking business, which is expected to be introduced in late 2013 or early 2014 (refer to: China Banks: Latest reports on interbank regulation (Document No. 9) indicate milder tightening than reported earlier, 25 Nov 2013); 2) the setting up of a deposit insurance scheme, which will lift banks’ expenses and therefore lower banks’ profits (China Banks: Setting up deposit insurance in China, 18 Jun 2013); 3) allowing banks to issue negotiable certificates of deposit (NCDs) to corporate and retail customers, which would further lift banks’ funding costs and therefore squeeze their NIMs refer to China Banks: Launch of NCDs has manageable impact on banks' funding costs, 15 Oct 2013); and 4) the soon-to-be-announced LGFV debt amount, which could be larger than the market expects.

Risks • Key upside risks to our defensive view: 1) delay in US QE tapering; and 2) more global

fund flows to the China/Hong Kong market.

• Key downside risks to our defensive view: 1) larger- and faster-than-expected increase in NPLs; and 2) faster-than-expected pace of interest rate deregulation.

Hong Kong banks 2014 outlook: stable earnings expected

Stable earnings expected in 2014 We maintain our expectation of a stable earnings outlook for the Hong Kong banks, driven by steady margins and sustained cross-border loan demand from China due to the lower cost of borrowing in Hong Kong compared to onshore. However, the key risk is the potential impact of US QE tapering on system liquidity (discussed below) which may result in margin







13 December 2013 25

pressure and a slowdown in loan growth. Credit costs will likely remain low in FY14E with no signs of systemic stress in Hong Kong. China asset quality may normalize from the currently low levels, but remains manageable overall in our view as most of the credit growth has been driven by trade bills (backed by banks) and trade finance which are both short in duration.

Tapering poses near-term downside risk We think a key risk to earnings growth for the Hong Kong banks is the potential impact of US QE tapering on system liquidity (discussed below). The tapering process could trigger fund outflows and result in a contraction of system deposits. Since the system loan-to-deposit ratio is at 72% (as at Sep 2013), a record high since 1999, and does not have much further room to increase, we could potentially see a contraction of loan growth initially, led by the shorter duration trade finance loans rolling off. Funding costs will likely rise as banks compete for deposit funding and manage their LDRs. After the initial margin pressure, we believe banks will reprice loans upwards to pass on the higher cost of funding and protect their net interest margins. We believe the large banks with strong deposit franchises are best positioned for tapering and a medium-term rise in benchmark interest rates.

Key risks • Key upside risks: 1) corporate action in the sector for the smaller family-run banks in

Hong Kong; 2) margin benefit from an earlier-than-expected rise in benchmark interest rates; and 3) credit costs remaining low for longer as asset quality conditions remain stable in China and Hong Kong.

• Key downside risks: 1) larger-than-expected fund outflows from QE tapering; and 2) sharp slowdown in China leading to worse-than-expected asset quality.

Stock picks

Our top stock picks among China and Hong Kong banks • Bank of China (3988 HK; OW; PT HK$4.60): We believe BOC is better positioned than

its peers to benefit from recovery in developed countries and potential interest rate hikes in the US because one quarter of its assets are overseas. In addition, the bank is undertaking a strategic shift to focus more on profitability, especially its NIM. Furthermore, RMB internationalization should help to support its high fee income growth. The bank is attractively valued, in our view, trading at 0.8x 2014E P/B with a 6.9% 2014E dividend yield.

• Hang Seng Bank (11.HK; OW; PT HK$153): We believe the strong deposit franchise makes HSB more defensive/leveraged to potential liquidity outflows/rising interest rates compared with peers. Furthermore, the bank is less vulnerable to volatility in China due to its lower mainland China exposure and strong risk management track record. Moreover, the drag on capital and dividend would be removed in the event that HSB disposes of its 10.9% stake in Industrial Bank. We believe the market has undervalued HSB’s core business, which generates an attractive sustainable ROE of 20.5% for 2014E, among the highest of the AEJ banks.

Our least preferred stocks among China and Hong Kong banks • Chongqing Rural Commercial Bank (3618.HK, UW, PT HK$4.25): We believe the bank

is not in a good position compared to peers, as: 1) the bank has greater exposure to interbank lending (34% of total deposits vs. sector average of 20%), thus we believe it will be more negatively impacted by potential regulatory tightening on interbank business; 2) the bank has one of the highest levels of exposure to LGFVs (13% of total loan book vs. sector average of 7%); and 3) as more medium- and small-sized Chinese


13 December 2013 26

banks are looking to go public in the H-share market, we believe these upcoming IPOs present a substitution risk for the bank.

• Bank of East Asia (23.HK, UW, PT HK$28): We believe valuations are expensive as BEA has benefited from sector corporate action. The bank has the largest exposure to mainland China among peers. A slowdown in China growth and acceleration in financial reform could place pressure on funding and margins given BEA’s weaker deposit franchise relative to domestic peers and the bank may experience deterioration in asset quality.

FIGURE 31 Greater China banks – stock picks

Price Curr Pot. up/

downside Mkt cap P/B (X) P/E (X) P/PPOP(X) Div. Y ROE

Ticker Rating target price to PT (%) (US$mn) 12A 13E 14E 12A 13E 14E 12A 13E 14E 12A 13E 14E 12A 13E 14E

Most preferred stocks

BOC-H 3988 HK OW 4.60 3.72 24% 130,914 1.0 0.9 0.8 6.0 5.3 4.9 4.1 3.5 3.1 5.8% 6.4% 6.9% 18.0% 17.4% 16.4%

HSB 11 HK OW 153.00 126.60 21% 31,215 2.6 2.3 2.2 12.5 8.8 13.8 15.2 12.1 11.2 4.2% 4.2% 4.2% 22.7% 27.3% 16.0%

Least preferred stocks

CRCB 3618 HK UW 4.25 3.88 10% 4,654 0.9 0.8 0.7 5.4 4.6 4.0 3.9 3.2 2.7 5.4% 6.2% 7.0% 17.9% 17.9% 17.3%

BEA 23 HK UW 28.00 33.70 -17% 9,948 1.3 1.2 1.2 11.7 12.0 12.7 11.1 10.2 10.3 3.1% 3.4% 3.2% 11.8% 10.6% 9.4%

Note: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Banks industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Bloomberg, Barclays Research estimates

http://publicresearch.barcap.com/�


13 December 2013 27

CHINA BASIC MATERIALS

Another year of nibbling away at overcapacity

2014 outlook • Restocking season into CNY: Restocking of steel begins 7-8 weeks before Chinese New

Year and we expect this has been happening since the first week of December. Inventories of steel (in terms of days of use) are at five-year lows, on our estimates. While this is partially driven by expectations of lower pricing and tighter credit conditions at private operators, any upside surprise in demand will likely drive faster restocking. Iron ore demand (and pricing) should be supported over the next two months due to the steel restock and associated pick-up in steel production. The coal restocking at the IPPs began in late September and appears to be tapering out now. Normal seasonality is playing out in cement with strong demand in 4Q13 followed by a marginal weakening into CNY.

• 2014 – another year when significant overcapacity gets nibbled away: Commodity prices more than volumes drive earnings and, in the medium term, supply matters more than demand for prices. The problem over the past four years has been overcapacity. Demand has been robust – 2013 demand growth rate for both coal and steel – two of the key commodities – both grew at 8-10% (compared to consensus expectation of 1-3% y/y at the beginning of the year). However, with c300mn tonnes of overcapacity in coal mining in China (c8% of demand) and c180mn tonnes of overcapacity in steel (c23% of demand) pricing was going to be range-bound, whatever the demand scenario. Coal prices started turning up in 2H13 and steel margins were better y/y in 2013, due to capacity additions slowing while demand growth continued apace. Unless demand decelerates sharply (Barclays economists forecast a healthy 7.2% y/y GDP growth rate for China, which we estimate should translate into c5-7% underlying demand growth for steel and coal, all else being equal), 2014 will see fundamentals continuing to improve, in our view.

• Drivers and catalysts: Supply disruptions in coal and copper globally are the key negative catalysts to watch out for. From a demand perspective, the GDP growth rate is going to be the key driver of growth.

• Stock picks: China Shenhua, China Hongqiao, Anhui Conch (all rated OW) and Chalco, which we rate UW.

Impact of the Third Plenum The Plenum generally reiterated what was broadly known and expected in the sector, in our opinion. From a top-down perspective, sentiment towards basic materials is driven by growth and the statements from and after the Plenum emphasized growth (unsurprisingly, stocks reacted positively). In terms of the specific measures:

• Capacity control on polluting industries: This has been a long-standing objective of the government – for decades – though public pronouncements by officials and companies have increased with increasing publicity around pollution problems. Counter-intuitively this would be a positive for the large listed producers under our coverage if actually implemented. As noted, supply rather than demand has been the problem, and capacity is a problem that is easier to tackle through a combination of incentives and penalties than reduced demand (which is effectively a decision to lower growth substantially which goes against the objectives coming out of the Plenum).

EQUITY RESEARCH

Asia ex-Japan Metals & Mining


Ephrem Ravi

+852 98191934

[email protected]

Barclays PLC Ada Dai +852 2903 4052 [email protected] Barclays Bank, Hong Kong


13 December 2013 28

• Resource taxes: A potential move to an ad-valorem tax rather than a per tonne of mined commodity tax has been discussed and expected for quite some time. While the intent is there, there has been no specific announcement related to implementation and none was discussed in the Plenum. We expect the implementation to be problematic due to resistance from provincial and local governments, some of whom are highly dependent on the resource taxes for their revenue.

• Unification of rural and urban construction land: To the extent that this is implemented and social housing is encouraged, we view it as positive for basic materials demand through increased urbanization.

• Relaxation of the one-child policy: In the long term, demographics drive basic materials demand, so a larger population means a greater requirement for housing and the infrastructure to cater to it. However, the impact will be felt only in decades and not in the near term.

How tapering affects the sector Commodities are a global industry and prices are set in US$. Global growth and a weak US$ are generally supportive for the sector. To the extent that tapering is negative for expectations of growth and strength of the US$, the sector will be under pressure on tapering/untapering.

Risks Acceleration or deceleration of GDP growth is the key risk across the sector. For individual sub-sectors, the risks are:

• Steel: Positive risk from capacity cuts actually happening (in line with the policy intent), negative risks from lower exports of steel as the price arbitrage window closes.

• Base metals: Positive risk for copper prices from major supply disruptions, negative risk for aluminium from warehouse inventory liquidations.

• Coal: Positive risk from extreme weather and low rainfall in hydropower catchment areas, negative perception risk from government policy to control pollution and imports.

• Cement: Positive risk from pollution-related closures by smaller players, negative risk from further price competition amongst the large players and bad debts on receivables.

FIGURE 32 Steel overcapacity in China has peaked

FIGURE 33 Coal prices have recovered after prices reached a cost floor and inventories were drawn down

0

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100

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2004 2006 2008 2010 2012 2014e 2016e

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acity

Theoretical steel overcapacity (Nameplate - production)

400

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Qinhuangdao port coal prices

5800 kcal/kg5500 kcal/kg5000 kcal/kg

Source: Mysteel, Barclays Research Source: Sxcoal, Barclays Research


13 December 2013 29

Stock picks • China Shenhua (1088 HK; OW; PT HK$33): Shenhua is our top pick within our China

(and regional) Metals & Mining coverage universe, due to a combination of best-in-class business model and attractive valuations. Even in the event of weakness in coal prices, we believe the large IPP business revenue offsets that. The company is transforming itself into a rail company, with over 50% of capex in the past two years going into rail and the EBITDA in that business going from RMB13bn to potentially well over RMB35bn (and constituting one-third of EBITDA) if tariff increases come though. The balance sheet with almost no net debt is amongst the best in the sector, and being a central SOE, reduces political risks. The stock is trading at 8.9x P/E, 5.4x EV/EBITDA, 1.4x P/B (on a sustainable ROE of 20%) and has a 4.5% dividend yield with a 40% payout ratio.

• China Hongqiao (1378 HK; OW; PT HK$6): Although we do not like aluminium as a commodity, Hongqiao is taking significant market share, as it is one of the lowest-cost producers of the metal in the world. With close to 2.5mn tonnes of integrated aluminium production in 2014E, we estimate it will be one of the six largest aluminium producers globally (from nothing a few years ago). Although the stock has outperformed the China Basic Materials complex by over 50% in 2013, valuations still remain very attractive at 3.4x P/E, 3.3x EV/EBITDA and 0.7x P/B and the risk/reward case also remains very attractive.

• Anhui Conch (914 HK; OW; PT HK$29.5): We view Anhui Conch as a defensive play in Chinese Cement. Although valuations at 11.4x P/E, 6.3x EV/EBITDA and 2.4x P/B are not particularly cheap, Anhui’s exposure to the eastern and southern regions positions it well for 2014, in our view. The company will also likely benefit from tougher enforcement of environmental standards, which may lead to closure of cement lines of some of its competitors. The balance sheet is also strong, with less than 20% gearing (compared to peers at over 100% gearing).

• Chalco (2600 HK; UW; PT HK$2.3): The company has been helped by generous acquisition terms from its parent company in 2013. Our outlook is for aluminium prices to be weak and hence Chalco’s investment case should remain challenged. With gearing at more than 275% and the 25% reduction in the book value of its equity in the past two years, bottom-up fundamentals have also deteriorated. However, if its cost position continues to improve (vs global players), with lower power costs, there could be an earnings tailwind in the next couple of quarters and the cash flows from disposals to its parent could also help. However, with about RMB3bn of interest and depreciation expenses every quarter, the company’s journey towards breaking even will still be long and arduous, in our view. We expect Chalco to continue to be loss-making and asset acquisition by the parentco from the listco at relatively expensive valuation is the key risk to our UW rating.

FIGURE 34 China Basic Materials – stock picks

Company Ticker Curr. Price Rating

Pot’l up/Downside

to PT Mktcap

(US$mn)

P/E EV/EBITDA P/B

2013E 2014E 2013E 2014E 2013E 2014E

China Shenhua 1088 HK HK$ 25.7 OW 28% 65,927 8.9x 9.0x 5.5x 5.4x 1.5x 1.4x

China Hongqiao 1378 HK HK$ 4.8 OW 26% 3,605 4.4x 3.4x 4.4x 3.4x 0.9x 0.7x

Anhui Conch 914 HK HK$ 30.3 OW -2% 20,675 15.1x 11.9x 7.2x 6.5x 2.3x 2.4x

Chalco 2600 HK HK$ 2.8 UW -19% 4,936 -- -- 32.4x 18.5x 0.7x 0.8x

Note: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Metals & Mining industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates



13 December 2013 30

CHINA CAPITAL GOODS

Lessons learned – positive on rail and construction

2014 outlook • We expect most of the China Capital Goods sector to remain lacklustre during Chinese

New Year in 2014E, as we see low utilization of the installed base to continue weighing on equipment demand.

• The bright spots we see are: 1) rolling stock makers, as we estimate MU utilization has reached 80% in 2013E, becoming a bottle neck for high-speed raid (HSR) passenger growth; and 2) Zoomlion – we expect the company to write off its bad debts in the coming quarter, setting the path for an earnings recovery as early as 2Q14.

• Top picks: Zhuzhou CSR, CSR and Zoomlion.

Positive read-through on railway equipment from Third Plenum The Third Party Plenum emphasized industry reform and trade liberalization. We see positive implications for railway equipment makers (Zhuzhou CSR and CSR), as we believe the Chinese government will start using HSR as a tool to deepen China’s political and economical ties with Southeast Asia and Central Asia. As a result, China’s rolling stock makers will likely begin exporting high-speed trains.

Small earnings impact from tapering In the event of tapering, we believe capital outflows from emerging market will depress the core export market for most Chinese manufacturers. We expect the earnings impact to be small, however as exports as a percentage of total revenue is generally low.

Risks The greatest risks to our call on the China Capital Goods sector are uncertainty in government policy regarding infrastructure investment and general funding constraints at both China Railway Corporation (CRC) and local governments.

FIGURE 35 China capital goods – potential for China’s HSR traffic density to increase further

FIGURE 36 Book value impact at different provision levels

Source: World bank, CEIC, Barclays Research estimates Source: Wind, Barclays Research estimates

Germany

Spain

France

Italy

Tokaido Shingansen

East/Central China

y = 0.2377x ‐ 19.03R² = 0.6684

‐5.0

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sity (m

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8%

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EQUITY RESEARCH Asia ex-Japan Capital Goods Industry view: Neutral Yang Song [email protected]

Barclays Bank, Hong Kong Aaron Qi [email protected]



13 December 2013 31

Stock picks Zhuzhou CSR (3898 HK; OW; PT HK$35.2) and CSR (1766 HK; OW; PT HK$8.2): We forecast strong earnings growth for the railway equipment companies in 2013-15E, which we do not expect for the other industrial subsectors – estimating am earnings CAGR of 27% and 23% for Zhuzhou CSR and CSR, respectively. This is driven by: 1) top-line growing at a CAGR of 21%/14% on strong MU demand of 400/500 sets in 2014/15E, +48%/+25% y/y, from 270 sets in 2012. 2) OP margin expansion of 5.7ppt/1.2ppt for Zhuzhou CSR and CSR, respectively, in 2013-15E.

We prefer Zhuzhou CSR for: 1) higher margin upside due to higher exposure to high value-add/high-margin products (52% exposure to locomotive and MUs in 2013E vs CSR’s 42%) and well managed SG&A expense; 2) removal of the equity issuance overhang; 3) higher asset turnover of 1.6x for 2014E vs 0.9x for CSR, hence less capex requirement should production capacity need to be expanded

Zoomlion (1157 HK; OW; PT: HK$9.1): We expect bad debts to be netted out from revenue when Zoomlion reports 4Q13 earnings (as was done in 4Q12), depressing reported P&L and margins, but setting up 2014 as a year of recovery. We expect ROE to bottom in 4Q13/1Q14 (forecasting 3.9% annualized for 4Q13), but normalize to c10-15% after the bad debts are purged.

Sany International (631 HK; UW; PT: HK$1.9): We also see price cuts in the coal mining equipment industry as a likely event, as we forecast production capacity utilization will decline to 72% in 2014E from 100% in 2012. We estimate coal producers’ operating cash flow will decline 18% y/y in 2013, with coal mining capex mostly flat versus 2013’s level. We believe this lower operating cash flow for miners is here to stay, as China continues its efforts to reduce pollution by encouraging the shift from coal to other energy resources; and coal mining capex will soon catch up with coal producers’ CFO, which is declining. We forecast a 14% decline in equipment spending in 2014, and, as a result, Sany International’s top line could decline 12% y/y (vs consensus forecast of 28% growth y/y).

FIGURE 37 China Capital Goods – stock picks

CP TP EPS PE PB ROE Div Yld

Company Ticker Rating (LC) (LC) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E

Zhuzhou CSR 3898 HK OW 28.7 35.2 1.24 1.63 1.99 18.2 13.9 11.3 3.1 2.7 2.2 17% 19% 19% 1.5%

CSR 1766 HK OW 7.05 8.2 0.31 0.43 0.47 18.1 13.0 11.9 2.1 1.8 1.6 12% 14% 13% 0.9%

Zoomlion 1157 HK OW 7.66 9.1 0.54 0.65 0.90 11.1 9.3 6.7 1.0 0.9 0.8 9% 10% 12% 1.9%

Sany International 631 HK UW 1.90 2.65 0.17 0.14 0.14 12.5 15.2 15.3 1.1 1.0 0.9 9% 7% 6% 2.4%

Note: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Capital Goods industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates Source: Bloomberg, Barclays Research estimates


13 December 2013 32

Sector outlook Top pick: railway equipment makers: Into 2014, we believe the railway equipment makers will outperform the other companies in our China Capital Goods universe. We forecast strong demand for multiple units (MU) at 400/500 sets in 2014E/15E, respectively, representing growth of 48%/25% y/y, driven by strong passenger growth at a CAGR of 33% over 2013-15E, due to an improvement in traffic density (from 20.5mn pkm/km to 21.6mn pkm/km), and new line completion of 9,868km over 2013-15E. We estimate capacity utilization of the current MU fleet has reached 80%, more or less at its limit (18ppt higher than capacity utilization of MUs for the Tokaido Shinkansen in Japan).

We believe investment in rolling stock will be more protected from China Railway Corporation (CRC) funding constraints than railway construction, since to attract private capital, CRC will likely strive to improve railway profitability. The simplest, quickest and most cost effective way to do that, in our view, is to add rolling stock where there is strong traffic demand – in other words, adding MUs on high-speed rail (HSR). We estimate ROA of 14.7% and 18.8%, respectively, for CRH380s (a 350km/h train) and 200-250km/h trains at 75% capacity utilization.

We are also optimistic about Zoomlion: We believe the bad news is the price and the good largely ignored. We expect bad debts to be recognized over the coming quarters, and once this overhang is removed, we expect sector valuation to re-rate upwards from below book today.

Outlook on 4Q13 earnings – poor but cathartic: We believe 4Q13 earnings (to be reported at the end of March 2014) will be a key catalyst. We expect more bad debts to be netted out of the revenue line, artificially depressing the reported P&L and margins but setting up 2014 as a year of recovery. We forecast gross margin in the low 20s for 4Q13, flattish to 4Q12, and operating margin at 4.1% (significantly lower than 15.9% in 9M13, also lower than 4.5% in 4Q12). We estimate ROE to bottom in 4Q13/1Q14 (forecasting 3.9% annualized for 4Q13), but normalize to 10-15%, as bad debt is purged out of the system and gross margin recovers to 30+%.

Negative on electrical and coal mining equipment makers: We believe this space is experiencing: 1) a multi-year structural downturn as a result of China’s efforts to shift away from coal combined with a slowdown in growth of energy-intensive industries; and 2) margin pressure from price competition.

We expect coal-fired power to be the “plug” for new power capacity requirement – ie, only being installed when power demand growth cannot be satisfied by other sources of power – as we see clear directions from the Chinese government to shift the power plant mix to cleaner sources including hydro, wind, solar and natural gas. As such, we forecast 155GW thermal capacity growth in China over 2013-16E, with annual installation declining to 35GW in 2015E/16E vs 51GW in 2012.

Also cautious on the heavy-duty truck (HDT) market: We forecast HDT sales of 688k units for 2014E, -10% y/y. HDT sales was +15% for 9M13, outperforming sales growth of excavators and wheel loaders by 23ppt and 15ppt, respectively, driven by: 1) pre-buying of National Standard III (NS III) trucks ahead of implementation of NS IV to avoid paying higher prices; and 2) lack of strong sales promotions in the HDT market in 2011/12, in our view. We expect the impact of the pre-NS IV ‘shopping spree’ to reverse in 2014, once more local governments implement NS IV.


13 December 2013 33

Neutral on the wind turbine generator (WTG) makers: We are encouraged by policy support and improvement in wind power off-take, but cautious on recovery of WTG installation since: 1) the grid bottleneck will remain until more UHV lines are completed; and 2) curtailment reduction has been partly due to a slowing of WTG installation. We forecast 15GW WTG installation pa on average for 2013-15E below market consensus of 16-18GW.

Sector drivers and catalysts • Railway equipment makers: Strong earnings and order flows from CRC; news flow on

railway reform and export market.

• Machinery makers: Bad debts recognition over the coming quarters; construction machinery sales and utilization hours.

• Electrical and coal mining equipment makers: order flow; earnings; news flow on price competition; news flow on nuclear equipment.

• WTG makers: Further government policy support and improvement in wind power off-take; earnings; data on WTG installation.


13 December 2013 34

CHINA INFRASTRUCTURE & TRANSPORT

Chinese airlines to benefit from economic re-structuring

2014 outlook The Chinese transport industry remains broadly oversupplied five years after the global financial crisis (GFC). As a result, valuation remains a key criterion for our stock recommendations. We are most positive on Chinese airlines that are trading near post-GFC P/B lows. In addition, we expect rising consumption to enable Chinese airlines’ Revenue Passenger-Km to accelerate 14% y/y in 2014E from 13% y/y growth in 2013E despite a slowing economy. Our top airline pick is China Southern (1055 HK, OW). We are also positive on Engineering & Construction stocks with 12-26% EPS growth for 2014E for our coverage group, which is trading at just 5-7x P/E 2015E. Our top E&C stock pick is CRCC (1186 HK, OW).

Third Plenum Free trade zone roll-out, air space and currency reform: The Third Plenum supported a larger roll-out of free trade zones (FTZ) and, while there is uncertainty over the execution, the process will likely raise land values in the FTZ, which would support the incumbent land holders, such as China Merchants (144 HK, OW) – see our 18 November 2013 note, Wheelhouse: Touring Shanghai's Free Trade Zone (link). We believe the increasingly liberal policy stance towards relaxing air space and floating the currency would benefit the airlines by reducing operating expenses and gains on US$-denominated debt.

Tapering a result of US consumption strength: We believe US Fed tapering as a response to economic growth is supportive of Chinese container volumes and container ports, such as COSCO Pacific (1199 HK, OW). Alternatively, weak growth compelling a slower taper would likely diminish the growth outlook in 2014-15.

Risks We see overly aggressive Fed tapering and tightening that drives the US back into recession as the key risk for the export-dependent sectors: ports and container shipping. Meanwhile, we believe the E&C, airline, expressway and dry bulk shipping sectors are reliant on Beijing policymakers successfully balancing reform and still delivering better than 7% y/y GDP growth.

FIGURE 38 China airlines – demand, supply & margin

FIGURE 39 Global dry bulk shipping supply and demand balance

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EQUITY RESEARCH

Asia ex-Japan Infrastructure & Transport


Jon Windham, CFA

+852 2903 4672

[email protected]


Patrick Xu, CFA

+852 2903 3458

[email protected]


Esme Pau

+852 2903 4363

[email protected]




13 December 2013 35

Stock picks

Airlines China Southern Airlines (1055 HK; OW; PT HK$4.24): We expect China Southern’s earnings to rebound 23% y/y in 2014E, driven by a 1% y/y recovery in yields, as the supply-demand balance tilts favourably for the airlines. We expect the introduction of the 72-hour visa-free policy in Guangzhou from August 2013 to stimulate passenger travel, and the company to gain market share with its “Canton route” in Europe-Asia-Australasia volumes. The stock is trading at 0.7x 2014E P/B vs the global peer average of 1.0x. We would view approval of the Pearl River Delta FTZ as a potential positive catalyst for the stock.

• In November 2013, the China Aviation Administration Commission (CAAC) and the military announced that China would open up low-altitude air space. We view this as a step closer to the opening up of more high-altitude air space in 1H14. We would expect substantially higher fuel efficiency for the Chinese airlines, with optimized flight paths (approximately a 10% saving in fuel burn per Revenue Ton-Km on our estimate), leading to material upside potential to the sector’s operating margin (an uplift of approximately 3ppt to our forecast 5.5% operating margin for the sector in 2014, on our estimates). The opening up of more air space should also alleviate congestion in the air and at airports, reduce delays and make air travel more appealing to travellers.

• The Governor of the PBOC announced in November 2013 that the central bank would basically end intervention in CNY trading and broaden the daily trading range. Once implemented, we believe we might see higher-than-expected exchange gains for the Chinese airlines. We estimate that every 1ppt appreciation of the CNY vs the US$ would positively impact airlines’ earnings for 2014E by 10-20%.

Ports COSCO Pacific (1199 HK, OW, PT HK$15.15): We expect higher growth rates in the core terminal and leasing business, driven by redeployment of cash from 2013 asset disposals. Currently trading at 11.4x 2014E P/E, we view COSCO Pacific’s valuations as attractive and expect multiple expansion due to lower earnings volatility, improving growth rates and exposure to expansion of free trade zones.

Shipyards Yangzijiang Shipbuilding (YAZG.SI, OW, PT S$1.50): We view YZJ as a quality shipyard and a survivor of the shipbuilding downturn; YZJ secured new orders worth US$2.1bn ytd November 2013. We regard it as reasonably valued, trading at 5.9x 2014E P/E.

Engineering & Construction China Railway Construction Corp (1186 HK; OW; PT HK$11.85): We forecast CRCC’s earnings to grow 18% y/y in 2014, driven by 11% y/y revenue growth and mild margin expansion. The company’s contract backlog was up 20% y/y as of end-3Q12, which we believe makes our 2014 revenue growth projection look achievable. We expect operating margin expansion in 2014E, driven by stricter control of SG&A expenses and higher gross margin y/y. The stock is trading at 7x 2014E P/E vs the global peer average of 12x. We would view the winning of the Thailand railway projects as a potential positive catalyst for the stock.

• Drivers & catalysts in 2014E – E&C: For the E&C companies, although investment is set to play a smaller role in the economy, the new leadership’s frugality campaign and crackdown on corruption could materially reduce SG&A expenses and bolster margins of these companies, in our view. Winning major overseas projects would be a potential catalyst for to the sector. Thailand’s Senate has given approval for the government to


13 December 2013 36

borrow up to US$69.5bn to construct transport infrastructure, including high-speed railways, in 2014-20. Such projects would likely be substantial compared to CRCC and China Railway Group’s (390 HK; OW) combined railway projects of US$51bn in 2012.

Airports Beijing Capital International Airport (694 HK; OW; PT HK$6.97): We forecast Beijing Airport’s earnings to grow 10% y/y in 2014, driven by 5% y/y growth in aeronautical revenue and 8% y/y growth in non-aeronautical revenue on the back of volume growth and increased spending per capita at the airport. The stock is trading at 12x 2014E P/E vs the global peer average of 19x. We would view Beijing Airport’s non-involvement in funding for the new airport as a potential positive catalyst for the stock.

Toll roads Jiangsu Expressway (177 HK; OW; PT HK$10.53): We forecast Jiangsu Expressway’s earnings to grow 16% y/y in 2014, driven by 5% y/y growth in toll revenue and increased property deliveries. The stock offers a 2014E dividend yield of 6.1% vs the global peer average of 4.2%. We would view tariff increases as a potential positive catalyst for the stock.

FIGURE 40 China Infrastructure & Transport – stock picks

Rating / Industry Price

Upside / downside Rept EPS P/E (x) P/BV (x) ROE (%)

Div. yield

Company Ticker view Price target to PT (%) crncy 13E 14E 13E 14E 13E 14E 13E 14E 13E

Beijing Capital 0694.HK OW / Neu HK$6.75 HK$6.97 3 CNY 0.36 0.39 14.8 13.5 1.4 1.3 9.7 9.9 2.7

CRCC 1186.HK OW / Pos HK$8.66 HK$11.85 36 CNY 0.80 0.95 8.5 7.2 1.0 0.9 13.0 13.7 1.9

China Southern 1055.HK OW / Neu HK$3.33 HK$4.24 27 CNY 0.20 0.25 13.1 10.6 0.7 0.7 5.8 6.8 1.4

COSCO Pacific 1199.HK OW / Neu HK$11.08 HK$15.15 36 USD 0.25 0.12 5.7 11.7 0.9 0.9 16.7 7.7 7.0

Jiangsu Expressway 0177.HK OW / Neu HK$9.89 HK$10.53 6 CNY 0.53 0.62 14.5 12.5 2.0 1.9 14.1 15.5 5.2

Yangzijiang YAZG.SI OW / Neu S$1.16 S$1.50 29 CNY 0.93 0.99 6.1 5.7 2.0 1.7 20.3 18.8 4.9

Note: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Infrastructure & Transport industry view is Neutral. Asia ex-Japan Engineering & Construction industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates


13 December 2013 37

CHINA AND HONG KONG INSURANCE

Survival of the fittest

2014 outlook We don’t see any significant improvement in fundamentals for the China life insurance sector and believe the structural growth story for protection demand may not play out in the near to medium term as over 80% of the sector’s premiums remain savings and investment-type products. Therefore, we believe 2014 will be another year of ups and downs for the China life insurers, in tandem with the A-share market’s performance.

Structurally, we are more positive on P&C insurers on a longer-term horizon. Despite near-term pressure on margins due to seasonally higher loss ratios in 2H, we continue to view P&C insurers as the key beneficiaries of urbanization in China. We believe the underwriting cycle for auto insurance should soon bottom as regulators potentially start intervening by introducing new tiered pricing. We view all these development as positive for P&C insurers in the medium to long term.

China Plenum: pension reform will take a long time to materialize The pension regime in China is still underdeveloped, as it is with life insurance. We are not convinced that potential reforms will materially impact China life insurers’ growth profile in terms of VoNB. We think that all insurance products in China are being treated as wealth management vehicles. When demand for pension products (mainly low-margin annuities) increase, there will be less demand for other insurance products, we expect. Therefore, it is all about asset allocation (zero-sum game) and we doubt the initial stage of the pension reform will bring in significant volumes or have a material impact on VoNB. Hence, while we regard this as a long-term positive (when critical mass is achieved and scale benefits prevail), we do not see it as a re-rating catalyst for the life insurers.

US tapering impact We see no material impact for the China insurers from tapering as their overseas investments are very limited, while China’s monetary policies do not follow those of the US. On the other hand, we think AIA would be impacted positively from tapering with its asset yields being re-priced higher, though book value might be negatively impacted by falling bond prices.

FIGURE 41 Premium growth is likely to remain lukewarm in 2014

FIGURE 42 A-shares remain the key share price driver for China insurers

Source: CIRC, Barclays Research estimates Source: Bloomberg, Barclays Research

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EQUITY RESEARCH Asia ex-Japan Insurance Industry view: Neutral Noel Chan +886 2 66384693 [email protected] BCSTW, Taiwan


13 December 2013 38

Risks • Upside risks to our cautious view on the China insurers include: 1) a strong A-share

market rally, which would likely induce more demand for participating products; it is possible our least preferred names, China Taiping (UW) and China Life (EW), and could outperform in such a scenario; and 2) additional quantitative easing and stimulus in the US causing more liquidity to flow to Hong Kong’s stock market.

• Downside risks to our positive view on AIA include: 1) unfavourable regulations on agency distribution in ASEAN countries; 2) continuous weakness in ASEAN stock markets might cap the share price performance of AIA; and 3) systemic risk arising from another financial crisis in ASEAN countries.

Stock picks • Ping An (2318.HK; OW; PT HK$87.9): We like Ping An for its agency-driven model,

which means it is less reliant on bancassurance (most competition is happening in this channel). It has acquired one of the most productive agency franchises (in regular payment products), enabling it to deliver stronger-than-peers VoNB growth in the medium to long term. The banking subsidiary might be a drag on sentiment as investors are uncertain how many hidden bad loans it has on the books, but we think this potential negative is a known quantity. Ping An’s solvency margin has significantly improved after being granted approval for an A-share CB issuance. We think its valuation discount to peers should continue to narrow.

• PICC P&C (2328.HK, OW, PT HK$14.60): Although margins are likely to disappoint in 2H13 due to seasonal weakness (more natural disasters) for the P&C sector, we think the underwriting cycle on auto insurance should be close to bottoming as we see signs that the government will soon start to intervene and promote more market discipline by introducing new initiatives such as tiered pricing, which is a more favourable development for the larger insurers. We continue to like PICC P&C as a secular play on China’s urbanization.

• AIA (1299.HK, OW, PT HK$41.60): AIA remains the best-run life insurance company in the region, in our view, with strength across the board (agency franchise, management, capital position and execution track record). Tapering might create some pressure on the stock markets for ASEAN countries that AIA currently has 55% exposure to. However, as we highlighted in our 9 July 2013 initiation report (“AIA Group Ltd: Initiate at OW; right place, right people, right product at right price”, click here), over 80% of its products are regular payment premiums, which are less affected by capital market movements. Therefore, we are confident that AIA will be able to deliver superior VoNB growth compared to its China peers.

FIGURE 43 China and Hong Kong Insurers – stock picks

Price Price

target Pot. up/

down Mkt cap P/EV (x) NB mult (x) P/B (x) PE (x) ROE

Stock name Ticker Rating HK$ HK$ to PT(%) US$m 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2014E

HK Insurance

AIA 1299 HK OW 38.75 41.6 7% 59,834 1.7 1.5 16.7 11.5 2.1 1.9 20 17 11.2%

China Insurance

Ping An 2318 HK OW 76.00 87.9 16% 77,131 1.3 1.1 6.7 3.0 2.5 2.1 15 13 17.4%

PICC 2328 HK OW 12.94 14.6 13% 22,569 n/a n/a n/a n/a 2.5 2.1 11 11 21.6% Note: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Banks industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates



13 December 2013 39

CHINA INTERNET & MEDIA

Riding the mobile Internet wave

2014 outlook • We see five key trends in China Internet in 2014: 1) increased competition and

monetization of smartphone games; 2) rising consumption benefiting transaction-based models (eg, online travel booking, eCommerce, LBS-based O2O business opportunities); 3) competition between online video players extending to the home entertainment/smart TV arena; 4) transition to mobile advertising to remain challenging and disruptive; and 5) continued fight for user traffic/mobile access points via individual apps, integrated platform and app store distribution approach.

• Drivers and catalysts: We see continued smartphone penetration, more substantial revenues stream from mobile Internet, and margin trends pointing to stabilization or even improvement, as the key drivers to move the sector up.

China Plenum impact In general, Internet companies are mostly privately owned rather than state-owned and technology information growth is supportive to growth of the overall China economy. As the Internet industry is relatively less regulated by the Chinese government, and its growth prospects are driven by technology innovation and product improvement, rather than being correlated to economic GDP data, we believe there is only limited impact from the announcements and policies at the Third Party Plenum.

Thanks to the positive outcome from CCTV’s 2014 ad auction on 18 November, we believe 2014 will likely be a stronger year for advertising in China driven by: 1) several big sporting events in 2014; 2) strong demand from auto sales; and 3) steady and more certain policy following the Third Plenum.

We believe online advertising companies such as Sina, Sohu, Tencent, NetEase and Baidu will likely benefit from a year full of major sporting events. As a result, unless the Chinese economy unexpectedly slows by more than is forecast, we believe overall online advertising growth next year is likely to be more positive than this year.

Risks • Recent outperformance (sector up over 100% ytd vs NASDAQ up 34% and HSCI up

5.4%) could imply stock prices running ahead of fundamentals, but we remain positive on the structural growth opportunities for the sector.

• Irrational and increasing competition could lead to margin disruption and erosion of creativity.

• Further slowdown of the China economy could dampen advertising demand.

Mobile Internet revolution We are in the midst of a transition from PC Internet to mobile Internet, the revolution brought about by rising smartphone penetration and China having the largest number of mobile phones of any country in the world. These factors will drive both opportunities and challenges for existing Internet companies. We believe Internet companies that have clear mobile strategies will benefit from the revolutionary transition and could possibly see their top line growth reaccelerate and their margins show a gradual improvement in the next couple of years.

EQUITY RESEARCH

Asia ex-Japan Internet & Media

Industry view: Positive

Alicia Yap, CFA

+852 2903 4593

[email protected]


William Huang

+852 2903 4766

[email protected]



13 December 2013 40

Key sector trends for 2014 We see the following trends dominating the Internet sector in 2014: 1) increased competition and monetization of smartphone/social-related mobile games adding further excitement in the online gaming industry; 2) rising consumption benefiting transaction-based models such as online travel booking, ecommerce and LBS-based O2O business opportunities; 3) competition between online video companies extending into the home entertainment/smart TV arena; 4) the transition to mobile advertising remaining challenging; and 5) continued fight for user traffic/mobile access points via individual apps, an integrated platform and app store distribution approach. (For more details please refer to our report, China Internet: Riding the mobile internet wave, published on 13 September 2013.

Mobile monetization ramp will remain key growth driver While 2013 has been an investment year for many companies, especially for their respective mobile transition initiatives, we think margin pressure is likely to ease off starting in 2014, especially for companies that expect to see mobile monetization beginning, from app store revenues or mobile games/advertising/transaction volumes.

As a result, even if China’s GDP growth forecast was to be lowered further to 7% from 7.5% in 2014, we believe the majority of Internet companies would not be affected by slowing growth. In fact, we think Internet companies that have clear mobile strategies could actually see their top line reaccelerating as a result of market share gain from the offline business as rising smartphone penetration and mobile Internet usage will expand their user penetration into third- and fourth-tier cities.

Stock picks Tencent (700 HK; OW; PT: HK$450): We like Tencent because of its integrated platform strategy and resilient revenue stream with its: 1) dominant market share in online gaming; 2) open platform growth potential, leveraging faster growth of the social/web games industry; 3) market share gains in the online advertising business with a diversified, solid pipeline; and 4) growth potential in its mobile Internet and eCommerce platforms – we believe WeChat has significant potential to monetize through mobile games, O2O/LBS and mobile advertising, and that eCommerce is progressing well with an increasing contribution to Tencent’s top line. With steady gaming revenues and healthy growth via a rich game pipeline and effective expansion packs for core games, Tencent is able to fund its growth initiatives in WeChat, mobile games, online video and social advertising, as well as eCommerce expansion. We see this as a clear strategy and believe that with its sticky user base, integrated platform and proven management execution, Tencent can once again deliver on its promising growth prospects as we transition from PC to mobile.

Baidu (BIDU; OW; PT: US$198): We believe Baidu’s latest mobile strategies and effort to strengthen its overall mobile Internet position and improve its monetization capability appear to be working. Looking ahead, we believe further synergies are likely to be realized via the integrated approach of its native app and light app strategies, its improved LBS offering via map and Nuomi integration, as well as the ramping of revenue from its mobile search offering, which bodes well for a stronger 2014. Although some of the aggressive S&M spending could start to taper off, once the important phase of grabbing an installed base from the rising smartphone penetration is over, we should start to see meaningful operating leverage kicking in, especially with lower S&M spend and leverage from R&D expenses. Hence, there is a possibility that margins could rebound and improve earlier or by more than we expect.

Qihoo (QIHU; OW; PT: US$95): While Qihoo’s share price has re-rated a couple of times over the past 12 months, we believe further catalysts could come from: 1) further search traffic share gains, leading to faster ramp in search revenues; 2) further mobile security penetration

https://live.barcap.com/go/publications/content?contentDocID=FC103224611�


13 December 2013 41

leading to stronger app store traction and higher mobile revenues; and 3) a faster-than-expected rebound in OP margins if revenues outperform our expectation for 2014.

Ctrip (CTRP; OW; PT: US$62): Similarly, although Ctrip’s share price has re-rated three times over the past 12 months, we believe Ctrip will remain a solid play into the early cycle of mobile Internet growth for the following reasons: 1) we see Ctrip gaining market share at a faster rate than last two years as it further consolidates the fragmented offline traditional agents benefiting from the rising smartphone penetration; 2) its one-stop shop comprehensive offering of online travel services as well as its scale should give it better leverage to compete more efficiently and economically; and 3) while competition remains intense, the “commoditize” of coupon rebate has meant pure pricing competition is not a differentiating factor for players in this space, and hence Ctrip’s full service/one-stop shop service could allow it to compete at more flexible prices.

Shanda Games (GAME; UW; PT: US$3.5): We are cautious on Million Arthur’s potential lifecycle and monetization sustainability in the China market in the next few quarters, as it is disappointing that revenues from Korea declined after only 3-4 months of operation. In light of the continued slowdown in legacy core games in 3Q13, we remain concerned that the recent ramp of mobile game revenues may not be enough to offset the declining trend for the company’s MMO games business.

FIGURE 44 China Internet – stocks picks

Company Ticker Curr. Price Rating

Pot’l up/ downside

to PT Mkt cap (US$mn)

P/E Price to sales EV/EBITDA

2013E 2014E 2013E 2014E 2013E 2014E

Tencent 700HK HK$ 462.40 OW -3% 110,240 41.6x 31.0x 11.8x 9.1x 29.6x 23.0x

Baidu BIDU US US$ 171.90 OW 15% 60,154 33.8x 26.1x 11.6x 8.4x 25.1x 18.6x

Qihoo QIHU US US$ 81.24 OW 17% 9,974 56.4x 34.4x 15.2x 9.8x 44.9x 26.3x

Ctrip CTRP US US$ 46.74 OW 33% 6,049 31.1x 25.0x 6.9x 5.4x 25.8x 17.7x

Shanda Games GAME US US$ 3.97 UW -19% 1,074 4.6x 4.5x 1.4x 1.5x 2.1x 1.2x

Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Internet & Media industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates



13 December 2013 42

CHINA OIL & GAS

A brighter future; PetroChina the largest beneficiary of gas pricing reform

2014 outlook • Following two tough years during which earnings fell 14% y/y, China’s three oil and gas

majors appear poised for an earnings rebound in 2014, helped by energy price reform. While we expect overall capex by China’s oil majors to moderate, upstream E&P capex will likely hold steady with a greater focus on efficiencies and more transparent award processes; this should be positive for China’s independent oilfield service providers.

• Stock picks: Among the majors, we prefer PetroChina and CNOOC, while we like Anton Oil in oilfield services, all rated OW.

• Drivers and catalysts: Higher gas prices are key to PetroChina; we expect another reset for 2012 baseline contracts and volume growth of higher-priced new volume to help raise blended realisations. Higher gas prices help CNOOC as well, but production growth is key; we expect the January 2014 strategy update to outline CNOOC’s plans for the year. For China’s oilfield services companies, we see capex of the oil majors as the key driver.

The Third Plenum suggested deepening resource reform; gas prices may rise The Plenum suggested that China will continue to reform resource pricing. This bodes well for continued increases in natural gas prices where the government promises to move from a cost-plus to oil product-linked market price framework. As China’s largest gas producer and importer, we believe PetroChina will be the biggest beneficiary, with every US$1/mcf rise in prices lifting 2014E EPS by 13.8% as E&P EBIT expands and import losses recede.

Tapering may weigh on oil prices, but the impact may be less pronounced While tapering may lower commodity prices, the impact on crude may be less salient. We forecast US$110/bbl Brent; every US$1 affects PetroChina/CNOOC 2014E EPS by 1.6/1.3%.

Risks Downside risks for all three oil and gas majors include lower oil and gas prices and production, while an overhang of corruption investigations is also a risk for PetroChina. Lower-than-expected capex by the SOEs could be negative for oilfield services players.

FIGURE 45 China Oil & Gas – earnings for the SOEs are expected to rise in 2014-15E after three tough years

FIGURE 46 China Oil & Gas – PetroChina and CNOOC have a better risk/reward profile than their Asian energy peers…

Source: Bloomberg, Barclays Research estimates Source: Companies, Barclays Research estimates

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EQUITY RESEARCH

Asia ex-Japan Oil & Gas


Somshankar Sinha

+852 2903 2434

[email protected]


Clement Chen

+852 2903 2493

[email protected]


Ying Lou

+852 2903 4673

[email protected]


Ross Wang

+852 2903 3319

[email protected]



13 December 2013 43

Stock picks • PetroChina (0857 HK; OW; PT HK$11.5): PetroChina stands to gain the most from

China’s regulatory tailwinds, in our view, and we estimate a US$1/mcf change in natural gas prices lifts 2014E EPS by 13.8%, as E&P EBIT expands and import losses fall. With higher refining EBIT, we expect a 16.6% EPS CAGR over 2013-15E, one of the highest among the global large-cap energy companies. Valuations are also supportive at a 7-9% discount to its own history and global large-cap integrated players.

• CNOOC (0883 HK; OW; PT HK$20.0): CNOOC is set to deliver a 12% CAGR production growth over 2013-15E, one of the highest amongst the global large-cap E&Ps, after three years of lacklustre volumes. With valuations at a 17-23% discount to peers and its own history, we believe there is more room for a re-rating.

• Anton Oil (3337 HK; OW; PT HK$6.30): We believe Anton’s differentiated approach through the introduction of new technologies and services, coupled with its increasingly integrated business model, is most likely to deliver the most sustainable earnings growth and returns among peers. 2014E P/E of 16x is still at a c20% discount to what we see as a ‘fair’ multiple to pay for a company expected to deliver a 30% CAGR in 2012-15E, given that international peers trade to peak cycle multiples of >30x, delivering earnings growth of c20%.

FIGURE 47 China Oil & gas – stock picks

Company Ticker Currency Price Rating

Pot’l up/ downside

Mktcap (US$mn)

P/E EV/EBITDA P/B Dividend yield (%)

to PT (%) 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E

PetroChina 857 HK HKD 9.08 OW 26 214,329 10.5 9.7 5.4 4.9 1.2 1.1 4.1 4.4

CNOOC 0883.HK HKD 15.56 OW 28 89,596 8.7 8.1 4.3 3.7 1.5 1.3 3.2 3.5

Anton Oil 3337 HK HKD 4.88 OW 29 1,331 22.2 15.0 14.3 10.5 3.6 3.1 1.4 2.0

Note: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Oil & Gas industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates

FIGURE 48 China Oil & Gas – PetroChina to have the highest growth while Sinopec has the lowest, on our estimates

FIGURE 49 China Oil & Gas – valuations are at a discount to their respective historical averages

Source: Bloomberg, Barclays Research estimates Source: Bloomberg, Barclays Research estimates

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13 December 2013 44

Natural gas pricing reforms are a tailwind for PetroChina China’s intent to double the share of natural gas in its primary energy mix to 8% over 2010-15E is well publicized, and has taken the shape of multiple policy thrusts – a slew of import contracts, extensive pipeline infrastructure, better pricing, and a focus on unconventional gas. The latter still remain somewhat distant for now, and thus less significant. China appears less inclined now to concede pricing ground during import negotiations, but has remained steadfast in its support of domestic gas producers, with several interventions in the past decade that have raised domestic realizations at a 10% CAGR over 2003-12.

For example, the National Development and Reform Commission (NDRC), China’s nodal agency for economic and administrative planning, raised gas prices for onshore producers by 24% in mid-2010 and followed up with a 10-15% hike in mid-2013. More importantly, it has incentivized volume growth by allowing oil linked prices for incremental production that will imply a c9% slope on Brent at the wellhead, 70-80% higher than current levels of US$5-6/mcf, with an intention to eventually converge prices for all output to this benchmark. While we fully expect push-back from end users, and the government will have to be careful to calibrate the increases, we believe the convergence will come, even if it takes longer than envisaged – we believe this will happen in 2018 rather than the 2015 outcome the NDRC proposes.

FIGURE 50 We forecast a 16% CAGR in realizations for SOEs in 2012-15E

FIGURE 51 We expect CNOOC to outperform peers on volume growth

Source: Company data, NDRC, Barclays Research estimates Source: Company data, NDRC, Barclays Research estimates

Still, our more gradual assumption of this convergence still implies a 16% CAGR in gas price realizations for China’s three SOEs, with PetroChina (where gas makes up 31% of current output and 51% of reserves) standing to gain the most. Not only will higher price prices allow E&P EBIT to rise, they also reduce losses on gas imports, as the gap between costs and realizations should fall by 60% over 2012-16E. While Sinopec would also gain, its slowing oil output is a drag. Gas prices are not regulated for CNOOC, but its realizations have closely tracked those of peers and we expect improved negotiating leverage to lift its realizations too.

FIGURE 52 PetroChina likely to be the clear gainer from higher gas prices

Share of China gas in…(%) Potential 2014E EPS impact of US$1/mcf rise in gas price (%) Comments Reserves Production E&P Revenues

PetroChina 51 31 15 13.8 Higher E&P EBIT adds 9% and lower gas losses adds 5% to EPS CNOOC 18 10 4 2.3 Natural gas is rising in importance Sinopec 28 25 12 4.8 The outlook for oil revenues is more important for SinopecSource: Barclays Research estimates

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The government recently raised natural gas prices by 15%; gas prices could eventually rise 70-80%

We expect the price increases to be phased out, but this still implies a 16% CAGR in realizations over 2012-15E


13 December 2013 45

Capex to moderate but services players still well placed Aggregate capex of China’s three SOEs have increased over 40% since 2010, leading to stretched balance sheets and poor return ratios. A broader “value over volume” refrain seems to be permeating these firms and could straddle optimization of capital spends as well as operational costs. Much of the moderation in capex will come in the downstream segments, though, with capex in E&P, which is where we believe SOEs generate their best margins and returns are expected to hold steady, driven by a need to raise production.

FIGURE 53 A sharp rise in capex for China oil & gas SOEs over 2010-13E, but now expected to pause…

FIGURE 54 … however, upstream capex will hold up as China drills more wells to drive production growth

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Source: Company data, Barclays Research estimates Note: China upstream capex based on PetroChina and Sinopec upstream capex. Upstream capex includes capex for wellsite infrastructure, eg. pipelines. Source: Company data, Barclays Research estimates

While this will still be a significant change from the rapid increases in the past decade, we believe that it also presents an opportunity for independent oil service companies to differentiate themselves. For example, the challenge for the Chinese national oil companies to balance production growth and spending is likely to ‘weed out’ the marginal oil service provider that is unable to differentiate itself through access to technology and/or efficiency gains. We believe that independent OFS companies that can differentiate through introducing new methods of technology – forming the ‘middle-ground’ where clients can access higher-end technology or greater efficiency at a lower cost should be able to bridge that ‘gap’ and gain market share.

Record of adding value for clients Anton Oil has demonstrated (Figure 55) how it has been able to create value for its customers either through improving service efficiencies or through introducing new techniques not previously used or available in various oilfields. As such, we believe its record of helping customers lower costs, and access new technologies and service methods, should help Anton Oil to continue to differentiate its services from those of other domestic independent and in-house service providers.

FIGURE 55 Anton Oil – record of adding value for clients

Date Company Service type Oilfield/Basin Description

1H13 Anton Oil Oil-based drilling fluid Tarim, China Reduction of average drilling cycle from 400-days to 200-days 1H13 Anton Oil Fracking Tarim, China Application if fibre-diverting volume fracking technology tripled average production per well 1H13 Anton Oil Fracking Ordos, China Coiled tubing-conveyed resettable packer multi-stage fracking improved production by 5-8

times compared to an adjacent well 1H13 Anton Oil Drilling optimization Southwest

Market, China High-speed motor, featured drill bits and MWD helped to achieve 30% improvement in drilling speed

Source: Company reports, Barclays Research

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13 December 2013 46

CHINA AND HONG KONG PROPERTY

Alpha in China, Beta in Hong Kong 2014 outlook – Two different crossroads • We recently initiated coverage on the Hong Kong and China property sectors. We are

negative on Hong Kong and neutral on China property. While we view both property markets as approaching crossroads in 2014, their paths are very different. In Hong Kong, after rising for 10 years, we believe the local property market is about to enter its first real downturn since 1998 and we expect home prices to drop by at least 30%. Against this backdrop, we expect the Hong Kong property stocks to underperform their Chinese peers as returns are more likely to be beta driven.

• In China, sixteen years after the 1998 housing reforms, we believe the China property sector is now entering a mature phase. Rather than the traditional “risk on, risk off” approach, we think China developers’ share price performance will increasingly be tied to their operational performance and execution. While we expect overall China property sales growth to slow from 25.9% in 2013E to 7.2% in 2014E and 5.1% in 2015E, we see scope for the 14 developers under our coverage to increase their market share from 9.2% in 2012 to 11.2% in 2015. Rather than the traditional beta-driven returns, we believe individual stock selection and a focus on alpha should drive investor returns in the China property space in 2014. For more details, please see our “Not crying wolf” and “Coming of age” reports.

• Drivers and catalysts: In Hong Kong, in addition to US interest rates and tapering, we think other potential drivers and catalysts to watch would include: 1) the January 15 Policy Address and February 26 Budget for possible relaxation of property cooling measures in Hong Kong; 2) continued price competition between developers and secondary homeowners; and 3) potential fund flows competition from a recovering Japanese real estate sector. In China, we are more focused on: 1) overall sales performance after Chinese New Year (31 Jan 2014); 2) release of developers’ 2014 contracted sales targets; and 3) the details of the possible property tax trials, if they get implemented.

Plenum impact on the sector Among 60 specific tasks on the agenda, seven tasks will likely have some degree of impact on China’s property sector. With the move towards making China more of a market-driven economy, we see little chance of any brand new demand-side cooling measures, whereas some short-term policy headwinds, such as property tax trials and stricter idle-land regulations, could possibly be just around the corner. The impact from rural land reforms on China’s property sector should be limited on both the supply and demand sides and we do not see any surprises on the urbanization roadmap. The easing of the one-child policy should be positive for the sector, but the impact will only be reflected over quite a long time frame. Overall, we see no significant potential change from the Plenum to the landscape of the China property sector in the near term. For more details, please refer to Read-through from the Third Plenum, Nov 18.

US tapering impact Hong Kong: We believe tapering (or untapering) will have a significant impact on the property sector. At the outset, the tapering decision and its impact on 10-year bond yields will have a direct impact on cap rates and dividend yield spreads. With 10-year bond yields having already risen from 1.75% to 2.75% in 2013, compared to the 4.0-5.0% cap rates that many Hong Kong property companies adopt, the yield spread has already narrowed from 225-325bp to 125-225bp. While there is still some cushion when compared to the historical

EQUITY RESEARCH

Asia ex-Japan Real Estate

Industry view: Negative

Paul Louie

+852 2903 4545

[email protected]


Alvin Wong

+852 2903 4535

[email protected]


https://live.barcap.com/go/publications/email?CL1977344&m=1380780041285&v=lcnZzk0jIW-2waWuFnJ-BvOTezXHJGX5AxKA4h82PVB8-Qy1XfuxT9iRHV0wh7lY�

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13 December 2013 47

yield spread of 51bp, as bond yields continue their upward march it will begin to put upward pressure on cap rates and therefore downward pressure on asset values.

Beyond the impact on bond yields and commercial properties, we believe the reduced liquidity could also impact banks’ willingness to lend. As Sharnie Wong pointed out in her 28 October “When will mortgage rates rise” note, tapering could lead to potential deposit outflows and, combined with strong loan demand from China, this could trigger the local banks to raise mortgage rates even ahead of an eventual rise in US Fed Fund rates. With Hong Kong’s home price to income multiple at 13.3x and already 1.75SD above its long-run average, an earlier-than-expected hike in mortgage rates could further exacerbate our forecast 30% home price correction.

On the contrary, if tapering were to be further delayed, we believe this extended window could give many of the Hong Kong property companies valuable time to presell their developments. The cash returned could help the highly geared developers like NWD and Kerry strengthen their balance sheets and also de-risk some of the low-margin development projects.

China: For China, we believe tapering will have less impact on the physical market but be slightly negative to property developers. Given that China has a relatively closed capital account, the PBoC’s monetary stance and its open market operations to a large extent determine typical liquidity conditions in China. To avoid any asset bubble, we expect the Chinese government to keep its neutral-to-tight monetary policy stance in 2014. Developers may have to bear higher borrowing costs when they raise funds in offshore markets amid a tapering environment. Some small developers may even find it difficult to secure their offshore loan quotas, we believe.

FIGURE 56 Hong Kong property: home price index

FIGURE 57 Hong Kong property: home price to income multiple

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13 December 2013 48

FIGURE 58 China property sales – 2000-2012

FIGURE 59 Market share of 14 Chinese developers under coverage

Source: CEIC, Barclays Research Source: Company data, CEIC, Barclays Research estimates

Risks • Upside risks to our negative view on Hong Kong include: 1) a pre-emptive unwind of the

Hong Kong Government’s property cooling measures; 2) additional quantitative easing and stimulus in the US causing 10-year Treasury yields to fall back below 2.0%; and 3) a significant rally in Chinese equities which could trigger a re-rating for Hong Kong stocks, including property.

• A downside risk to our neutral view on China is tightening or stricter enforcement of home purchase restrictions and/or policy initiatives. Upside risks include faster or better economic growth and urbanisation to boost end-user demand and trigger a re-rating for the sector.

Stock picks • Shimao Property (813.HK; OW; PT HK$22.60): Shimao is one of our top picks in the

China property space. We believe the company’s prime-located landbank and strong sales teams should help sustain its sales momentum in 2014, and thus gain more market share. The strong sales performance should result in a healthy earnings CAGR of 51% over FY12-14E, compared to the sector average of 22%.

• KWG (1813.HK, OW, PT HK$6.30): We believe KWG’s insistence on high-quality delivery should be rewarded in the changing competitive landscape. Its disciplined landbanking strategy, mostly in leading tier cities, should provide strong defensiveness to its sales performance. Having fine-tuned its product mix and increased the supply of mid-end/smaller-sized units, we expect sales to accelerate and this should help lift the stock’s valuation.

• Hang Lung Properties (101.HK, OW, PT HK$27.95): HLP is one of only two OW-rated stocks in our Hong Kong property coverage. We believe it is well positioned to face a likely downturn in the Hong Kong property market for three reasons: 1) the organic growth of its China retail portfolio; 2) highest embedded development margin among peers; and 3) very low net debt with gearing at 0.3%.

• New World Development (17.HK, UW, PT HK$8.52): While we recognize the significant effort that NWD has made to improve the company’s product branding, asset turnover and corporate transparency, in our screen of defensive qualities we remain concerned about NWD’s relatively high gearing level and also the low embedded development

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13 December 2013 49

margin of its Hong Kong development portfolio, both of which would magnify downside risk in the event of a significant home price correction. Should tapering be further pushed out in 2014, this could afford NWD precious time to de-gear and de-risk its balance sheet.

FIGURE 60 Hong Kong and China Property – stock picks

Mkt Pot.up/ Disc. to Disc. to

cap Share Price downside Curr. Cur. Fwd fwd Target Yr P/E (x) Dividend yield

(US$mn) Curr. price target to PT (%) Rating NAV NAV NAV NAV disc. end FY12A FY13A/E FY14E FY12A FY13A/E FY14E

Shimao 813 HK 8,160 HKD 18.22 22.60 24% OW 31.13 -41% 32.25 -44% -30% Dec 13.4 8.3 6.0 3.0% 3.5% 4.9%

KWG 1813 HK 1,694 HKD 4.54 6.30 39% OW 11.88 -62% 12.59 -64% -50% Dec 5.5 4.8 4.2 4.2% 5.2% 6.0%

Hang Lung Prop 101 HK 14,586 HKD 25.25 27.95 11% OW 36.11 -30% 34.93 -28% -20% Dec 18.3 28.7 16.0 2.9% 2.9% 2.9%

New World Dev 17 HK 8,238 HKD 10.12 8.52 -16% UW 20.63 -51% 18.94 -47% -55% Jun 10.9 9.9 8.6 3.8% 4.2% 4.2%

Note: Prices as of the market close on 9 December 2013. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Real Estate industry view is Negative. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, company data, Barclays Research estimates



13 December 2013 50

CHINA RETAIL

Expecting no incremental negatives in 2014

2014 outlook • Sales and margins continue to stabilize: Into Chinese New Year, we expect retail

companies’ sales and margins to continue to stabilize, as comps in 2H12 and 1H13 were relatively easy and macroeconomic conditions largely stabilized after the conclusion of the Third Plenum in November.

• We expect relaxation of the one-child policy to bode well for retailer sentiment, as the expected 1.3mn extra births per year should boost jewellery names’ and department stores’ business for inborn celebration gifts and baby products, respectively. Within the sub-sectors, we have an OW rating on Chow Tai Fook and Golden Eagle, and we believe the risks are on the upside.

• Expecting no incremental negatives: While we do not expect to see incremental negatives to companies’ fundamentals in 2014, we remain selective in retail and favour retailers with: 1) retail-focused, multi-branded, omni-channel and franchisee-free business models for better inventory control; and 2) strong brand equity and solid balance sheets to withstand increasing competition from e-commerce. Our stock picks include Chow Tai Fook and Belle (both rated OW) for their respective secular growth stories and reasonable valuations, along with Parkson (UW) for its repeatedly disappointing results and lack of brand equity.

• Drivers and catalysts: Sector drivers include more disciplined expansion (in store openings, for example) and effective cost control. Catalysts include stronger-than-expected company results and macro policies that could encourage consumption.

China Plenum impact Further to China’s Third Plenum concluded in November, we believe that relaxation of China’s one-child policy and refinement of the social security system bode well for sentiment on China retailers. In our 22 November 2013 report, “Asia Themes: Relaxing the one-child policy – business as usual for staples” (click here), economist Jian Chang estimated that the policy change could result in up to 1.3mn extra births per year, implying an increase of 8% from the 16mn births per year in recent years. In our view, the market’s expectations of significant impacts from the relaxation of the one-child policy are exaggerated, as the policy had already been partially relaxed before this latest announcement. With expectations for fundamentals improving, we do however think this “baby theme” will bode well for sentiment on selected retailers.

Second, China announced a reform to centralize the administration of the social security system, which is expected to facilitate labour mobility and urbanization. It has also restructured the pension system to ensure fairness and sustainability of insurance systems, in light of growing aging populations. We believe that a more comprehensive social security system that could potentially include full coverage of basic pensions and expanded financial resources for public health expenditure, suggests a more stable economy and hence it bodes well for general sentiment.

Risks • Upside risks to our sector outlook include omni-channel development, increased dividend

payouts and better-than-expected results on strong top lines and stringent cost controls.

• Downside risks include a prolonged economic recovery and worse-than-expected cost control by the companies.

EQUITY RESEARCH Asia ex-Japan General Retail Industry view: Neutral Candy Huang +852 29034883 [email protected] Barclays Bank, Hong Kong Ally Wang +852 29034261 [email protected] Barclays Bank, Hong Kong



13 December 2013 51

FIGURE 61 China consumer confidence index

FIGURE 62 China consumer good retail sales, y/y growth


Stock picks • Chow Tai Fook (1929.HK; OW; PT HK$14.00): We believe the company will be the

major beneficiary of secular growth in jewellery in Greater China. It is the leading jeweller in Greater China with 14% and 21% market share in China and Hong Kong, respectively according to a Frost & Sullivan report. As of 30 September, the company had 1,954 stores, most of which are self-operated. Chow Tai Fook remains retail-focused, with 81% of revenue generated from retail in FY09 growing to 87% in 1HFY14, which aided effective inventory control. With strong brand equity, the company has good traction in e-commerce, with average daily traffic reaching 110,000 and its accounts having more than 1.1mn followers as of 1HFY14, according to the company.

• Belle (1880.HK; OW; PT HK$15.10): We believe the company’s multi-brand and omni-channel strategies will sustain growth. In 2012 and 2013 Belle acquired “Big Step” and “Baroque”, and expanded into apparel in addition to footwear. It has extended into the low end with brand “15-min”. Belle started to sell online, in addition to traditional department stores and shopping malls, to extend its omni-channel strategy. The company has tight inventory control, with inventory turnover days at 5-6 months.

• Parkson (3368.HK; UW; PT HK$2.10): We are UW on Parkson as its 3Q13 results came in materially worse than we had expected and company guidance remains unexciting. After a results miss from a combination of a worse-than-expected top line and margins, as well as increasing operating expenses, management guided for the SSS growth outlook to remain cloudy, expecting sales disruption and margin pressure to continue in the next few years.

FIGURE 63 China retail – stocks picks

Ticker Curr

Closing price Dec 9

Target price

Pot. up/ downside to PT (%) Rating

Mkt cap (US$mn) 2013E PE 2014EPE 2015EPE

2013-15E EPS

Growth PEG ratio Div yield

Chow Tai Fook 1929 HK HKD 11.80 14.00 19% OW / Neu 14,907 15.8 13.3 11.8 15.7% 1.0 2.5%

Belle 1880 HK HKD 9.28 15.10 63% OW / Neu 10,017 13.5 11.8 10.4 13.6% 1.0 2.3%

Parkson 3368 HK HKD 2.49 2.10 -16% UW / Neu 944 12.1 11.6 10.9 5.3% 2.3 3.8%

Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan General Retail industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates

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13 December 2013 52

CHINA STAPLES

Growth to continue; minimal effect from one-child policy

2014 outlook • Sales and margins continue to stabilize: Into Chinese New Year, we expect staples

companies’ sales and margin trends to continue to stabilize, riding on healthy growth in 1H14 with respectable y/y earnings growth of 12% on average, across the companies we cover. Support comes from the largely stabilizing Chinese economy.

• Growth stories remain intact: With average earnings growth of 24% y/y on our estimates for 2014, we expect continued growth in the sector. While we think the official announcement on changes to China’s one-child policy bodes well for market sentiment, we do not expect to see a great impact on companies’ fundamentals.

• Drivers and catalysts: Sector drivers into 2014 include potential ASP hikes on rising raw materials costs, volume growth on the potential population growth theme, and effective implementation of cost controls. Catalysts include faster-than-expected expansion, lower-than-expected cost inflation and stronger-than-expected company results.

China Plenum impact Further to China’s Third Plenum concluded in November, we believe that relaxation of China’s one-child policy and refinement of the social security system bode well for sentiment on China staples companies, although we expect the policies will not have a great impact on companies’ fundamentals.

First, China officially announced the widely anticipated loosening of the one-child policy, allowing couples to have two children if either of the parents is an only child. In our 22 November 2013 report, “Asia Themes: Relaxing the one-child policy – business as usual for staples” (click here), economist Jian Chang estimated that the policy change could result in up to 1.3mn extra births per year, implying an increase of 8% from the 16mn births per year in recent years. In our view, the market’s expectations of significant impacts from the relaxation of the one-child policy are exaggerated, although we believe China’s dairy and HPC sectors still have significant room for upside on existing secular trends.

Second, China announced a reform to centralize the administration of the social security system, which is expected to facilitate labour mobility and urbanization. It has also restructured the pension system to ensure fairness and sustainability of insurance systems, in light of growing aging populations. We believe that a more comprehensive and fair social security system offers economic and social stability, hence it bodes well for general sentiment.

Our top picks on the population growth theme are Want Want (151.HK; OW; PT HK$13.30), as its “Hot Kid Milk” accounts for more than 60% of EBIT, and Hengan (1044.HK; OW; PT HK$97.00), on the expected diapers and tissues secular growth trend.

Risks • Upside risks to our sector outlook include companies’ strong pricing power, which could

enable them to keep growing revenue and gaining market share, as well as faster-than-expected consumer product penetration in China.

• Downside risks include an uncontrollable surge in raw materials costs and worse-than-expected cost control by the companies.

EQUITY RESEARCH Asia ex-Japan Staples Industry view: Neutral Vineet Sharma +852 2903 4609 [email protected] Barclays Bank, Hong Kong Ally Wang +852 29034261 [email protected] Barclays Bank, Hong Kong



13 December 2013 53

FIGURE 64 Dairy and Household & Personal Care – China’s spending as percentage of disposable income vs. Korea’s and Japan’s

Note: Market size (2013E) and spend as a % of GDP (latest) data are Barclays Research estimates based on Euromonitor and company data. Population and GDP data are the latest available as per CIA World Factbook. Source: Euromonitor, company data, CIA, Barclays Research estimates

FIGURE 65 China’s per-capita milk consumption is low compared with developed countries

Source: China National Bureau of statistics; IMF, Barclays Research

Stock picks • Want Want (151.HK; OW; PT HK$13.30): We believe Want Want is one of the few

staples companies that has an accelerated growth earnings profile. We forecast 28% y/y growth in 2013 and high-teens growth thereafter. We think the company’s focus on profitability is the right strategy, hence it warrants a valuation premium to peers, which is supported by the company’s strong margin beat in its 1H13 results.

• Hengan (1044.HK; OW; PT HK$97.00): Hengan has a prominent growth profile in various divisions, including: 1) napkins, where it has mid- to high-teens market share and we believe it could continue growing at a mid-teens rate over the medium term; 2) tissues, where declining wood pulp prices bode well for margins and flexible tissue capacity; and 3) diapers, on continuous product-mix improvement to a higher proportion of mid- to high-end products sales.

FIGURE 66 China staples – stocks picks

Ticker Curr

Closing price Dec 9

Target price

Pot. up/ downside to PT (%) Rating

Mkt cap (US$mn) 2013E PE

2014EPE

2015EPE

2013-15E EPS Growth

PEGratio

Div yield

Want Want 151 HK HKD 11.48 13.30 16% OW / Neu 19,575 27.6 23.4 20.1 17.2% 1.6 2.7%

Hengan 1044 HK HKD 96.60 97.00 0% OW / Neu 15,069 29.1 24.8 21.6 16.0% 1.8 2.2%Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Staples industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates

China Korea Japan China Korea Japan China Korea Japan China Korea Japan China Korea Japan

Diapers 2,200 250 3,000 1,350 49 127 2 5 24 5,400 22,800 45,800 0.03 0.02 0.05

Tissues 4,200 600 3,800 1,350 49 127 3 12 30 5,400 22,800 45,800 0.06 0.05 0.07

Milk Products 3,080 846 3,710 1,350 49 127 2 17 29 5,400 22,800 45,800 0.04 0.08 0.06

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13 December 2013 54

CHINA TELECOM SERVICES

Too many regulatory headwinds; stay away 2014 outlook • We are cautious in our outlook, as we see no incentive for operators to focus on profit

growth for now – 4G comes with all the excuses to do just that. We believe China Mobile (CM) is incentivized to aggressively push TD-LTE at the cost of (rather than with) profits – this is bad for sector margins. (For more details, please see our 10 December 2013 report, “China Telecom Services: Stay away, too many headwinds”.)

• Value-added tax (VAT) reform is likely in 2014, in our view, and is another overhang to sector profitability.

• Valuations are cheap and imply limited downside risk. That said, with a clear and visible overhang to worsening competitive stress and consequently overhangs to profit estimates into 2014, we struggle to see the stocks performing on a 12-month view. We highlight China Mobile (UW) as out top UW idea, while we prefer China Unicom (CU; EW) as we see it as the best of a bad bunch.

I. China Mobile incentivized to aggressively push TD-LTE at the cost of (rather than with) profits From our recent conversations with operators, we sense there is an increasing likelihood that asymmetric measures are put in place to ensure that any growth at CM does not come at a cost to the other operators. We note that whilst CM’s overall telecom service revenue share has fallen from 56% in 2009 to 53% in 2013E (and CM’s wireless service revenue declined from 82% in 2009 to 69% in 2013E), CM’s profit share of the industry remains dominant at over 80%.

Consequently, what we once saw as a window of opportunity – if CM were left alone to focus on driving TD-LTE adoption without additional regulatory intervention – is now looking increasingly more unlikely. In fact, we would argue that it could even make longer-term sense for CM to overspend and tilt the profit share further just so there is enough “rightsizing” of profits within the industry. The 4G TD-LTE initiative into 2014 gives CM all the excuses to want to do that. It is just looking more and more likely that most other parts of the ecosystem (consumers, handset and equipment providers, internet content aggregators and providers) will benefit more from this spend. Therefore, until it makes sense for CM to focus on sustainable profit growth again, we would struggle to see this spending focus going away.

FIGURE 67 China – total telecom services revenue share (%)

FIGURE 68 China – total telecom services profit share (%)

25.1% 24.7% 24.4% 25.1% 25.2%

56.1% 56.3% 55.9% 54.5% 53.3%

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Source: Company data, Barclays Research estimates Source: Company data, Barclays Research estimates

EQUITY RESEARCH Asia ex-Japan Telecom Services Industry view: Neutral Anand Ramachandran, CFA +65 6308 3895 [email protected] Barclays Bank, Singapore



13 December 2013 55

FIGURE 69 China – wireless service revenue share (%)

FIGURE 70 China – wireless subscriber share (%)

81.9% 78.8% 75.5% 71.9% 69.0%

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II. VAT reform – another looming earnings overhang to profitability Although the specifics about exactly when and how value-added tax (VAT) will be rolled out to the sector are still vague, our latest conversations with the operators suggest that China’s telecom industry will most likely start recognizing VAT from the beginning of 2014. We view VAT reform as a confusing transition, given that many of the specifics are still unknown. In summary, we believe there is potential downside risk to the entire sector's profitability as we do not think operators can pass additional costs to consumers.

III. What to make of CM’s fixed-line license – neutral to sector profitability is a best case; risks cannot be ignored Alongside 4G (TD-LTE) licensing, MIIT has removed “restrictions” on CM from operating fixed-line services. We believe this reflects a view from the decision makers that CM should be more aggressive in the fixed-line market and do its part in promoting the national “Broadband China” initiative. This could come with two impacts, both negative in our view:

• This increases the competitive intensity for CU and CT, against a background whereby broadband revenue growth has just about started to offset voice decay to drive overall fixed line revenue growth.

• Higher capex for CM: The associated and lower fixed-line returns bring along the risk of higher capex for CM, in our view.

FIGURE 71 CM – capex trend (Rmb bn)

FIGURE 72 CU and CT – fixed line revenue growth trends (%)

113.2123.3 123.2

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13 December 2013 56

IV. CT and CU are doing little wrong, but can they escape collateral damage? We think a more aggressive stance from market leader CM naturally creates headwinds for the earnings growth prospects of CT and CU, but point out here a few things that still work in favour of CU and CT.

(i) Possible introduction of asymmetric interconnect to favour CU and CT If this were to be introduced, CU and CT would pay a lower interconnect rate per minute (vs. the current rate of Rmb0.06/min) for the calls that terminate on CM’s network, whilst CM would continue to pay the same rate. This would result in material savings for CU and CT, as we estimate each of them under the current regime pays interconnect charges to CM of more than Rmb10bn per annum.

FIGURE 73 Sensitivity on changes in interconnect rate that CU/CT pays to CM

China Telec om

China Unic om Chin a TelecomChina

UnicomCh ina

TelecomChina Unicom

Decrease in interconnect revenue

% hit to 2014E PBT

Rmb0.06/min Rmb11-12bn Rmb12-13bn na na na na na na

Rmb0.05/min Rmb9.6bn Rmb10.4bn Rmb1.9bn Rmb2.1bn 7.7% 10.7% Rmb4.0bn -2.5%



Interconnect charges paid to CM

Potential saving Impact to 2014E PBT (%) China Mobile

Source: Barclays Research estimates

(ii) More mass market focus for both CU and CT into 2014 We expect both CU and CT to be more mass-market focused into 2014, rather than directly confronting CM, as we think CM initially will focus on transitioning its high-end customer base to TD-LTE. However, we think CU could be relatively more exposed than CT, as CU used the initial period of iPhone exclusivity in China to try to gain some high-end market share from CM. Nevertheless, the emergence of Rmb1,000 price point HSPA+ handsets should further help CU to drive adoption in the mass market.

FIGURE 74 China – avg. data usage per month for 3G handset user (MB)

FIGURE 75 China – 3G mobile data tariff comparison (RMB per MB)

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Note: *CU mobile data tariff is based on our estimates. Source: Company data, Barclays Research

(iii) Increasing data tariffs likely cheaper into 4G and should stimulate usage – also positive for CT and CU CM indicated it expects data tariffs (per MB) to be cheaper into 4G vs for 3G, but higher data usage is likely to drive higher data ARPU. We believe a rising tide lift all boats – if the market leader CM increases its data offering into 4G and steps up efforts on cultivating


13 December 2013 57

data-usage habits, we expect CU and CT to also benefit. We note current mobile data per 3G user is low at c150MB per month, implying ample room for growth.

(iv) CT and CU not locked out of FDD-LTE, their preferred 4G technology We think MIIT made it clear that CT and CU are allowed to build hybrid networks using both TD and FDD-LTE. Both operators are encouraged to trial the hybrid networks and FDD-LTE licenses are to be issued as and when MIIT deems it appropriate. While this announcement does bring some relief, especially for CT, given its technology handicap in transitioning from CDMA to TD-LTE, it also brings a risk of costs ahead of revenues. We expect both operators (CT and CU) to actively build out ‘hybrid’ networks in 2014 (mostly FDD-LTE networks, in our view), but we do not expect them to be able to commercially launch service charges on this standard until licensing comes through.

Risks • Upside risks to our sector view include: 1) accelerated data usage into 4G to stimulate

revenue as well as profit growth, while the market competition environment stays stable or improving into 2014; and 2) higher dividend payments.

• Downside risks to our sector view include: 1) a hike in competitive intensity driving price cuts and unsustainable handset subsidies: a lose-lose for the entire industry; and 2) material escalation in capex levels.

Stock picks China Mobile (941 HK; EW; PT HK$76.0): beating a retreat. What has crucially changed in our thesis is a higher likelihood that asymmetric measures to divert profit growth are more likely than not, as we view CM’s competitive position as stronger in a 4G era. Consequently, we see it as logical that CM looks to grow revenues at the cost of (vs. hand in hand with) profits. Until this change, we find it difficult to see why investors would own the stock. Hence, we are UW, with a PT of HK$76.

China Unicom (762 HK; EW; PT HK$14.0): best of a bad bunch into 2014. We expect CU’s strategy into 2014 to be more mass-market focus riding on the rise of cheap HSPA+ smartphones, though we acknowledge that CU is more exposed to potential revenue loss (than CT) from a more aggressive CM. Meanwhile, VAT reform and build and costs for the FDD-LTE network ahead of revenues are all additional overhangs. However, asymmetric regulations could bring in a material windfall, and FCF inflexion holds good for 2013-14E. Hence we are EW, with a PT of HK$14.

FIGURE 76 China telecoms stock pick

Rating/ Industry Price

Pot. up/downside Mkt Cap P/E (x) EV/EBITDA (x) Div. yield (%)

Companies Ticker View Price Target to PT (%) (US$mn) 2013E 2014E 2013E 2014E 2013E 2014E

China Mobile 941 HK UW/Neu HK$84.65 HK$76.0 -11.4% 220.1 11.0 11.3 3.9 3.8 3.9% 3.8%

China Unicom 762 HK EW/Neu HK$11.96 HK$14.0 14.6% 36.8 21.0 15.2 3.9 3.4 1.9% 2.6%

Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Telecoms industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates



13 December 2013 58

MACAU GAMING

Continued growth – mass market to remain a driver

2014 outlook • Jan-Feb growth to remain strong: We expect the Chinese New Year months of January

and February to continue to see strong industry gross gaming revenues (GGR) growth, at 17% y/y on continued resilient gaming sentiment and an easy base comparison from last year.

− Expect 13% GGR growth in 2014: We forecast 13% industry GGR y/y growth for full-year 2014, before further acceleration to at least 16% in 2015. For 2014, we expect mass table revenues to be a main driver, with 26% GGR growth, but we expect VIP table revenue growth to be slower at +7% y/y. A 13% GGR growth implies high-teens percentage growth in profits for casinos due to the higher-margin mass market’s faster growth.

− Drivers and catalysts: Drivers include continued strength in mass market demand, supported by improved transportation and infrastructure, and rising disposable incomes. Continued growth in the China economy, and positive sentiment on the macro backdrop would also boost premium mass and VIP volumes.

− Stock picks: Galaxy (OW) is our top pick for 2014, for its strong growth at its existing properties but also with Phase 2 likely opening in early 2015. We also like Sands China (OW) and MGM China (OW).

China Plenum impact The Third Plenum did not include policies that will directly impact Macau gaming revenues. However, macro factors will likely affect the sector. We believe for the VIP segment, playing sentiment could be impacted by sentiment on economic growth (business performance) and wealth effect factors. Assuming slightly slower but still stable economic growth next year, as well as a higher base comparison, we look for 7% y/y growth in VIP revenues for the sector next year.

For the mass market, we forecast mass table GGR growth of 26% y/y in 2014. We expect demand to continue to grow on improved transportation and infrastructure, and rising disposable incomes. We expect: 1) c10% y/y growth in Chinese visitor arrivals to Macau; 2) visitors from outside of Guangdong to be a key driver, since those from further afield are likely to stay longer, encouraging higher playing volumes; and 3) economic growth into 2014 to stimulate premium mass playing volumes, as long as macro sentiment remains positive.

We believe stepped-up efforts by the casinos over the past few years to attract premium mass players and higher-end mass players to their membership programmes, some even via direct sales servicing, will boost visitor return frequency and volumes played.

Risks Upside risks to our sector outlook would come from economic growth and asset price growth accelerating in 2014, which would positively impact VIP and premium mass playing sentiment.

Negative risks include worse-than-expected macro sentiment and wealth-related factors that could negatively impact VIP and premium mass playing sentiment.

EQUITY RESEARCH

Asia ex-Japan Gaming &Leisure


Phoebe Tse

+852 2903 4285

[email protected]



13 December 2013 59

FIGURE 77 Gross gaming revenues by segment

Total GGR % growth VIP GGR % of total

GGR % growth Mass GGR % of total

GGR % growth Slot GGR % of total

GGR % growth 2010 188,343 58% 135,648 72% 70% 44,077 23% 33% 8,618 5% 33%2011 267,867 42% 196,126 73% 45% 60,316 23% 37% 11,425 4% 33%2012 304,139 14% 210,850 69% 8% 80,045 26% 33% 13,244 4% 16%2013E 361,903 19% 239,879 66% 14% 107,361 30% 34% 14,663 4% 11%2014E 409,034 13% 257,631 63% 7% 135,274 33% 26% 16,129 4% 10%2015E 474,964 16% 285,970 60% 11% 170,446 36% 26% 18,549 4% 15%Source: CEIC, Barclays Research estimates

FIGURE 78 Overall gross gaming revenue growth

Source: CEIC, Barclays Research estimates

Stock picks Galaxy (27 HK; OW; PT: HK$66.70): We expect strong growth at Galaxy with a 21% EBITDA CAGR over 2013-15E. Galaxy Macau Phase 1 is continuing to drive growth, along with Phase 2 potentially opening in early 2015. A potential stock price catalyst could come when Galaxy receives its construction permit for Phases 3 and 4 some time in 2014. Our 2014E EBITDA estimate is 4% above Bloomberg consensus.

Sands China (1928 HK; OW; PT HK$60.30): We expect Sands China to see the strongest EBITDA growth among Macau casino operators in 2014E, at 29% y/y. We expect growth to be driven by Sands’ continuing ability to capture the higher-margin and faster-growing mass market segment. We expect to see consensus upgrades continuing.

MGM (2282 HK; OW; PT HK$32.20): We like MGM as a valuation laggard: it is trading at 15x 2014E vs Sands and Galaxy both at 17x. We project a 10% EBITDA CAGR over 2013-15E before further acceleration in 2016E following the opening of its Cotai casino.

We continue to remain positive on the Macau gaming market as we expect 2014 to still see high-teens earnings growth for the sector. We believe operators will continue to focus on managing table yields in 2014, before new casino supply further accelerates demand growth with the 2015-16 Cotai casino openings.

FIGURE 79 Macau Gaming – stocks picks

Company Ticker Curr. Rating Stock price

Price target

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yield

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CAGRSands China 1928 HK HKD OW 61.90 60.30 -3% 64,358 22.6 17.3 15.1 29.1 21.2 18.4 2.4% 21%Galaxy Macau 27 HK HKD OW 63.55 66.70 5% 34,568 20.8 17.0 13.9 25.6 20.2 17.0 0.0% 21%MGM China 2282 HK HKD OW 28.85 32.20 12% 14,137 17.1 14.9 14.4 21.5 18.1 17.0 3.3% 10%Average 20.2 16.4 14.5 25.4 19.8 17.4 1.9% 17%Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Gaming & Leisure industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates

44%

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13 December 2013 60

Taiwan: Fixed Income Research


13 December 2013 61

TAIWAN FIXED INCOME RESEARCH

An investment boost in the making This is an excerpt from The Emerging Markets Quarterly, published 10 December 2013. For analyst certifications and important disclosures, please refer to the full report. To view the report, please click title for link to Barclays Live.

After a disappointing 2013, we are turning more constructive on Taiwan for 2014 and 2015, when we expect growth to re-accelerate. The government has tabled a bill of tax incentives for seven free trade zones to attract investment. We expect these to add to the structural boost the economy is receiving from increased tourism and the onshore CNY business, which will help to drive domestic demand and asset prices.

Key recommendations FX: We expect more positive domestic economic momentum to be supported on the external front by growing US demand for Taiwanese exports. In addition, continued positive momentum in global manufacturing, in the context of a high share of cyclical sectors in Taiwan’s equity market, also bodes well for the TWD.

Following the disappointing Q3 GDP outturn (0.3% q/q), we expect growth momentum to improve slightly to 0.4% q/q sa in Q4. We expect Taiwan’s export recovery to underperform those of industrial peers such as Korea, hampered by weaker panel shipments to an oversupplied China market, a weak global PC outlook and frequent maintenance-related disruptions to refinery output. The Government recently lowered its growth forecasts to 1.7% for 2013 (Barclays: 1.6%) and 2.6% for 2014 (previously 2.3% and 3.4%, respectively). To counter the cyclical weakness, the Central Bank of China (Taiwan) has maintained excess reserves in the banking system at a relatively high level of TWD30bn/day in Q4 (2012: TWD17.1bn; TWD5-7bn when growth is above trend). However, the central bank has resisted calls for currency depreciation from exporters. Indeed, CBC Governor Perng argued in Parliament in November that a weaker TWD would not boost Taiwan’s competitiveness, but instead pushed for the introduction of structural measures to: 1) encourage companies to take advantage of low real interest rates to invest; and 2) allow state-owned enterprises to raise capital on their own.

Despite this, we are raising our 2014 GDP forecast to 3.5% (from 3.1%) to take into account two factors. The first is the faster-than-expected development of the CNY capital market in Taiwan, prompting more rapid growth in financial services – in lending and underwriting.

FIGURE 80 An investment driven-driven growth model shapes up

FIGURE 81 IP and exports – slightly stronger in Q4

Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

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ECONOMICS RESEARCH Wai Ho Leong* +65 6308 3292 [email protected] FX STRATEGY Nick Verdi* +65 6308 3093 [email protected] * These authors are members of the Fixed Income, Currencies and Commodities Research department and are not equity research analysts

The economy has bottomed out; electronics leading the turnaround

We raise our growth forecast for 2014 to 3.5%, up 40bp



13 December 2013 62

In a landmark move on 25 November, Taiwan’s Financial Supervisory Commission allowed Chinese enterprises such as state-owned Chinese banks to issue CNY-denominated “Formosa” bonds in Taiwan. A day later, China’s Bank of Communications and Agriculture Bank of China announced “Formosa” bond issues of CNY1.2bn and CNY1bn, respectively. This follows strong growth in CNY deposits in Taiwan since the launch of this service on 6 February, with deposits of CNY123bn as at end-October (2.2% of total deposits), surpassing the government’s year-end 2013 target of CNY100bn.

A second factor supporting growth in 2014 is a concerted drive to attract investment in Taiwan – spearheaded by the Council of Economic Policy and Development (CEPD). Keen to reverse the declining investment share (2013F: 19% of GDP; 2000: 25%), the CEPD plans to offer tax incentives in seven free trade zones (FTZs) across the country. CEPD Minister Kuan Chung Ming is also leading efforts to pass a special tax bill through the Legislature by year-end that would grant: 1) 10-year tax reductions; and 2) ease access to foreign workers. We believe these efforts would complement a drive to attract Taiwanese firms based overseas – particularly in China. Since November 2012, 16 project commitments worth USD5bn have been approved, mainly from Taiwanese firms located in China, according to the CEPD. Coupled with the FTZ strategy and tax incentives, we estimate Taiwan could secure USD8bn in FDI commitments in 2014. When realised, these investments could lift trend growth by 0.25pp on an annual flow basis, on our estimates. Rising investment levels should also narrow Taiwan’s structural net FDI deficit, reducing the drag from the overall financial account on its balance of payments.

We believe this sets the stage for domestic demand to become a more important growth driver in 2014 and 2015, contributing over 3pp to our 3.5% forecast next year (2013: 1.2pp of our 1.6% forecast). We expect private consumption to contribute 1.5pp to growth (2013F: 0.7pp), helped by rising tourism receipts. We look for capital formation to contribute 1.6pp to GDP growth in 2014 (2013F: 0.6pp), supported partly by construction and facilities investment. The contribution from net exports is likely to fall slightly to 0.3pp (2013F: 0.4pp), as we expect a higher level of intermediate and capital imports. We expect Taiwan’s growth profile to remain similar in 2015, as the investment boom is likely to be more strongly felt within the economy.

FIGURE 82 Mainland Chinese visitor arrivals likely to top 3mn in 2014

FIGURE 83 Services balance – from structural negative to structural positive


Meanwhile, the evolution of cross-Strait ties, which has awakened Taiwan’s services economy, continues at a brisk pace. Indeed, on 25 November, China’s new chief negotiator on cross-Straits issues, Chen De Ming, said that more opportunities will be created for cross-Straits cooperation as the Third Plenum made it clear that China is committed to deepening reform and opening up (Xinhua). Another indication of deepening ties is tourism, which has resulted in a widening of Taiwan’s current account surplus. A hotel and retail

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CEPD is planning a concerted push to attract investment in Taiwan

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Cross straits ties are paying strong dividends for the services economy


13 December 2013 63

boom appears to be underway, due to the influx mainland Chinese tourists, 2.7mn of whom visited Taiwan and spent USD6bn in 2012, equal to two months of the goods trade surplus. From 28 August this year, residents in another seven Chinese cities became eligible to apply for individual tours to Taiwan, bringing the number of Chinese cities to 28. We expect 20% of the projected 3mn mainland visitors to Taiwan in 2014 to be individual travellers, up from 7% in 2012. We raise our current account surplus projection for 2013 to USD53bn or 11% of GDP (previously USD48bn), reinforcing the safe-haven appeal of Taiwanese assets.

We see two factors supporting stronger consumption in 2014. First, there are indications that employment is picking up, particularly in the services economy. The employment opportunity sub-index of the consumer confidence index has risen steadily in November 2013 (to 106.50), since hitting the year’s low of 104.70 in June. Indeed, according to a recent survey by Manpower Services (a regional recruitment consultant), Taiwan has the highest recruitment demand from firms in Q4 13 among Asian economies – 35% of 1,031 Taiwanese companies plan to hire (unchanged from Q3). Second, inflation is low. We lowered our 2013 forecast to 0.9% from 1.2% (2012: 1.9%), due to weaker-than-expected demand-side pressures this year. We still expect inflation to rise in 2014, but at a more moderate pace (1.8%; previously: 2.3%).

The stronger services economy is also likely to boost property prices, in our view. Prices rose for the ninth successive quarter in Q3, by 2.2% q/q sa (Q2: 5.8%; Q1: 4%). Since the low in December 2008, home prices have risen 84% as of September 2013. Demand remains strong. Construction activity is also pointing up. Despite the weaker economy, housing building permits increased 38.3% y/y to 92,829 units for the first nine months of 2013. We expect prices and transaction volumes to rise further, following comments by the Finance Minister on 14 November that the minimum holding period for investment properties subject to the luxury tax would not be extended beyond the current two years (Taipei Times). Another potential source of upside we see would be from more decisive measures to boost home affordability, particularly for first-time buyers.

FIGURE 84 Tax incentives for businesses Proposed tax incentives in Free Economic Pilot Zones

Exemption for repatriated dividends used for investment in capital equipment Exemptions for patent and technology transfer Tax credits for R&D over 3 years, up to 15% of spending For regional HQs that meet specific criteria on size, investment and job creation: Income from overseas affiliates taxed at 10% (normally 17%) for first 3 years Source: Taiwan Council for Economic Planning and Development

FIGURE 85 Strong upturn in residential house prices is underway…

FIGURE 86 …but not enough to drive demand-side inflation yet

Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

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KMT came to power; begins cross straits ties

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Real estate demand remains strong. More steps may be taken to boost housing affordability


13 December 2013 64

FIGURE 87 Employment conditions are strong and stable

FIGURE 88 TWD REER significantly below 18-year average – little downside risk

Source: Haver Analytics, Barclays Research Source: Bloomberg, Barclays Research

FIGURE 89 Taiwan macroeconomic forecasts

2010 2011 2012 2013F 2014F 2015F

Activity Real GDP (% y/y) 10.8 4.2 1.5 1.6 3.5 4.5 Domestic demand contribution (pp) 8.1 0.6 0.2 1.2 3.1 3.5 Private consumption (% y/y) 4.0 3.1 1.6 1.4 2.8 2.9 Fixed capital investment (% y/y) 21.1 -2.3 -4.0 3.7 9.7 10.2 Net exports contribution (pp) 2.7 3.6 1.3 0.4 0.3 1.0 Exports (% y/y) 25.6 4.5 0.1 3.0 5.5 5.8 Imports (% y/y) 27.7 -0.5 -2.2 3.3 6.9 6.1 GDP (USD bn) 428 465 475 488 515 554 External sector Current account (USD bn) 39.9 41.7 50.7 53.4 51.3 49.7 CA (% GDP) 9.3 9.0 10.7 11.0 10.0 9.0 Trade balance (USD bn) 26.5 28.3 31.6 34.0 32.5 31.0 Net FDI (USD bn) -9.1 -14.7 -9.9 -10.0 -6.5 -2.5 Other net inflows (USD bn) 8.7 -17.3 -21.7 -31.0 -24.0 -24.0 Gross external debt (USD bn) 102 123 131 142 149 156 International reserves (USD bn) 382 386 403 414 434 456 Public sector Public sector balance (% GDP) -3.3 -2.2 -2.5 -2.0 -1.0 -1.0 Gross public debt (% GDP) 33.5 34.8 35.7 36.6 36.2 35.1 Prices CPI (% Dec/Dec) 1.2 2.0 1.6 1.3 1.4 1.7 FX, eop 30.37 30.29 29.14 29.50 29.75 28.75 1y ago Last Q4 13F Q1 14F Q2 14F Q3 14F

Real GDP (% y/y) 3.8 1.7 0.8 2.4 2.8 3.9 CPI (% y/y, eop) 1.6 0.8 1.3 2.6 2.0 1.0 FX (domestic currency/USD, eop) 29.14 29.67 29.50 29.50 29.75 29.75 Base rate (%, eop) 1.875 1.875 1.875 1.875 1.875 2.000 Overnight rate (%, eop) 0.413 0.386 0.386 0.386 0.386 0.488

Source: Barclays Research

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13 December 2013 65

Taiwan: Equity Research

TAIWAN: EQUITY RESEARCH


13 December 2013 66

TAIWAN EQUITY STRATEGY

Revenge of the nerds: add to tech in 2014 • Can TAIEX outperformance repeat? Our model portfolio ends 2013 so far up 17.3% vs

MSCI Taiwan up 7.5% (as of 9 December 2013) on our preference for non-tech all year. Should we expect TAIEX to outperform the region again next year (up 7.5% vs up 0.8% for MSCI Asia ex-Japan)? We think so as long as we don’t expect a global equities “risk on” environment, especially in China, which could detract from Taiwan’s performance.

• Adding to technology laggards into 2014: After the underperformance for tech in 2013, we recommend adding to tech in 2014. We increase our position in semiconductors, and while we see secular risks for hardware, we cannot resist looking for opportunities into this consensus negative view, so we add Asustek to our Taiwan Equity Model Portfolio and continue to hold Quanta along with sector favourite Delta.

• Reducing exposure but still overweight non-tech vs tech into 2014: After the significant outperformance for non-tech in 2013, we reduce our exposure but maintain our significant positions in financials, property and selected materials stocks. We continue to expect secular improvement in domestic consumption/services, asset prices and tapering opportunities on the continuing theme of China detente.

• Opportunistically adding defensives and yield: In our report “Taiwan Equity Strategy: Protect gains, lower beta, add telecom” of 29 October, we recommended lowering beta and adding defensives; we continue to expect market uncertainty and see high dividend yields as an appealing lower-risk strategy in 2014. We like Far EasTone, Nan Ya Plastics, Uni-President, Merida and Hiwin with a portfolio beta below 1x. We keep some caution in our strategy.

FIGURE 90 Taiwan equities – sector performance so far in 2013

Sector Performances year to dateAutos 41.4%Financials 21.5%Department stores 18.2%Hardware components 16.9%Plastic 14.3%Rubber 14.1%Cement 13.5%Non-tech ex-financials 12.9%Construction 12.4%Semiconductors 12.0%Hardware PC/NB 10.6%TWSE 9.7%Food 9.1%Tech 4.4%Chemicals 3.3%Transportation -2.9%Steel -3.3%Hardware wireless -9.9%Note: Performances for 28 December 2012 to 9 December 2013. Source: Bloomberg, Barclays Research

• 2014 themes: 1) The rise of non-US tech opportunities following the US NSA debacle is a positive for Asian server, storage and cloud companies, we believe. 2) China’s white-box smartphones are ramping up in 2014 – a sign of a take-off or a peak? 3) The consensus negative outlook in tech hardware is an opportunity, we believe, after the poor tech performance in 2013. 4) Renewables/energy-efficient sectors looking for a

EQUITY RESEARCH Taiwan Equity Strategy Kent Chan +886 2 663 84688 [email protected] BCSTW, Taiwan Emily Huang +886 2 663 84692 [email protected] BCSTW, Taiwan




13 December 2013 67

rebound after bottoming. 5) Taipei mayoral elections in December 2014 should be supportive of our domestic consumption theme. And 6) China growth moderation and reform should be positive longer term but cause choppiness near term.

• New stock picks for 2014: The new additions to our model portfolio and top picks into 2014 include Asustek, FCFC and Novatek, which we add to existing portfolio picks MediaTek, ASE, Delta, Cathay FHC, CTBC, Nan Ya Plastics, Kindom, Merida and Uni-President. For our Taiwan Equity Model Portfolio, please refer to Figure 91, and for a full list of analyst stock picks by sector, please refer to Figure 117.

Adding tech in 2014 2013 saw the consensus build in a bifurcated view with negative consensus forming around hardware tech, notebooks PCs and the mobility supply chain. Although positive sentiment formed, we believe by default in some cases around financials (especially insurers), property and consumption, especially if branded and exposed to China. In 2014, we cannot help but explore some of the consensus thinking and look at the 2013 laggards, such as hardware tech PCs, hardware tech wireless and materials. However, we stand by our 2013 structural calls, including:

• “Domestic Renaissance” theme in Taiwan.

• Secular fall in tech hardware.

• Upside for financials into US tapering.

• Soft landing in China and gradual recovery of China consumption and discretionary spending.

We believe sentiment is currently too negative on tech, especially with the gradual improvement in the US economy. As such, we recommend adding back to tech positions, albeit more in the semiconductor/displays space for which we return to significant positions after consistently adding to TSMC, MTK and ASE over the past few months, and in this report, adding to Novatek. Going one step further, we also explore hardware names in search of the next Delta Electronics (we maintain our holding in Quanta, for instance), or perhaps just an opportunistic bounce in the share into a possible corporate action or a surprise to the upside (maintain Asustek).

Still overweight non-tech vs tech but just less so In non-tech, we continue to reduce our positions as we increase our tech positions. However, we do remain overweight non-tech at 51% of our portfolio vs tech at 49% into 2014, especially in financials and property and add to our materials and defensive consumption names as we continue to expect moderate global growth and uncertainty to support the TAIEX’s attraction as a defensive growth market with high yield and attractive exposure to both the US and China. Recent changes in our non-tech view include Sidney Yeh’s upgrade in chemical/plastics on improving demand, margins and earnings (see “Formosa Group: Upturn in profit cycle and higher dividends from 2014”, 26 November 2013), which causes us to add FCFC to our portfolio, alongside holdings in defensive stocks Far EasTone and Uni-President.

We note that we no longer benchmark our portfolio to the MSCI Taiwan index.




13 December 2013 68

FIGURE 91 Barclays Research Taiwan Equity Model Portfolio

Company Ticker Rating

Model portfolio

sector weight %

Price (NT$)

Price target (NT$)

Pot upside to PT

Market Cap US$

bn

3M Avg. Traded Value

US$ mn

Abs perfor.

after costs

Relative perfor.

vs MSCI

Div yld.

Adj. beta Covering analyst

Information Technology 49% Semi & Semi Equipment 34% TSMC 2330 TT OW/Pos 15% 105 139 32% 92 106 7% 0% 3% 0.9 Andrew Lu MediaTek 2454 TT OW/Pos 6% 428 445 4% 20 85 27% 20% 2% 1.2 Andrew Lu ASE 2311 TT OW/Pos 6% 30 35 18% 8 28 3% -5% 5% 1.0 Andrew Lu HMI 3658 TT OW/Pos 4% 918 1,250 36% 2 11 73% 65% 2% 0.8 Sebastian Hou Novatek 3034 TT OW/Pos 4% 125 141 13% 3 13 3% -4% 5% 1.2 Jamie Yeh Tech Hardware & Equipment 14% Quanta 2382 TT UW/Neu 4% 67 55 -18% 9 15 20% 13% 5% 1.0 Kirk Yang Asustek 2357 TT OW/Neu 4% 267 265 -1% 7 30 1% -7% 7% 0.8 Kirk Yang Delta 2308 TT OW/Neu 6% 158 175 11% 13 22 37% 29% 4% 0.9 Kirk Yang Non-tech 51% Financials 21% Mega FHC 2886 TT OW/Neu 5% 25 27 10% 10 14 14% 6% 4% 1.0 Noel Chan Shin Kong 2888 TT OW/Neu 5% 10 12 19% 3 10 4% -3% 0% 1.2 Noel Chan Cathay FHC 2882 TT OW/Neu 7% 46 51 9% 19 31 55% 48% 2% 1.1 Noel Chan CTBC 2891 TT OW/Neu 5% 19 22 13% 10 18 22% 14% 4% 1.1 Noel Chan Telecommunication Services 5% Far EasTone 4904 TT OW/Neu 5% 64 72 12% 7 17 1% -7% 6% 0.4 A. Ramachandran Materials 7% Nan Ya Plastics 1303 TT OW/Pos 5% 68 78 13% 18 12 13% 6% 3% 1.2 Sidney Yeh FCFC 1326 TT OW/Pos 2% 85 101 18% 17 12 3% -5% 3% 1.1 Sidney Yeh Consumer Discretionary 0% Industrials 11% Huaku 2548 TT OW/Neg 4% 86 109 26% 1 3 29% 22% 6% 0.8 Sidney Yeh Kindom 2520 TT OW/Neg 4% 38 51 33% 1 5 -5% -12% 10% 1.1 Sidney Yeh Hiwin 2049 TT OW/Neu 3% 252 264 5% 2 17 21% 13% 1% 1.3 Sebastian Hou Consumer Staples 8% Uni-President 1216 TT EW/Neu 4% 53 57 7% 9 19 1% -7% 3% 0.6 Sidney Yeh Merida 9914 TT OW/Neu 4% 232 244 5% 2 9 14% 6% 3% 0.8 Grace Li Energy 0% Health Care 0% TOTAL 100% 17.3% 9.8% 3.6% 0.98

Notes: Priced as of the close 9 December 2013. Performances are absolute and relative to the MSCI Taiwan index as of 4 December 2013 since the date a stock was added to the portfolio. Our portfolio was launched on 8 February 2012 and rebased as of 28 December 2012; therefore, performance data are less than 12 months. Past performance is not a reliable indicator of future results. Please refer to our report “Taiwan Equity Model Portfolio: Buying beta and laggards” of 8 February 2012 in which we launched our model portfolio for a full discussion of our methodology, including a discussion on transactions costs. In addition, please contact us for full details on how we calculate the performance of our model portfolio and for details on historical transactions, including additions and deletions of stocks to the portfolio. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Sector views: Pos: Positive; Neu: Neutral; Neg: Negative. For full disclosures on each rated company, including details of our company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Source: MSCI, Bloomberg, Barclays Research estimates

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13 December 2013 69

FIGURE 92 Barclays Research Taiwan Equity Model Portfolio – Changes

Company Ticker Rating Date addedto portfolio

Date removedfrom portfolio

Price at timeof addition

(NT$)

Price at time of latest action

(NT$) Current weight

Previousweight

Absolute performance

after costs

Relative performance

vs MSCI TaiwanCovering analyst

Add Novatek 3034 TT OW/Pos 10-Dec-13 - 121 121 4% 0% - - Jamie Yeh Asustek 2357 TT OW/Neu 10-Dec-13 - 265 265 4% 0% - - Kirk Yang FCFC 1326 TT OW/Pos 10-Dec-13 - 83 83 2% 0% - - Sidney Yeh Change weight Far EasTone 4904 TT EW/Neu 28-Oct-13 - 62 65 5% 8% -1% -7% Anand RamachandranCathay FHC 2882 TT OW/Neu 20-Jun-13 - 34 46 7% 9% 42% 36% Noel Chan Remove Cheng Shin Rubber 2105 TT OW/Neu 27-Sep-13 10-Dec-13 78 76 0% 3% 2% -4% Sidney Yeh Notes: Priced as of the close 9 December 2013. Performances are absolute and relative to the MSCI Taiwan index as of 9 December 2013 since the date a stock was added to the portfolio. Our portfolio was launched on 8 February 2012 and rebased as of 28 December 2012; therefore, performance data are less than 12 months. Past performance is not a reliable indicator of future results. Please refer to our report “Taiwan Equity Model Portfolio: Buying beta and laggards” of 8 February 2012 in which we launched our model portfolio for a full discussion of our methodology, including a discussion on transactions costs. In addition, please contact us for full details on how we calculate the performance of our model portfolio and for details on historical transactions, including additions and deletions of stocks to the portfolio. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Sector views: Pos: Positive; Neu: Neutral; Neg: Negative. For full disclosures on each rated company, including details of our company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Source: MSCI, Bloomberg, Barclays Research estimates





13 December 2013 70

Key risks We see three key risks into 2014:

• China is a double-edged sword: If the recovery in the global economy is too strong on better growth in developed markets, a “risk-on” environment in Chinese equities would pull away fund flows from the TAIEX, in our opinion. Conversely, a disappointing economic recovery would result in a dulling of the China concept stock attractiveness, where valuations are very high. As such, a best-case scenario in China would be a gradual recovery through 2014, possibly leading to a similar environment to 2013.

• Are US equities priced for perfection? The expectation build-up on the US economic recovery, Fed tapering and equity/asset price performance appears a considerable risk into 2014, in our view, and perhaps Black Friday consumption disappointment may be the first sign of a crack in the consensus thinking. Our global Equity Strategist, Ian Scott, calls for a shift from US equities into EU and emerging markets in “Global Outlook: Window for risk assets narrowing”, 9 December 2013, and while there is still a debate on the timing of tapering and concerns persist over falling commodity prices and slower-than-expected inflation and job growth, there is a risk that a disappointing US recovery would negatively impact Taiwan’s tech exporters as well as the consensus view of strength in financials and property.

• Domestic politics: Taipei mayoral elections will occur in December 2014 and, while elections tends to be seen as a boost to equity markets, any disappointing policy, unexpected events (such as shootings – which have occurred in prior elections) or a possible DPP win would be considered negative by the markets, we believe. However, it is our view that policy and rhetoric into the elections will be supportive; this is the consensus view too.

FIGURE 93 TWSE FINI ownership( %)

FIGURE 94 Taiwan financials FINI ownership (%)

Source: TEJ, Barclays Research Source: TEJ, Barclays Research

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13 December 2013 71

FIGURE 95 FINI and ITC ownership vs TWSE index

FIGURE 96 FINI vs ITC ownership by sub-sector

Source: TEJ, Barclays Research Source: TEJ, Barclays Research

Key upside risks to equities – local retail investors Foreign institutional investors (FINI) continue to add to Taiwan holdings and represent the driving force in the TAIEX in 2013, we believe. As we believe equity market uncertainty and attractions of yield will remain an attraction in 2014, we expect FINI ownership trends to rise and at least remain high despite the high ownership ratio at present. For financials, despite the rise in FINI ownership, holdings are still below 2007 peak levels. Since we see more structural and sustainable upside to financial sector fundamentals and attractiveness into tapering, we thus see potential upside to the sector.

Potential upside could also come from the domestic side, given domestic retail investors are the least engaged in the TAIEX than they have been in the past 15 years. Meanwhile, as trading in local equities falls, transactions in Taiwan property continue to rise. And, although we do not expect locals to refrain from investing in property any time soon, any positive surprise in tapering, China relations, tech earnings, or unforeseen events could present more upside than downside risks, in our view.

FIGURE 97 Taiwan liquidity indicator

FIGURE 98 Taiwan property transactions vs interest rates and CPI

Source: Bloomberg, TEJ, Barclays Research Source: TEJ, Barclays Research

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13 December 2013 72

TAIEX valuations still undemanding Valuations remain undemanding for the TAIEX. On a forward price-to-earnings basis, the TAIEX is trading at 14x on estimated 17% earnings growth in 2014 (based on consensus estimates from Bloomberg). While no longer cheap, the valuation is low versus historical levels on a price-to-trailing book basis and is not demanding (slightly above historical mean levels) on forward P/E. Moreover, we see limited downside risks as valuations are either at or below historical means and the ownership of Taiwan big cap tech, financials and non-tech has come off from peak levels.

FIGURE 99 TWSE trailing P/B valuation

FIGURE 100 TWSE forward P/E valuation


FIGURE 101 P/E for TWSE index

FIGURE 102 P/B for TWSE index


Looking at sub-sector valuations, plastics, chemicals and financials sectors still have decent valuations in the Taiwan non-tech space. The petrochemical sector (plastics and chemicals) appears undemanding on trailing P/B valuation, and is now trading at slightly below its historical mean level (plastics at 1.9x P/B and chemicals at 1.5x trailing P/B), while cement is trading above its historical average (of 1.1x) at 1.5x, and the consumer sector is at a historical peak of 2.6x following a strong performance year-to-date.

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13 December 2013 73

FIGURE 103 Barclays Research Taiwan sub-sector 2013-14 estimates vs consensus

Barclays EPS Consensus EPS Difference

2013E 2014E 2013E 2014E 2013E 2014E

PCs/NBs 4.67 5.16 4.61 5.31 0.06 -0.15 y/y change -2% 10% -3% 15% Components 5.67 6.49 5.54 6.22 0.13 0.27 y/y change -38% 14% 11% 12% Wireless equipment 4.89 6.61 4.52 5.47 0.37 1.14 y/y change -47% 35% -50% 21% TFT-LCDs 0.65 0.53 0.69 0.53 -0.04 0.00 y/y change -121% -19% -126% -23% Semi-non fabless/DRAM 4.12 4.83 4.14 4.81 -0.02 0.03 y/y change 33% 17% 33% 16% Semi-fabless 5.54 15.50 5.19 14.48 0.36 1.02 y/y change 50% 180% 51% 179% Steel 1.15 1.26 1.11 1.23 0.05 0.03 y/y change 112% 9% 104% 11% Telecoms 4.57 4.91 4.69 4.75 -0.12 0.16 y/y change 1% 7% 0% 1% Banks 1.41 1.55 1.52 1.60 -0.11 -0.05 y/y change 17% 10% 28% 5% TWSE 2.64 3.13 2.67 3.11 -0.03 0.02 y/y change 34% 18% 35% 17%

Note: Barclays forecasts include stocks within our coverage universe and consensus forecasts for stocks we do not cover, by sub-sector; consensus includes all stocks with available forecasts. Barclays EPS is calculated as total net profit for the sector divided by the total number of shares. Source: Bloomberg consensus, Barclays Research estimates

We believe the petrochemicals sector will see earnings growth next year, which could provide support to sector valuation (please see Sidney Yeh’s recent report (see “Formosa Group: Upturn in profit cycle and higher dividends from 2014”, 26 November 2013), and we prefer Nan Ya Plastics (1303 TT; OW; PT NT$77.6) and FCFC (1326 TT; OW; PT NT$100.6).

For the financials sector, despite strong year-to-date performance, +22%, valuations are undemanding at mean trailing P/B levels. Noel Chan prefers Cathay FHC (2882.TT; OW; PT NT$50.7), Shin Kong FHC (2888.TT; OW; PT NT$12.3), CTBC Financial (2891.TT; OW; PT NT$22.0) and Mega FHC (2886.TT; OW; PT NT$27.0).

FIGURE 104 Taiwan chemicals trailing P/B valuation

FIGURE 105 Taiwan plastics trailing P/B valuation


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13 December 2013 74

FIGURE 106 Taiwan financials trailing P/B valuation

FIGURE 107 Taiwan food trailing P/B valuation


Despite undemanding valuations for Taiwan tech, our analysts consider that falling ASPs and the shift to white-box mobility favours semis over hardware tech. In downstream tech, we remain more focused on companies that shift their product mix to avoid the downdraft in PCs such as our tech analysts’ top picks Delta Electronics (2308.TW; OW; PT: NT$175), Largan (3008 TT; OW; PT NT$1,300), Catcher (2474 TT; OW; PT NT$205) and Lenovo Group (992.HK; OW; PT: HK$10).

FIGURE 108 Taiwan electronics trailing P/B valuation

Source: Bloomberg, Barclays Research

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13 December 2013 75

FIGURE 109 Taiwan computer & peripheral trailing P/B valuation

FIGURE 110 Taiwan wireless equipment trailing P/B valuation


Earnings revision trends Taiwan earnings revisions are on a declining trend due to negative earnings revision in technology (semi and hardware) while non-tech revisions remain positive. For semis, Andrew Lu believes that negative revisions in consensus earnings forecasts should bottom in 4Q13 as foundries, OSAT/substrate vendors and fabless vendors have guided for a smaller decline in sales for 4Q13 (see report “Taiwan Semis and Touch Displays: Takeaways from Oct sales”, 11 November 2013).

As for hardware, Kirk Yang maintains his negative view on PCs/NBs on a shrinking total addressable market “The Asia PC+ Pulse (Issue No. 75): No Black Friday surprises – NBs slightly better on inventory builds; more iPhone 4s, fewer 5c and 5s forecast unchanged”, 3 December 2013.

FIGURE 111 Taiwan earnings revisions vs TWSE index

FIGURE 112 Taiwan tech earnings revisions vs Taiwan electronics index

Source: Datastream, Barclays Research Source: Datastream, Barclays Research

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13 December 2013 76

FIGURE 113 Taiwan hardware earnings revisions vs Taiwan PC/NB index

FIGURE 114 Taiwan semi earnings revisions vs Taiwan semi index


Non-tech earnings revisions are positive although the momentum is stalling, especially for financials, as most of the upward revisions were completed in 2Q13 as the market was surprised by better-than-expected 1Q13 results. We expect consensus earnings revisions for non-tech to continue to rise as China and consumer demand recovers.

FIGURE 115 Taiwan non-tech earnings revisions vs TWSE index

FIGURE 116 Taiwan financials earnings revisions vs Taiwan financials index


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13 December 2013 77

ANALYSTS’ TAIWAN STOCK PICKS

FIGURE 117 Taiwan Equity Research – Analysts’ stock picks

Source: Company data, Bloomberg, Barclays Research estimates

Price PTPot’l up/ downside

Sector Stock picks Ticker Rating (local curr.) (local curr.) to PT (%) FY13E FY14E FY13E FY14E FY13E FY14ETSMC 2330.TW OW 105 139 32% 14.9 13.2 3.3 2.8 23% 23%

MediaTek 2454.TW OW 428 445 3% 21.8 18.0 3.5 3.2 14% 19%ASE 2311.TW OW 29.75 35 17% 15.0 12.3 1.9 1.8 13% 15%

Nan Ya PCB 8046.TW UW 35.55 31 -12% - 45.3 35.5 0.8 0.7 -2% 2%

Radiant 6176.TW OW 107 122 14% 10.9 9.2 2.4 2.1 22% 24%Novatek 3034.TW OW 124.5 141 13% 16.4 14.8 3.0 2.9 19% 20%

Chipbond 6147.TWO OW 61.4 72 17% 13.7 11.6 1.9 1.9 14% 17%Wintek 2384.TW UW 10.25 6.5 -36% - 2.5 - 4.2 0.7 0.8 -23% -17%

Lenovo 0992.HK OW 9.48 10 5% 19.8 16.4 4.7 4.1 25% 27%Delta 2308.TW OW 158 175 10% 22.0 17.2 4.8 4.4 21% 27%

Largan 3008.TW OW 1105 1300 17% 16.2 13.6 5.2 4.2 35% 34%Catcher 2474.TW OW 192.5 205 6% 10.8 11.3 2.1 1.8 20% 17%

Telecommunication Far EasTone 4904.TW OW 64.2 72 12% 16.9 15.3 2.8 2.8 17% 19%

Cathay 2882.TW OW 46.4 50.7 9% 18.4 17.1 2.0 1.9 12% 12%Shin Kong 2888.TW OW 10.3 12.3 19% 8.9 14.1 1.0 0.9 11% 7%

CTBC 2891.TW OW 19.45 22 13% 13.4 10.4 1.4 1.3 12% 13%Mega 2886.TW OW 24.65 27 9% 11.9 10.9 1.2 1.2 11% 11%

Huaku 2548.TW OW 86 108.5 26% 8.1 7.4 1.7 1.5 22% 22%Kindom 2520.TW OW 38 50.5 32% 17.7 4.6 1.7 1.3 10% 32%

Petrochem Formosa Chemicals 1326.TW OW 85.2 100.6 18% 18.2 16.7 1.7 1.6 10% 10%Nan YaPlastics 1303.TW OW 68.4 77.6 13% 22.8 18.5 1.9 1.9 9% 10%

Merida 9914.TW OW 232 243.7 5% 22.5 20.0 6.5 5.8 31% 31%Hiwin 2049.TW OW 252 264 4% 33.1 25.2 5.5 4.8 18% 20%

Airtac 1590.TW OW 253 255 0% 26.4 21.6 4.6 4.3 23% 21%

Gourmet Master 2723.TW OW 208.5 223 6% 43.4 21.5 4.8 4.3 11% 21%

Sector view: We believe Taiwan banks will continue to see strong growth from their offshore banking units which currently account for 30-40% of their pre-tax earnings. This is mainly attributable to increasing foreign currency loan demand from Taiwanese corporations who are currently operating in China yet finding it more difficult to get funding due to continuously tightening monetary policy in China.

Sector view: Given light new supply additions into the market in Nov/Dec, we expect the sales ratio to move up towards year-end as demand recovers. We believe the pick-up will be due to gradual alleviation of worries over unfavourable interest rate movemenrevisions to regulations. Among the major metropolitan areas, we continue to prefer Taipei City given the resilient upgrade/replacement demand and continued tight supply.

Sector view: Despite the seasonal weakness in 4Q13, we believe global demand is picking up, which has now filtered into the chemical space, with chemical companies turning more positive towards “demand recovery” in 2014, from a “flattish outlook” previouslMeanwhile, we believe US tapering (our US economist expects the Fed to cease quantitative easing by June 2014) is further proof that demand in mature markets is getting back on track. Together with disciplined supply additions, we expect most chemical prodto see better margin spreads in 2014.

Sector view: Going into 2014, we recommend investors focus on the fairly valued mid-cap stocks such as bicycles, automation and selective consumer. For automation, the new policy reforms in China present a shor-term risk but on a medium- to long-term view are very positive on the outlook for factory automation (FA) in China. For the consumer sector, we recommend focusing on companies with a margin expansion story such as Merida, underpinned by the consumer upgrading and urbanization themes in China.

Property

Mid-cap non-tech

Financials

P/B ROE%

Semiconductor

LCD Displays

Sector view: We expect Asia ex-Japan foundry/OSAT vendors to guide an 8-10% q/q moderate sales decline in 1Q14E affected by structural demand weakness from notebook/PC markets and inventory adjustment during 2014 CNY. Driven by new demand drivers and production switch of Apple application processor to Taiwan from Korea starting 1Q14, we expect foundry/OSAT sector sales growth of 8-10% y/y for 2014E and 2Q14E sales growth of >15% q/q.

Sector view: We expect a 0-5% y/y decline for China TV in coming CNY, as we see the China market gradually normalizing after slowing down to a 15% y/y decline post energy-saving subsidy program expiring in June 2013. For LCD panels, we expect supply and demand to remain balanced. We expect 10%-20% UHD (4K2K TV) adoption will help panel makers to optimize their blended ASPs. For touch panels, we expect adoption on NBs will increase to 20% in 2014E with touch panel module ASPs declining by another 40%.

Sector view: We see demand mainly coming from the corporate sector before CNY and expect China rural areas to become the next driver, where PC penetration is relatively low. Moreover, we believe M&A and consolidation are necessary in China's PC industry, amost tech hardware companies have not seen much top-line growth these past few years.

Sector view: We are cautious on the sector due to decelerating growth in smartphone units and ASP pressure in the supply chain. Thus, we are selectively positive on certain names due to their long-term sustainable margins and upside from Apple’s expected mshare recovery in 2014. We are positive on the larger screen iPhone/iPad cycles and acceleration of 4G-LTE adoption in China.

Sector view: We expect the Big 3 operators to launch 4G services in 2H14, and do not think 4G newcomers Ambit and Taiwan Star will bring material market disruptions, but we believe investors are likely to remain concerned unless proven otherwise. Despite trelated costs into 2014, we do not believe dividend sustainability will be materially compromised.

LCD Displays

Wireless Equipment

P/E


13 December 2013 78

TAIWAN FINANCIALS

In the sweet spot

2014 outlook We remain positive on Taiwan financials into 2014, especially the insurance-centric holding companies. We believe the liberalization of RMB will continue to provide opportunities for Taiwan banks to expand into onshore/offshore RMB business. We reiterate our view that offshore/overseas operations have been gaining significance for Taiwan banks over the past three years and the trend is likely to continue due to limited domestic growth (ex-SME business). We reiterate our investment thesis:

• An expected steepening yield curve, which helps unlock valuation discounts for Taiwan insurers vs. regional peers as they continue to improve their negative spreads legacy.

• Continuing ROE expansion on onshore and offshore RMB business opportunities.

• Event-driven catalysts: we expect some FHCs to complete M&A activity in early 2014, which we estimate will be broadly earnings-accretive.

China reform – supportive for offshore banking business We expect Taiwan’s banks to continue to see strong growth in their offshore banking units, which currently account for 30-40% of their pre-tax earnings. This will mainly be attributable to increased foreign currency loan demand from Taiwanese corporations operating in China and finding it difficult to get funding due to continuous monetary policy tightening there. We have seen US$ interbank rates picking up in 2H13 and expect this to continue into 2014. This should help improve interest margin for the big corporate banks. Mega and CTBC Financial are the two biggest US$ lenders in Taiwan, and we rate them both OW. Separately, non-interest income growth should continue to be supported by new RMB business, for which the Taiwan banks were first issued licenses in February 2013.

US tapering could make Taiwan a safe haven Unlike other emerging markets, we have seen a deleveraging in Taiwan corporates and households since the first round of quantitative easing in 2009. Liquidity still appears abundant domestically, with the LDR at c80%, a historical low. Rising property prices have been supported by a supply/demand mismatch and money flowing back into Taiwan from overseas due to the removal of the inheritance tax in 2009. We believe these factors would make Taiwan’s financial system very defensive should tapering happen in 2014. We do not expect NPL levels to pick up significantly as we are not yet seeing a renewed credit cycle domestically. Together with continued improvement in PPOP, we expect Taiwan banks’ ROE to continue to expand in 2014.

Key risks • Key upside risks to our sector outlook: 1) sector consolidation; 2) cross-strait M&A; and

3) a stronger-than-expected recovery in the global economy, which might lead to earlier-than-expected rate hikes.

• Key downside risks: 1) liquidity loosening again in China and the US; and 2) a slowdown in China, leading to worse-than-expected asset quality for domestic SMEs.

EQUITY RESEARCH Asia ex-Japan Banks Industry view: Neutral Asia ex-Japan Insurance Industry view: Neutral Noel Chan +886 2 663 84693 [email protected] BCSTW, Taiwan


13 December 2013 79

FIGURE 118 Increasing overseas/offshore contributions

FIGURE 119 Investment spreads continue to expand on higher bond yields

Source: CBC , Barclays Research Source: Company data, Barclays Research estimates

Stock picks • Cathay FHC (2882.TT; OW; PT NT$50.70): We expect Cathay FHC to continue to

benefit from a steepening yield curve in 2014. With average liability costs gradually coming down, coupled with upward re-pricing of asset yields on higher long-end rates, we forecast Cathay Life’s investment spread to continue to expand over the next two to three years. This should help unlock the valuation discount on its reported embedded value. Our sensitivity analysis shows that for every 100bp increase in bond returns for Cathay Life, its estimated NAV would increase by cNT$9/share. The stock is trading at 0.7x 2014E P/NAV, a 30% discount to its 10-year average of 1.0x P/NAV.

• Shin Kong FHC (2888.TT; OW; PT NT$12.30): We expect Shin Kong FHC will also benefit from a steepening yield curve. However, we believe it is most leveraged (on the upside) to a normalization of the yield curve if US tapering happens in 2014. Trading at 0.4x 2014E P/NAV (a 50% discount to the sector average), we see limited downside risk from here.

• CTBC Financial (2891.TT; OW; PT NT$22.00): We like CTBC Financial due to its leverage to Taiwan’s foreign currency lending business. The bank announced two acquisitions recently. Our analysis suggests that the deals would be ROE and EPS accretive for CTBC Financial, which we believe the market may not be factoring in. By leveraging its newly acquired life insurance arm, we believe CTBC Financial can improve its ROE in the near to medium term in a rising yield environment. CTBC Financial is now trading at 1.3x 2014E P/B against a sustainable ROE of 13.5% and a dividend yield of 3-4% for 2013E-14E. We consider it attractively valued at current levels.

• Mega FHC (2886.TT; OW; PT NT$27.00): With more than 50% of its income derived from its offshore banking unit (mainly US$ lending), we believe Mega would be the key beneficiary of a tightening environment in China and the US (if tapering happens). We expect foreign currency loan growth to be stronger than domestic loan growth in 2014, which would drive further margin expansion for Mega. With the biggest RMB deposit pool among all Taiwan banks, we believe Mega is also geared to the positive development of the offshore RMB business over the next two to three years. The stock is trading at 1.1x 2014E P/B with a cash dividend of 4-5% for 2013E-14E, and we consider it attractively valued at current levels.

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already breakeven in 2H12


13 December 2013 80

FIGURE 120 Taiwan Financials – stock picks

Current Price Pot. Up/

downside P/E (X) EPS growth P/B (X) ROE Div. Y

Rating price target to PT (%) 13E 14E 13E 14E 13E 14E 13E 14E 13E 14E

Chinatrust OW 19.5 22.0 13% 14.2x 10.9x -12% 30% 1.47x 1.37x 11.1% 13.0% 3.7% 4.2%

Mega OW 24.7 27.0 10% 12.4x 11.6x 5% 7% 1.25x 1.19x 10.3% 10.5% 4.5% 4.8%

Current Price Pot. up/

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Rating price target to PT (%) 13E 14E 13E 14E 13E 14E 13E 14E 13E 14E

Cathay OW 46.4 50.7 9% 0.7x 0.7x 0.7x 0.7x na na 2.0x 1.9x 18.4x 17.1x

Shin Kong OW 10.3 12.3 19% 0.4x 0.4x 0.3x 0.3x na na 1.0x 0.9x 8.9x 14.1x

Notes: Prices as of the market close on 9 December 2013. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Real Estate industry view is Negative. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, company data, Barclays Research estimates


13 December 2013 81

CHINA AND TAIWAN IT HARDWARE

PC demand visibility remains poor

2014 outlook • China demand mainly comes from corporate sector before Chinese New Year: For

traditional PCs (desktops and notebooks), we believe that demand will mainly come from the corporate sector into the new year, including government, academic institutions, the military and hospitals. According to the latest data from StatCounter, an Irish web analytics company, by the end of October 2013 about 54.13% of China’s PCs were still running on the Windows XP OS, which Microsoft will no longer support from early 2014. Termination of support services will inevitably push corporate customers to upgrade their computers to ensure information security, in our view.

• Expect rural areas to become the next driver: China’s PC industry has experienced rapid growth in recent years and has played an increasingly important role in the economy. Despite the weak global demand, the China market overtook the US to become the world’s largest PC market in 2012, according to data from IDC. Looking forward, we expect the next driver in China to come from sales in rural areas where PC penetration is relatively low.

• Pricing remains key, but with rising brand awareness: Based on data from China’s ZDC (ZOL Data Centre), the mid-range PC segment outgrew the high end and low end in terms of sales in 2013. PCs/NBs priced between RMB3,000 and RMB4,999 are most popular among Chinese customers with a market share of 46%. We also note the top-10 PC vendors had 95.8% of market share in 2Q13, indicating the increasing importance of brand awareness among Chinese customers.

• Local China brands to consolidate: We believe consolidation is necessary in the China PC industry, as most tech hardware companies have seen little top-line growth these past few years (and when they do it is at the expense of lower margins). Greater economies of scale with more product offerings are needed for companies to remain competitive and survive in the long term, in our opinion.

FIGURE 121 Price distribution of China DT market

FIGURE 122 Price distribution of China NB market

Source: ZOL Data Centre, Barclays Research Source: ZOL Data Centre, Barclays Research

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EQUITY RESEARCH Asia Ex-Japan IT Hardware Industry view: Neutral Kirk Yang +852 2903 4635 [email protected] Barclays Bank, Hong Kong Dale Gai +886 2 663 84697 [email protected] BCSTW, Taiwan Mark Chen +886 2 663 84530 [email protected] BCSTW, Taiwan Ava Chang +886 2 663 84676 [email protected] BCSTW, Taiwan


13 December 2013 82

China’s Party Plenum to benefit domestic IT industry China’s ruling party held its Third Plenary Session of the 18th Central Committee on 9-12 November in Beijing. We see the most important development as the consolidation and centralization of power, which is intended to enable deeper reform. We believe the domestic IT industry will benefit from the reform with the country’s promotion of: 1) information security; 2) Hospital Information System (HIS); 3) educational informatization; 4) military informatization; and 5) intellectual property protection. We expect the trend of IT localization prompted by the recent US PRISM scandal to continue given the session’s emphasis on national security.

FIGURE 123 Leading players in China’ domestic IT industry

Sector Company

Server Lenovo (0992.HK), Inspur (0596.HK), Sugon Storage Lenovo (0992.HK), Huawei Routers Huawei, ZTE (0763.HK) Office software Kingsoft (3888.HK) Source: Barclays Research

US tapering has little impact on the IT industry Tapering may change the global demand backdrop and impact exchange rates, which will indirectly affect the IT industry. However, we do not expect to see a major or direct impact on China’s PC market.

Margin contraction still the key risk for 2014 As we expected, more white-box and tier-2 players entered the China market in 2013 to compete with tier-1 PC/tablet companies such as Lenovo, Acer and Asustek. We expect Greater China PC players will continue to face competition risk in 2014, as well as: 1) weaker-than-expected demand for NBs/DTs due to smartphone/tablet cannibalization; 2) large ASP declines as a result of the intensifying price competition; and 3) slower-than-expected growth of China’s economy.

Stock picks • Lenovo (992.HK; OW; PT: HK$10): We believe enterprise products, such as corporate

PCs, servers and storage, are likely to be the next driver for Lenovo, along with smartphones and tablets. For both FY14 and FY15, we look for top-line growth of 10%-plus and net income growth of 20%-plus. Margins for smartphones should start to expand more rapidly due to expansion in emerging markets and more channel sales.

• Delta Electronics (2308.TW; OW; PT: NT$175): We believe Delta’s fast shift to higher-margin products, such as Industrial Automation (IA), networking, data centre and passive components will be the key margin driver. Its new hot press power choke, which rolled out in late-3Q13, has a profit margin of 40-50% (currently used in iPhone 5c/5s). We expect market share of wearable devices, NBs and tablets to eventually rise.

FIGURE 124 China/Taiwan IT Hardware – stock picks

Company Rating/ sector Price PT

Pot. up/downside

Market Cap P/E (x) P/BV (x) ROE (%)

Dividend yield (%)

name Ticker view (local) (local) to PT (%) (US$mn) FY13E FY14E FY13E FY14E FY13E FY14E FY14E

Lenovo 0992.HK OW/Neu 9.14 10.00 9 12,258 19.2 15.9 4.6 3.9 24.8 26.6 2.5Delta Elec 2308.TW OW/Neu 161.00 175.00 9 13,230 22.6 17.6 4.9 4.5 21.3 26.8 4.3Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan IT Hardware industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates



13 December 2013 83

TAIWAN LCD DISPLAYS

Selective, based on product trends

2014 outlook • We expect a 0-5% y/y decline in volumes of LCD TVs in China over the upcoming

Chinese New Year period as we see the China market has gradually normalized after it slowed down to a 15% y/y volume decline following the expiry of the energy-saving subsidy programme in June 2013.

• For LCD panels, we expect supply and demand will still be balanced in 2014 as it has been in 2013, since we anticipate the 5% y/y area growth can digest the 5% y/y supply increase. We expect an estimated 10%-20% UHD (4K2K TV) adoption rate will help panel makers to optimize their blended ASP, while consuming more capacity. For touch panels, we expect adoption in NBs will increase to 20% penetration in 2014E and we expect touch panel module ASP will decline by another 40% y/y.

• Catalysts: 1) New products such as a potential 12.9” convertible device and Apple TV may drive new applications or stronger replacement demand from 2H14; and 2) consolidation in LCD panel or touch industries could lead to a healthier pricing environment.

China import tariffs for panels: status quo • We expect China’s government will not lift the import tariff for TV panels to 8% from the

current 5% because domestic panel suppliers could not then fulfil demand for all sizes. However, if the government does successfully raise the import tariff to 8%, we believe more supply may be encouraged in China, thus impacting panel pricing.

Risks • Risks to our positive view on LCD displays and driver ICs: 1) slower TV demand as a result

of weaker GDP and property transactions; 2) a lower than 10% 4K2K penetration rate if customers are unwilling to pay a 20% premium; and 3) China’s government raises import tariffs, and Korea and China, but not Taiwan, increase supply.

• Risks to our negative view on touch panels: 1) NB touch penetration increases to more than 30%; 2) more new products adopt touch; and 3) industry consolidation is faster.

FIGURE 125 Driver IC makers benefit from 4K2K adoption

FIGURE 126 NB touch adoption only driven by ASP decline

Source: Displaysearch, Barclays Research estimates Source: Company data, Barclays Research estimates

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EQUITY RESEARCH Asia ex Japan LCD Displays Industry view: Positive Jamie Yeh +8862-6638-4689 [email protected] Barclays


13 December 2013 84

Stock picks • Radiant (6176 TT, OW; PT: NT$122): We like Radiant for: 1) its 6% dividend yield; 2) its

leadership position in Apple’s products (iPad, iMac, Macbook) and positioning for potential 12.9” products (it may gain share in the NB space); and 3) the potential for Apple TV in 2015.

• Novatek (3034, OW, NT$141): We like Novatek because: 1) its 5% dividend yield looks sustainable; we believe Novatek is protected against market share loss since more panel supply is coming from China domestic players, which are using Novatek’s driver IC solutions; 2) it should benefit from 4K2K TVs as UHD TV panels require 2-3 times the number of driver ICs, and we expect a 10% penetration rate for UHD in 2014E; and 3) it can improve its blended ASP in smartphones and will likely gain market share as smartphones move to HD720.

• Chipbond (6147 TT, OW, NT$72): We are Overweight on Chipbond because: 1) the gold bumping back-end industry is more consolidated now that Chipbond has 70% market share in Greater China and 35% global market share; 2) Chipbond can benefit from 4K2K TVs as its gross margin will be higher when utilization for 8” bumping and COF increases on growing driver IC content; and 3) Chipbond will likely benefit from the next-generation iPhone as we expect it is likely to increase its bumping area (die size) and testing time on the TDDI driver IC design.

• Wintek (2384 TT, UW, NT$6.5): We are Underweight on Wintek because: 1) the NB touch adoption rate is slower than expected, without touch-friendly applications being available to attract more users; 2) we expect competition from panel makers’ integrated solutions and from China in areas such as O Film to continue into 2014; and 3) our analysis shows that Wintek faces a gap of NT$3.8bn between its cash on hand and one-year debt such that it needs to conduct the planned GDR; we also expect the company will continue to face pressures with a 114% gearing ratio and we expect no fundamental improvement in profitability.

FIGURE 127 Taiwan LCD Displays – stock picks

Rating/ Industry Closing

Price target

Pot. up/downside Mkt cap EPS Dividend P/E P/B ROE (%)

Company Ticker view Prices (NT$) to PT (%) (US$m) 2013E 2014E % 2013E 2014E 2013E 2014E 2013E 2014E

Wintek 2384 TT UW/Pos 10.25 6.50 -37% 641 -3.33 -2.00 0% N.A. N.A. 0.6 0.7 -18.8 -13.3

Novatek 3034 TT OW/Pos 124.50 141.00 13% 2,559 7.59 8.43 5% 16.4 14.8 3.0 2.9 18.3 19.3

Chipbond 6147 TT OW/Pos 61.40 72.00 17% 1,348 4.42 5.29 6% 13.9 11.6 1.9 1.9 13.7 16.3

Radiant 6176 TT OW/Pos 107.00 122.00 14% 1,685 9.83 11.58 6% 10.9 9.2 2.4 2.1 22.4 22.4

Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan LCD Displays industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates



13 December 2013 85

TAIWAN NON-TECH MID-CAPS

Selective in our picks

2014 outlook Going into 2014, we recommend investors focus on what we view as fairly valued mid-cap stocks such as bicycle manufacturers (Merida, OW), automation companies (Hiwin and Airtac, both OW) and selected consumer stocks (Gourmet Master, OW) rather than chasing the more expensively valued contact lens stocks (St. Shine and Ginko, both EW).

• Automation: The new policy reforms in China present a short-term risk, in our view, but on a medium- to long-term view we are positive on the outlook for factory automation (FA) in China. In fact, we see these manufacturing reforms creating more opportunities for automation. We expect China to focus increasingly on factory upgrades and value-added manufacturing, and continue to reduce labour costs. Looking at global PMI numbers, the machine tool order trend in China/Japan/Taiwan, pneumatic component production in China/Japan, and linear guideway orders of THK Co. and Hiwin, we have seen signs of stabilising orders and an initial rebound in 2H13, and we expect positive y/y growth in 2014.

• Consumer: Within the Taiwan staples and general retail sectors, we recommend focusing on companies with a margin expansion story such as Merida and Gourmet Master (both rated OW), underpinned by the consumer upgrade and urbanization themes in China. For the bicycles sector, we see increasing need for leisure/sports bikes driving 2014E bicycle demand growth in China, based on a similar experience at Shimano in Japan. We also expect weaker US/EU markets (affected by poor weather conditions this year) to return to a positive trajectory next year. For Gourmet Master, we believe urbanization could increase consumer acceptance of western food and beverages such as bread and coffee. We believe key catalysts for the consumer space include better-than-expected China macro data, domestic consumer confidence and margin expansion.

Limited impact from the Plenum • Automation: The recent Third Plenum did not focus on industrials and manufacturing,

so we see limited changes, and we expect the guidelines for the financial sector proposed by China’s State Council on 5 July 2013 to continue to apply. One of the key guidelines is “industry reforms” – increasing credit support to key industries such as advanced manufacturing and modern IT, and a strict ban on new credit or direct financing to industries/projects with overcapacity.

• Consumer: We believe China’s loosening of its one-child policy would have a limited impact on the consumer market. Our China economist estimates that a partial relaxation of the one-child policy would lead to an 8% increase in the number of new babies born and that most of these births would be in urban areas, which are generally already competitive markets given multinationals’ focus.

EQUITY RESEARCH Asia ex-Japan Staples Industry view: Neutral Asia ex-Japan General Retail Industry view: Neutral Asia ex-Japan Capital Goods Industry view: Neutral Sidney Yeh +886 2 663 84677 [email protected] BCSTW, Taiwan Emily Huang +886 2 663 84692 [email protected] BCSTW, Taiwan Grace Li +886 2 663 84684 [email protected] BCSTW, Taiwan Sebastian Hou +886 2 663 84687 [email protected] BCSTW, Taiwan


13 December 2013 86

Tapering to have a minor impact on Taiwan automation companies • Capital goods: We believe both Hiwin and Airtac have a certain degree of leverage (debt

ratios of 97% for Hiwin and 81% for Airtac, as of 3Q13), and they rely heavily on short-term borrowings to fund their working capital. Therefore, if interest rates were to increase under the current low interest rate environment, both companies may face higher interest expenses and some downward pressure on their net profit margins. Among the two, we believe Airtac would be impacted less than Hiwin if interest rates were to increase, given that Airtac has demonstrated a superior working capital management capability with a lower cash conversion cycle.

• Consumer: Small- to mid-cap consumer stocks are trading at a premium to their historical average and breaching +1SD. If interest rates were to increase, we believe valuations could come under pressure. Nonetheless, Taiwan consumer companies generally have little leverage and solid balance sheets, in our view. Thus, we do not see higher rates driving interest expense to a level that would impact our earnings estimates.

FIGURE 128 China machine tool orders vs IP growth vs Hiwin sales

FIGURE 129 China pneumatic component production vs Airtac sales


FIGURE 130 Hiwin’s monthly sales vs THK’s monthly overseas orders

THK’s monthly orders in China/US/Europe – c80% of Hiwin’s sales in 2012 on our estimates – provide a good leading indicator of Hiwin’s future sales

Note: Red arrows represent the three months time difference between THK’s overseas orders and Hiwin’s monthly sales. Source: THK, Hiwin, Barclays Research

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13 December 2013 87

Stock picks Merida (9914 TT; OW; PT NT$243.7): We like Merida for its: 1) growing own-brand penetration with a high-end focus in China, positioning it favourably to ride trade-up demand; 2) capacity expansion in Jiangsu, scheduled to start contributing to revenue in 1Q14, which should boost sales/profits into 2014-15E; and 3) solid net cash position and cash flows. Despite seasonal weakness in 4Q13, we are positive on the 2014 growth outlook, mainly led by a recovery in the European/US markets and continued strength from China (20% y/y growth) on the back of: 1) its more aggressive, high-end product launches (ie, more road bikes with retail ASP two times those of mountain bikes); and 2) the expansion of points of sale in China, with management targeting 2,500 stores by 2015 compared to 2,000 currently.

Hiwin (2049 TT; OW; PT NT$264): Hiwin has shown improvements in its sales, margins, inventory turnover, and account receivables turnover in 2H13, due to the successful transition of its new distributors in China, as well as the stabilizing growth in China’s economy. We believe THK’s order trend is a leading indicator of Hiwin’s sales (due to the two-three-month leadtime), and that the stronger growth in THK’s orders in September and October should be positive for Hiwin’s sales y/y growth. In addition, our Japan colleague Tomohiko Sano’s positive view on THK’s future order rebound suggests a prolonged y/y growth cycle for Hiwin throughout 2014. We reiterate our Overweight rating on Hiwin.

Airtac (1590 TT; OW; PT NT$255): We expect continued order growth for Airtac through 2015, due to: 1) continued expansion of its sales branches and product portfolio – Airtac’s new product launches have increased 40%+ y/y in 2013, which we expect to help sustain growth in the next three years; 2) it sustaining a gross margin at >50% for the next two years on vertical integration and rising pricing power in China due to market share gains; and 3) the move into electric components starting in 2015E, which we estimate could impact our 2015 EPS forecast by c6% if the new business materialises.

Gourmet Master (2723 TT; OW; PT NT$223): 2013 was a year of adjustments for Gourmet Master with the launch of second-generation stores and US store openings, and we believe 2014 will be the year the company will reap the benefits. We see new growth drivers coming from the US operations, with continued improvements in same-store-sales growth and store expansion driving China growth. We forecast US sales will reach 15% of total sales by 2014E and 23% by 2015E. Higher US OPM could lead to a greater OP contribution, especially after we factor in labour cost savings of c5-6ppt from the automation at its central kitchen. We reiterate our OW rating.

FIGURE 131 Taiwan non-tech mid-caps – stock picks

Price Pot. up/

downside Company/

Industry Mkt Cap.

(mn in P/E P/B ROE %

Company Ticker Target Price to PT (%) Rating local curr) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E

Airtac 1590.TW 255.0 253.0 0% OW/Neu 40,607 26.4 21.6 18.3 4.6 4.3 3.9 23% 21% 22%

Hiwin 2049.TW 264.0 252.0 4% OW/Neu 63,963 33.1 25.2 20.9 5.5 4.8 4.2 18% 20% 21%

Merida 9914.TW 243.7 232.0 5% OW/Neu 66,061 22.5 20.0 17.5 6.5 5.8 5.1 31% 31% 31%

Gourmet Master 2723.TW 223.0 208.5 6% OW/Neu 29,424 43.4 21.5 16.5 4.8 4.3 3.8 11% 21% 25%

Notes: Prices as of the market close on 9 December in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Bloomberg, Barclays Research estimates



13 December 2013 88

TAIWAN PETROCHEMICALS

Upturn in profit cycle and higher dividends from 2014

A higher profit cycle Despite seasonal weakness in 4Q13, our recent visits to local companies in the petrochemical industry actually suggested that global demand is picking up. This has now filtered into the chemical space, with the chemical companies we met with turning more positive on a “demand recovery” in 2014, from a “flattish outlook” previously. Meanwhile, we believe US tapering (Barclays US economist expects the Fed to cease quantitative easing by June 2014) is another indication that demand in mature markets is back on track. Together with disciplined supply additions, we expect most chemical products to see better margin spreads in 2014. Moreover, we expect the refinery business to sustain decent profits in 2014 given the balanced oil demand/supply.

We prefer selected products – SM, EG and benzene We believe prices of aromatic derivatives, such as styrene monomer (SM) and benzene, could sustain their strength into 2014 given healthy demand amid limited supply additions. Longer term, we believe aromatic derivatives (SM, benzene) and propylene derivatives (PP) should be more profitable than ethylene derivatives (PVC, PE), which are seeing greater supply pressure from the US shale gas capacity expansion. Among the Formosa Group companies, FCFC has larger exposure to aromatic and propylene derivatives than Nan Ya and FPC.

Less capex burden implies higher dividend We expect Formosa Group companies to deliver 9-25% EPS growth in 2014 given: 1) higher production utilization rates; and 2) better margin spreads for most chemical products. In addition, we expect higher dividends for 2014 and 2015 given: 1) our assumptions for profit growth for 2013 and 2014; and 2) the lower capex burden and thus better cash flows, as its investment for steel plant in Vietnam and pipeline replacement are nearing completion in 2013.

FIGURE 132 Formosa Group – petrochemical product margin spreads

FPCC FPC Nan Ya FCFC

Ethylene Propylene Butadiene PVC HDPE LDPE/EVA LLDPE PP AN EG POY PTA SM Phenol Benzene ABS PX

2014 outlook Up Up Up Flat Flat Flat/up Flat Flat Flat Up Flat/up Flat Up Flat Decent Flat Flat

Historical avg. 351 377 798 147 236 388 232 131 323 300 482 166 196 599 246 140 5

Peak 811 703 3,079 275 791 1,037 868 374 1,138 701 1,180 338 668 1,175 779 411 505

Trough 92 85 -1 -53 -154 53 -134 -159 -124 8 59 -76 42 119 -431 -429 -915

2007 495 424 355 188 213 354 204 202 399 318 359 117 181 n.a. 367 194 -174

2008 397 392 1,110 200 385 582 401 240 374 261 405 146 239 n.a. 131 73 -413

2009 288 336 477 127 380 472 383 188 535 162 275 146 190 280 190 136 3

2010 373 475 1,195 123 258 579 309 104 735 276 469 221 169 901 205 227 -157

2011 290 465 2,016 132 243 626 224 61 594 517 440 155 140 655 168 3 347

2012 306 368 1,421 132 253 399 200 41 274 296 414 54 137 359 286 59 295

10M13 390 460 559 136 291 562 267 62 124 274 391 74 253 269 400 174 281 Note. PVC = Polyvinylchloride; HDPE = High Density Polyethylene; LDPE = Low Density Polyethylene; LLDPE= Liner Low Density Polyethylene; PP= Polypropylene; AN=Acrylonitrile; PS= Polystyrene; ABS= Acrylonitrile- Butadiene- Styrene; PX= Para-Xylene; PTA= Purified Terephthalic Acid; SM= Styrene Monomer. Source: Bloomberg, Barclays Research estimates

EQUITY RESEARCH Asia ex-Japan Oil and Gas Industry view: Positive Sidney Yeh +886 663 84677 [email protected] BCSTW, Taiwan Grace Li +886 2 663 84684 [email protected] BCSTW, Taiwan


13 December 2013 89

FIGURE 133 Styrene monomer (SM) – global industry operating rate

FIGURE 134 Nan Ya Plastics – MEG utilization trend

Source: PCI, Barclays Research estimates Source: Bloomberg, Barclays Research

Stock picks Formosa Chemicals (1326 TT; OW; PT NT$100.60): We like Formosa Chemicals (FCFC) for its: 1) strong margin spreads for SM in 2013, which we expect to carry on into 2014 due to tight supply and a healthy demand outlook; 2) benzene and PX products, which we expect to deliver decent profit margins in 1H14; 3) weak product cycles for PTA and phenol, which we believe have already bottomed as some peers have shut down production; and 4) resilient volume growth in nylon fibre.

Nan Ya (1303 TT; OW; PT NT$77.60): We reiterate our OW rating on Nan Ya Plastics as we believe the growth outlook for the company remains bright into 2014 following a strong recovery in 2013 given: 1) we forecast MEG to generate higher margins in 2014 due to small new capacity additions amid a decent demand recovery (textile filament and beverage packaging); and 2) we believe a turnaround in the DRAM business is sustainable into 2014. These are the key drivers for 23% y/y EPS growth in 2014, on our estimates. We also forecast profit for the plastic and fibre business to grow 14-30% y/y due to the improving macro environment.

FIGURE 135 Taiwan petrochemicals – stock picks

Current PricePot. up/

downside P/E (x) P/B(x) Div Yield (%) ROE(%)

Name Ticker Rating Price Target to PT (%) 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E

Taiwan Petrochemicals

Nan Ya Plastics 1303.TW OW 68.40 77.60 13.0 22.8 18.5 1.9 1.9 2.8 3.5 8.8 10.2

Formosa Chemicals 1326.TW OW 85.20 100.60 18.0 18.2 16.7 1.7 1.6 3.4 3.9 9.6 9.8

Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Oil & Gas industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Bloomberg, Barclays Research estimates

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13 December 2013 90

TAIWAN PROPERTY

Healthy outlook for Taiwan property; we prefer Taipei City

Pre-sale market transaction volumes picking up Following a quiet period in July-September, the overall pre-sales market in Taiwan improved in October, with sell-through in Taipei City and Xinbei City up 12% and 13% (to NT$5.9bn and NT$22.9bn), respectively, from September, while ASPs held up well. The sales ratio was at 61% in October, which we consider a healthy level (we view 60% as a threshold point to identify whether the market is in undersupply or oversupply). Given light new supply additions in the market in November and December, we expect the sales ratio to move up towards year-end on a recovery in demand. We believe the pick-up will be due to a gradual alleviation in concerns over unfavourable interest rate movement and revisions to regulations.

We continue to prefer Taipei City Among the major metropolitan areas, we continue to prefer Taipei City given its resilient upgrade/replacement demand and continued tight supply. On the demand side, the government cooling measures (both monetary and fiscal) introduced since 1Q10 have driven property speculators from Taipei to areas such as Taoyuan, Taichung and Kaohsiung, where control measures are less rigorous. This is evidenced by lower transaction volumes and less price appreciation in Taipei City compared to other cities/areas in Taiwan. Despite declining speculative demand, we believe replacement/upgrade demand remains solid, mainly supported by healthy household balance sheets.

We see the downward trend in new supply of residential property in Taipei City as the key factor supporting property prices. That said, construction approvals granted by the Taipei City government declined from 2.2m sqm in 2007 to 1.1mn sqm in 2012. This figure contracted a further 8% y/y for 9M13, and we attribute this to less land being available and the city’s unfavourable urban renewal policy.

Macro concerns alleviating Since July, property transaction volumes have been on a downward trend due to weakening interest, with prospective buyers concerned about macro issues such as the risk of an interest rate rebound or another round of property tax reform. We believe these concerns have been largely alleviated following the announcement by the Ministry of Finance on 13 November that it plans to make minimal revisions to Taiwan’s luxury property tax. The only new revision is the inclusion of industrial land transactions in non-urban areas, which is not relevant to most property participants (either individuals or property developers).

Low interest rate environment remains; limited impact from US tapering The other lingering market concern is a possible upward movement in interest rates and mortgage rates given uncertainty over global monetary policy, in particular the US Fed tapering policy. Recently, we have seen loose monetary policy in several economies (including Europe, Japan and Australia). Our economists continue to believe interest rates in Taiwan are likely to be unchanged in 1H14, and that any rate change in the next two years would be small. While mortgage rates are volatile in the US (they moved up by 1ppt in 1H13), the mortgage rate in Taiwan is stable and flattish, according to our banks analyst. We expect Taiwan’s mortgage rate volatility will be minimal given excess liquidity in the local banking system (78% loan-to-deposit ratio as at Sep 2013).

EQUITY RESEARCH Asia ex-Japan Real Estate Industry view: Negative Sidney Yeh +886 663 84677 [email protected] BCSTW, Taiwan Grace Li +886 2 663 84684 [email protected] BCSTW, Taiwan


13 December 2013 91

FIGURE 136 Pre-sale market sell-through in Taipei City (%)

FIGURE 137 Property supply in Taipei City remains disciplined, given low construction approvals by the government

Source: Housing Weekly, Barclays Research Source: Ministry of Interior, Barclays Research

Stock picks Kindom Construction (2520 TT; OW; PT NT$50.50): Kindom is our top pick in Taiwan’s property space due to: 1) its strong forecast earnings growth for 2014 and 2015 on the completion of several projects with good sell-through – we also expect profit momentum to be supported in 2016 and 2017 due to the company’s landbank of luxury residential projects in Xinyi district, Taipei City; and 2) its attractive valuation – we believe Kindom is attractively valued among Taiwan property stocks, trading at a 47% discount to estimated NAV for 2013 and at only 4.6x 2014E EPS.

Huaku Development (2548 TT; OW; PT NT$108.50): We like Huaku for its: 1) solid brand equity and management execution, as evidenced by its strong sell-through during August-October, when market sentiment turned negative; 2) good earnings visibility into 2016E; and 3) our expectation for a sustainable yield (at 8-9%) into 2017E.

FIGURE 138 Taiwan Real Estate – stock picks

NAV Price Current Pot. up/

downside Discount P/E(x) P/B(x) Div Yield (%) ROE(%)

Name Ticker Rating Base Target Price to PT (%) to NAV 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E

Kindom 2520.TW OW 72.2 50.5 38.0 33% -47% 17.7 4.6 1.7 1.3 2.8 9.7 9.9 31.7

Huaku 2548.TW OW 135.7 108.5 86.0 26% -37% 8.1 7.4 1.7 1.5 6.2 8.8 22.4 21.7

Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Real Estate industry view is Negative. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Bloomberg, Barclays Research estimates

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13 December 2013 92

TAIWAN SEMICONDUCTORS

New drivers for semiconductors

2014 outlook • Affected by structural demand weakness from notebook and PC markets, coupled

with seasonal demand and inventory adjustment during the Chinese New Year, we expect Asia ex-Japan foundry/OSAT vendors to guide for an 8-10% q/q moderate sales decline in 1Q14E. This suggests a 4Q13-1Q14 semiconductor downturn due more to seasonal factors than cyclical ones.

• We expect foundry/OSAT sector sales growth of 8-10% y/y for 2014E. In 2Q14 we expect sales growth of >15% q/q, driven by new demand drivers and production switch of Apple application processors to Taiwan from Korea starting 1Q14E.

• Catalysts: New technology drivers include fingerprint sensors; near-field communications (NFC); smart glasses/watches; 3G base station deployment in emerging markets and 4G in developed countries; 4K2K TVs and smartphones; and data centre cloud computing, using a 64bit ARM-based micro server A57 IP core for storage and web front-end.

China impact • Within our coverage universe, MediaTek (OW) has the largest sales exposure to

China smartphone demand, as well as smartphone demand from outside China, but these products are manufactured in China. We expect China’s smartphone market to grow 35-40% y/y in 2014 to 500-600mn units, outperforming global market growth of 30% y/y. This shipment growth should benefit MediaTek and some of its supply chain vendors like ASE (OW), SPIL (OW) and Kinsus (OW). Also potentially benefiting MediaTek is the recent anti-monopoly investigation case into Qualcomm mounted by the China National Development and Reform Commission – we estimate this could result in lower 3G/4G licensing fees as a percentage of handset free on board (FOB) prices for MediaTek customers.

US tapering impact • US tapering will likely trigger an interest rate increase and US dollar appreciation

against other currencies. Within our coverage universe, ASE has the largest exposure to this risk, we believe. However, during August-September 2013 ASE raised US$115mn in cash through a new rights issue and raised US$400mn in zero-coupon bonds, with the aim of cutting its US$ debt exposure and its net debt-to-equity ratio of 56% by 3Q14.

Risks • Upside risks to our sector view include: 1) faster-than-expected global economic

recovery; 2) stronger-than-expected inventory replenishment across supply chain vendors; and 3) stronger new tech product demand.

• Downside risks include: 1) growth deceleration in smartphones in developed countries, which might drive ASP and margins lower for semiconductor vendors; 2) rising competition for MediaTek from Spreadtrum and RDA Microelectronics consolidation; and 3) rising competition for TSMC from Intel, Samsung and Globalfoundries in 14nm FinFET development.

EQUITY RESEARCH

Asia ex-Japan Semiconductors


Andrew Lu

+886 2 663 84698

[email protected]

BCSTW, Taiwan

Jamie Yeh

+886 2 663 84689

[email protected]

BCSTW, Taiwan

Sebastian Hou

+886 2 663 84687

[email protected]

BCSTW, Taiwan


13 December 2013 93

FIGURE 139 Months of inventory for global fabless companies

FIGURE 140 Comparison between customer demand and foundry supply

Source: Company data, Barclays Research Source: Company data, Barclays Research estimates

Stock picks • TSMC (2330 TT; OW; PT: NT$139): We forecast a 2014-16E sales CAGR of >10% for

TSMC on three key catalysts: 1) application processor (AP) wafer starts for Apple should start in 1Q14E, to account for 6%/10% of 2014/15E sales; 2) in addition to smartphone growth of 30%/17% y/y in 2014/15E, impacts from fingerprint sensors, wearable devices and 64bit ARM CPUs for cloud storage and front-end environments; 3) a structural profitability improvement on lower 20/16nm capex.

• MediaTek (2454 TT; OW; PT: NT$445): We like MediaTek for new products such as its MT6592 octa-core SoC, MT6290 4G LTE baseband 4G SoC and 64bit AP on 20nm for developed markets, as well as ex-China emerging markets expansion. By leveraging strong sales, MediaTek should return to a three-year OPM high of 20% or more. In addition, if Qualcomm is required by China’s government to lower its licensing fee as a percentage of FOB prices to a fixed US$ amount per smartphone, we estimate this could result in lower costs for MediaTek customers.

• ASE (2311 T; OW; PT: NT$35): By expanding its fingerprint system in package (SiP) and application processor flip-chip chip-scale packaging (FC-CSP) with WiFi module business, we expect Apple to account for 34-35% of ASE’s sales in 1-2 years, from 10% in 1H13E.

• Nan Ya PCB (8046 T; UW; PT: NT$31): Three structural overhangs drive our UW rating: 1) Nan Ya PCB may continue to gain PC CPU substrate share from its Japanese peers; however, a 5-9% unit decline CAGR in the global PC market in 2014-16E (per Barclays forecasts) could drive greater-than-expected price competition in a fight for a piece of the shrinking pie; 2) we estimate gross margin will be capped below 10% long-term as CPU substrate gross margin is weaker than the average; and 3) we are not convinced the company can shorten its technology lag of 9-12 months behind Ibiden and Shinko.

FIGURE 141 Taiwan Semiconductors – stock picks

Price Diff MKT Cap EPS P/E (x) P/BV (x) ROE

(%, single yr) Stock Sector Ticker Rating Close PT (%) (US$b) FY13F FY14F FY13F FY14F FY13F FY14F FY13F FY14FTSMC Foundry 2330 TT OW/Pos 105.0 139.0 32 92.15 7.02 7.93 14.9 13.2 3.3 2.8 21.9 21.5ASE OSAT 2311 TT OW/Pos 29.8 35.0 18 7.81 1.96 2.43 15.2 12.3 2.0 1.8 12.9 15.0Mediatek Fabless 2454 TT OW/Pos 428.0 445.0 4 19.55 19.62 23.83 21.8 18.0 3.5 3.2 16.2 17.7Nan Ya PCB Substrate 8046 TT UW/Pos 35.6 31.0 -13 0.78 -0.79 1.00 N.A. 35.5 0.8 0.7 -1.7 2.1Notes: Prices as of the market close on 09 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Semiconductors industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com. Source: Bloomberg, Barclays Research estimates

-

0.5

1.0

1.5

2.0

2.5

3.0

1Q06

4Q06

3Q07

2Q08

1Q09

4Q09

3Q10

2Q11

1Q12

4Q12

3Q13

Months of

Inventory

US fabless MOI Taiwan fabless MOI

-40%

-20%

0%

20%

40%

60%

80%

100%

1Q06

4Q06

3Q07

2Q08

1Q09

4Q09

3Q10

2Q11

1Q12

4Q12

3Q13

2Q14E

Q/Q

Top fabless q/q demand TSMC q/q sales



13 December 2013 94

TAIWAN TELECOM SERVICES

Competitive uncertainties into 4G but dividends look sustainable • We expect the big 3 Taiwan operators to launch 4G services in 2H14. Among them

Chunghwa Telecom (CHT) is the best positioned, in our view, given the better spectrum resources it has acquired (also at the highest price). Taiwan Mobile (TWM) and Far EasTone (FET) need to cooperate on a potential spectrum swap, we believe, in order to launch 4G services on the 1800MHz band – otherwise, both could end up only launching 4G services on 700MHz band in 2H14, where handset availability may still be a problem.

• Two unknowns into 4G in 2014: We do not think 4G newcomers Ambit and Taiwan Star will bring material market disruption, but we believe investors are likely to remain concerned unless proven otherwise. On the positive front, the big 3 operators are hopeful of introducing tiered data pricing into 4G, which could bring higher revenue should it come through.

• Despite the 4G-related costs into 2014, we do not believe dividend sustainability is materially compromised. We estimate a c8-10% potential impact on EPS in 2014 and DPS could be commensurately lowered, but this should still leave c6% yields for FET and TWM in 2014.

• CPI related changes to voice tariffs will continue to follow through into 2014, as will interconnect rate changes, as mandated in early 2013. These are built into our estimates. We do not expect but would not fully rule out further changes

The two big unknowns into a 4G era in Taiwan

Can tiered data pricing come through? All operators have been cautiously optimistic on being able to introduce tiered data pricing for 4G services, citing that initial regulatory feedback has been generally supportive. If tiered or higher data pricing were to come through, we see a case for potentially higher revenues, and this could offset the earnings risks brought by additional 4G costs somewhat. Nevertheless, we note that flat data pricing for unlimited data usage is the norm for 3G services in Taiwan, and the operators’ previous initiatives for re-pricing (up) have been unsuccessful.

Potential competitive disruption from the two newcomers Given the nature of telecom business, we see the biggest risks to the big 3 operators to come internally. Two newcomers, Ambit and Taiwan Star, have won some 4G spectrum on 700 and 900MHz bands. We do not believe either can be successful in a mature market like Taiwan, but reckon investors will still be concerned about potential market disruptions to the currently (reasonably) benign competitive environment, unless proven otherwise.

Impact from US tapering There are two specific impacts to think about, in our view:

• Valuations for all three stocks (FET, TWM and CHT) are at a considerable premium to historical 10-year averages. We believe this is to some extent driven by yield re-pricing amidst a low interest rate environment. Should interest rates start to rise, we believe valuations could then come under pressure.

• Debt levels are, by and large, very manageable. Balance sheets are solid as well. Consequently, we do not see higher rates as driving higher interest costs that would move the needle materially on earnings estimates.

EQUITY RESEARCH Asia ex-Japan Telecom Services Industry view: Neutral Anand Ramachandran +65 6308 3895 [email protected] Barclays Bank, Singapore


13 December 2013 95

Stock picks • Far EastTone remains our top pick in Taiwan, given its relatively better growth prospects

compared with its peers. We forecast 2013-16 EBITDA and EPS CAGRs of 5% and 8.6%, respectively.

• We estimate a c10% impact to EPS from 4G-related costs in 2014, and DPS could be commensurately lower, but this should still leave c6% yields, which is sustainable in our view. Nevertheless, FET’s willingness to go beyond a 100% payout could offset this – but we think that will depend on the competitive dynamics (into the 4G era) becoming clearer.

• With c18% potential total shareholder return, we are OW on FET.

FIGURE 142 Taiwan telcos – potential financial impacts from 4G-related costs

*For sensitivities, we assume spectrum cost to be paid in 2013; in addition, we assume capex increase by 10% in 2014/15 from our current estimates. Source: Barclays Research estimates

FIGURE 143 Taiwan Telecom Services – stock picks

Rating/ Industry Price

Pot. up/downside Mkt Cap P/E (x) EV/EBITDA (x) Div. yield (%)

Companies Ticker View Price Target to PT (%) (US$mn) 2013E 2014E 2013E 2014E 2013E 2014E

Far EasTone 4904 TT OW/Neu NT$64.2 NT$72.0 12.1% 7.1 16.9 15.3 7.6 7.2 5.9% 6.5%

Taiwan Mobile 3045 TT EW/Neu NT$95.8 NT$105.0 9.6% 11.1 15.4 14.7 8.4 8.2 4.4% 5.0%

Chunghwa Telecom 2412 TT UW/Neu NT$92.7 NT$86.0 -7.2% 24.4 19.1 18.2 19.1 18.2 5.2% 5.7%

Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Telecom Services industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Bloomberg, Barclays Research estimates

2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E

Our current estimates (no impact from 4G)

EPS (NT$) 4.85 5.10 5.32 5.90 6.52 6.82 3.79 4.19 4.57

DPS (NT$) 4.38 4.6 4.8 5.90 6.52 6.82 3.80 4.20 4.60

net debt/EBITDA (x) net cash net cash net cash 0.18 0.16 0.16 net cash net cash net cash

net debt/equity (%) net cash net cash net cash 11.3% 9.9% 10.4% net cash net cash net cash

FCF yield (%) 6.5% 3.6% 5.2% 6.2% 6.5% 6.8% 4.8% 6.5% 7.5%

dividend yield (%) 4.7% 5.0% 5.2% 6.2% 6.8% 7.1% 5.9% 6.5% 7.2%

Sensitivity analsysis

Spectrum costs

EPS (NT$) 4.83 4.91 4.98 5.86 6.02 6.03 3.71 3.82 3.94

EPS revision vs. curr est (%) -0.4% -3.7% -6.3% -0.7% -7.7% -11.6% -2.1% -9.0% -13.8%

FCF yield (%) 1.1% 3.1% 4.7% -5.1% 6.1% 6.5% -10.1% 6.1% 7.2%

net debt/EBITDA (x) net cash net cash net cash 0.82 0.82 0.82 0.83 0.79 0.69

net debt/equity (%) net cash net cash net cash 51.1% 52.2% 53.8% 29.3% 29.5% 27.0%

DPS (NT$) 4.36 4.43 4.49 5.86 6.02 6.03 3.70 3.80 3.90

DPS revision vs. curr est (%) -0.5% -3.7% -6.5% -0.7% -7.7% -11.6% -2.6% -9.5% -15.2%

dividend yield (%) 4.7% 4.8% 4.8% 6.1% 6.3% 6.3% 5.8% 5.9% 6.1%

Chunghwa Telecom Taiwan Mobile Far EasTone

NT$39,075mn NT$29,000mn NT$31,315mn



13 December 2013 96

CHINA AND TAIWAN WIRELESS EQUIPMENT

Focus on next iPhone cycle and 4G-LTE in China

2014 outlook • Selective on sector beneficiaries into Chinese New Year: We are cautious due to

decelerating growth in smartphone units and pricing pressure in the supply chain. Thus, we are selectively positive on certain companies due to their long-term sustainable margins and upside from Apple’s anticipated recovery in market share recovery in 2014.

• Larger iPhone and 4G-LTE to watch in 2014: Due to expectations for limited innovative and revolutionary new smartphone models in 2014, we expect more intense competition in Android OEMs when most of the hardware upgrade momentum has been saturated. We are only positive on two trends: larger-screen iPhone/iPad cycles and acceleration of 4G-LTE adoption in China. Overall, we forecast 30% y/y growth in global smartphone units and 50% y/y growth in China, mostly in the low-end segment.

• Drivers of earnings recovery in sub-sectors: 1) We expect stable margins (especially operating margin) for Apple’s top-tier component suppliers in 2014 due to Apple’s shortened product cycles as it increases the number of its new models. A stronger iPhone replacement cycle should drive upside to y/y earnings growth for selected suppliers such as Largan (OW). 2) While we expect volume growth in China’s smartphone supply chain, margin and pricing pressure implies downside earnings risk for China OEMs and component makers. 3) The 4G-LTE capex cycle in China should

benefit wireless equipment vendors, in our opinion.

FIGURE 144 Barclays global smartphone and tablet shipment forecasts

FIGURE 145 China smartphone market – ASP, total shipments in China

Source: Gartner, Barclays Research estimates Source: Gartner, Barclays Research estimates

Rise of the Chinese brand

Market shares gains for Chinese brands Improvement in mobile system design, competitive prices and stronger distribution channels have led Chinese brands to gain significant market share in the local market in 2013 from non-Chinese players like Nokia. We expect 75% of 2014 China smartphone shipments to be from local brands. Despite greater economies of scale for leading brands like Huawei or Lenovo, we do not expect near-term margin improvement given the severe price competition in the China market. The overseas markets, on the other hand, offer

299

473

680

954

1,240

1,445

18 70136

209 245 284

0

200

400

600

800

1,000

1,200

1,400

1,600

2010 2011 2012 2013E 2014E 2015E

Smartphone (mn units) Tablet (mn units)

2,060

1,822

1,533 1,320

1,056 919

28 78 205

360 542 625

0

500

1,000

1,500

2,000

2,500

2010 2011 2012 2013E 2014E 2015E

ASP (RMB) China smartphone shipment (mn units)

EQUITY RESEARCH Asia ex-Japan Wireless Equipment & Products Industry view: Positive Dale Gai +886 2 663 84697 [email protected] BCSTW, Taiwan Kirk Yang +852 2903 4635 [email protected] Barclays Bank, Hong Kong Ava Chang +886 2 663 84676 [email protected] BCSTW, Taiwan Mark Chen +886 2 663 84530 [email protected] BCSTW, Taiwan


13 December 2013 97

future upside for these China brands, in our view, with growth opportunities and better margins. We expect Lenovo, TCL and Huawei to lead the market share gains in non-China markets from 2014.

China’s Party Plenum stimulates domestic consumption China’s Party Plenum is likely to stimulate demand for domestic consumption. The sector may see a slight positive impact as more consumer electronics products may be purchased.

US tapering has little impact on the smartphone industry Tapering may slow down global demand and change exchange rates, which will indirectly affect the companies we cover. However, we do not see a major and direct impact.

Risks Downside risks to our positive industry view include: 1) disappointing iPhone sales in 2H14 if the upgrade cycle in iPhone does not occur; 2) volatile margins in the supply chain due to fierce price competition; and 3) a slowdown in China smartphone demand caused by a weak economic situation, causing it to fail to meet our bullish shipment forecast for 540mn units in 2014E.

Stock picks Largan (3008 TT; OW; PT NT$1,300): We think Largan’s technology and cost leadership should continue into 2015 due to even higher entry barriers for potential competitors. Largan fits our “cherry picking” thesis for smartphone stocks given its deep penetration in mainstream China smartphones, prospective margin improvement, and bargaining power with customers on prices.

Catcher (2474 TT; OW; PT NT$205): We believe Catcher is likely to start shipping iPhone 5s casings in 4Q13-1Q14, based on commentary from the company during a recent conference call. This schedule is a few months ahead of our current projections and could lead to potential upside surprise in terms of 4Q13-1Q14 sales. We forecast Catcher’s smartphone sales will increase by at least 50% y/y in 2014E, before we factor in potential Samsung and next-generation iPhone orders.

FIGURE 146 China/Taiwan Wireless Equipment & Products – stock picks

Company Rating/ sector Price PT

Pot. up/downside

Market Cap P/E (x) P/BV (x) ROE (%)

Dividend yield (%)

name Ticker view (local) (local) to PT (%) (US$mn) FY13E FY14E FY13E FY14E FY13E FY14E FY14E

Largan 3008 TT OW/Pos 1,070.00 1,300.00 21 4,853 15.4 13.0 4.9 4.0 35.4 34.1 3.0

Catcher 2474 TT OW/Pos 180.50 205.00 14 4,581 10.1 10.6 1.9 1.7 20.4 17.2 3.3

Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Wireless Equipment & Products industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Bloomberg, Barclays Research estimates



13 December 2013 98

Appendix APPENDIX


13 December 2013 99

GREATER CHINA COVERAGE UNIVERSE FIGURE 147 China/Hong Kong coverage universe

Pot. Up/

DownsideMkt Cap.

(mn in P/E P/B EV/EBITDA ROE %Company Ticker PT Price (%) Rating local curr) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Basic Industries Aluminum Corporation of China 2600.HK 2.30 2.83 -18% UW 38,273 -9.2 -21.0 134.8 0.7 0.8 0.8 32.4 18.5 13.6 -7% -4% 1%Angang Steel 0347.HK 6.00 5.79 3% EW 41,890 43.5 51.7 34.9 0.7 0.7 0.7 7.5 8.7 7.9 2% 1% 2%Anhui Conch Cement 0914.HK 29.53 30.25 -2% OW 160,304 15.1 11.9 10.9 2.3 1.9 1.7 9.1 7.0 6.1 17% 19% 18%China Coal Energy 1898.HK 5.50 5.04 9% EW 66,824 10.4 10.7 8.4 0.6 0.6 0.6 7.4 7.0 5.2 6% 6% 7%China National Building Material 3323.HK 6.35 8.86 -28% UW 47,835 6.6 5.9 5.3 1.1 0.9 0.8 7.7 7.2 6.8 19% 18% 17%China Shanshui Cement Group 0691.HK 3.08 3.23 -4% EW 9,096 7.4 8.6 6.3 0.8 0.7 0.7 7.1 7.1 6.2 11% 9% 12%China Shenhua Energy 1088.HK 33.00 25.70 28% OW 511,173 8.8 9.0 8.2 1.5 1.4 1.2 5.5 5.4 4.9 18% 17% 17%Jiangxi Copper 0358.HK 16.00 14.50 10% EW 50,210 11.4 14.6 14.2 0.9 0.9 0.8 8.3 8.5 7.9 8% 6% 6%Maanshan Iron & Steel 0323.HK 2.20 2.20 0% EW 16,941 31.4 27.2 9.8 0.6 0.6 0.5 5.8 5.0 3.9 2% 2% 6%Yanzhou Coal Mining 1171.HK 7.00 7.89 -11% UW 38,806 42.9 10.9 9.8 0.7 0.7 0.7 8.0 7.1 6.5 2% 7% 7%China Hongqiao Group 1378.HK 6.00 4.75 26% OW 27,954 4.1 3.3 2.9 0.9 0.7 0.6 4.4 3.4 2.8 24% 25% 23%China Resources Cement 1313.HK 5.32 5.40 -1% EW 35,204 12.8 10.5 9.8 1.5 1.3 1.2 8.7 7.5 6.7 13% 14% 14%CST Mining Group 0985.HK 0.12 0.07 71% EW 1,873 2.2 259.3 31.1 0.3 0.3 0.3 1.2 2.0 1.6 13% 0% 1%IRC 1029.HK 1.40 0.80 74% OW 4,358 -19.4 299.6 9.2 0.6 0.6 0.5 -372.0 22.0 5.6 -3% 0% 6%MMG 1208.HK 3.00 1.85 62% OW 9,786 17.0 11.6 9.2 0.8 0.7 0.7 4.6 4.5 3.9 5% 7% 8%UC Rusal 0486.HK 3.00 2.27 32% EW 34,488 -6.9 -36.0 7.5 0.5 0.5 0.5 12.0 12.1 7.1 -6% -1% 6%Average 11.1 42.4 19.5 0.9 0.8 0.8 -15.2 8.3 6.1 8% 8% 9% Consumer Staples Ajisen (China) 0538.HK 8.62 7.50 14% OW 8,039 31.6 23.6 18.2 2.7 2.6 0.0 12.7 9.9 10.0 9% 11% 14%Hengan International Group 1044.HK 97.00 96.60 0% OW 118,475 29.1 24.8 21.7 7.5 6.8 6.1 22.6 19.0 16.4 26% 28% 29%Tingyi Corp. 0322.HK 20.40 22.90 -10% EW 128,057 38.2 29.3 22.1 5.9 5.3 4.6 15.1 11.9 9.5 16% 19% 22%Tsingtao Brewery 0168.HK 46.44 64.45 -27% UW 87,071 34.7 30.6 27.9 4.9 4.4 4.0 17.4 15.1 13.3 14% 17% 14%China Mengniu Dairy 2319.HK 29.50 35.60 -17% EW 62,940 32.9 25.3 22.1 3.6 3.2 2.9 15.6 12.1 10.3 12% 14% 15%China Resources Enterprise, 0291.HK 24.70 27.00 -8% EW 64,771 36.5 28.2 22.1 1.6 1.5 1.4 9.0 7.6 6.2 3% 4% 5%Hop Hing Group 0047.HK 0.37 0.31 19% EW 3,099 0.0 0.0 0.0 9.2 6.2 4.4 14.7 9.5 7.4 34% 39% 34%Sun Art Retail Group 6808.HK 11.70 11.10 5% EW 105,891 29.1 25.2 22.2 4.3 3.8 3.4 15.3 13.2 11.5 15% 15% 15%Want Want China 0151.HK 13.30 11.48 15% OW 151,829 27.6 23.4 20.1 11.0 9.9 8.8 18.3 15.7 13.5 42% 45% 46%Average 28.9 23.4 19.6 5.6 4.8 3.9 15.6 12.7 10.9 19% 21% 22% Integrated Oil & Gas Anton Oilfield Services 3337.HK 6.30 4.88 29% OW 10,324 22.2 15.0 11.5 3.6 3.1 2.6 14.3 10.5 8.2 17% 21% 23%China Oilfield Services (COSL) 2883.HK 22.80 23.75 -3% OW 106,764 14.2 12.9 11.6 2.3 2.0 1.7 9.5 8.2 7.3 16% 15% 15%CNOOC 0883.HK 20.00 15.56 28% OW 694,697 8.7 8.1 7.4 1.5 1.3 1.2 4.3 3.7 3.2 19% 18% 17%Hilong Holding, 1623.HK 6.00 5.94 1% OW 9,453 22.4 14.4 11.8 3.4 2.9 2.5 12.0 8.8 7.6 18% 20% 21%Honghua Group 0196.HK 2.20 2.78 -20% UW 8,879 10.1 9.7 8.3 1.4 1.3 1.1 5.9 5.9 5.2 14% 13% 14%PetroChina 0857.HK 11.50 9.08 26% OW 1,661,830 10.5 9.7 9.1 1.2 1.1 1.0 5.4 4.9 4.7 10% 11% 11%Sinopec 0386.HK 6.70 6.63 1% EW 748,304 8.9 8.6 8.0 1.1 1.0 0.9 4.6 4.3 4.3 13% 12% 12%SPT Energy Group 1251.HK 5.40 4.89 10% EW 6,582 18.1 14.1 10.6 3.2 2.7 2.2 10.3 8.0 6.2 18% 19% 21%Average 14.4 11.6 9.8 2.2 1.9 1.7 8.3 6.8 5.8 15% 16% 17% Financial Services Agricultural Bank of China 1288.HK 4.19 3.97 5% EW 1,289,432 6.2 5.6 5.2 1.2 1.0 0.9 5.7% 6.3% 6.7% 20% 20% 18%Bank of China Limited 3988.HK 4.60 3.72 23% OW 1,038,427 5.3 5.1 4.9 0.9 0.8 0.7 6.6% 6.9% 7.1% 17% 16% 15%Bank of Communications 3328.HK 6.70 5.65 18% EW 349,654 5.0 4.7 4.5 0.8 0.7 0.6 6.1% 6.5% 6.7% 16% 16% 15%China CITIC Bank Corporation 0998.HK 4.81 4.44 8% EW 207,734 5.0 4.7 4.5 0.7 0.6 0.6 5.0% 5.4% 5.6% 15% 15% 14%China Construction Bank Corp. 0939.HK 7.54 6.25 20% OW 1,562,569 5.8 5.4 5.3 1.1 1.0 0.9 6.0% 6.4% 6.6% 21% 19% 18%China Merchants Bank 3968.HK 17.85 16.20 10% OW 349,549 5.7 5.9 5.6 1.2 1.0 0.9 5.2% 5.1% 5.3% 21% 19% 17%China Minsheng Banking 1988.HK 11.18 9.02 23% EW 240,970 4.4 3.9 3.6 1.0 0.8 0.7 5.1% 5.7% 6.2% 25% 23% 21%Chongqing Rural Commercial Bank 3618.HK 4.25 3.88 9% UW 36,084 4.6 4.2 3.9 0.8 0.7 0.6 6.4% 7.0% 7.6% 18% 17% 17%Industrial & Commercial Bank of China 1398.HK 6.60 5.60 17% OW 1,954,870 5.9 5.6 5.4 1.2 1.0 0.9 5.9% 6.3% 6.5% 22% 20% 18%China Life 2628.HK 23.30 25.60 -8% EW 723,576 21.8 19.5 15.8 2.3 2.1 1.9 1.2% 1.5% 1.7% 0% 0% 0%China Pacific Insurance 2601.HK 32.20 32.75 -1% EW 296,781 25.3 21.8 19.0 2.2 2.1 1.9 1.6% 1.8% 1.8% 0% 0% 0%China Taiping 0966.HK 12.50 16.28 -23% UW 27,720 20.5 15.9 14.0 1.7 1.5 1.3 0.0% 0.0% 0.0% 0% 0% 0%PICC Property & Casualty 2328.HK 14.60 12.94 12% OW 158,592 10.9 9.4 8.4 2.2 1.9 1.5 2.4% 2.7% 3.1% 0% 0% 0%



13 December 2013 100

FIGURE 147 (CONTINUED) China/Hong Kong coverage universe

Pot. Up/

DownsideMktCap.(mn in P/E P/B EV/EBITDA ROE %

Company Ticker PT Price (%) Rating local curr) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Ping An 2318.HK 87.90 76.00 15% OW 601,620 14.8 13.1 12.9 2.5 2.1 1.8 0.9% 1.0% 1.2% 0% 0% 0%Bank of China (Hong Kong) 2388.HK 28.00 25.65 9% EW 271,192 12.0 11.4 11.6 1.8 1.7 1.6 5.5% 5.9% 5.9% 15% 15% 14%Bank of East Asia 0023.HK 28.00 33.70 -16% UW 76,290 12.6 13.4 12.8 1.2 1.2 1.1 3.4% 3.2% 3.3% 11% 10% 10%Dah Sing Banking Group 2356.HK 15.80 14.14 11% OW 17,490 10.5 10.8 10.3 1.1 1.0 0.9 2.9% 2.8% 2.9% 11% 10% 10%Dah Sing Financial 0440.HK 51.00 45.20 12% OW 13,318 9.5 9.7 8.6 0.8 0.8 0.7 3.2% 3.1% 3.5% 9% 8% 9%Hang Seng Bank 0011.HK 153.00 126.60 20% OW 242,039 8.8 13.7 13.1 2.3 2.1 2.0 4.2% 4.2% 4.2% 30% 17% 16%HSBC PLC 0005.HK 96.00 84.20 14% OW 1,538,418 12.0 10.0 8.6 1.4 1.3 1.2 5.0% 6.0% 7.0% 12% 13% 14%Standard Chartered PLC 2888.HK 184.00 169.00 8% EW 412,233 10.3 9.5 8.4 1.4 1.2 1.1 4.1% 4.3% 4.9% 14% 14% 14%Wing Hang Bank 0302.HK 126.00 115.50 9% EW 34,945 16.2 18.4 17.9 1.7 1.6 1.6 2.4% 2.5% 2.8% 11% 10% 9%PAX Global Technology Limited 0327.HK 4.04 2.80 44% OW 2,906 13.1 10.7 8.8 1.4 1.3 1.1 0.0% 0.0% 0.0% 12% 12% 13%AIA Group 1299.HK 41.60 38.75 7% OW 466,705 20.2 17.2 14.8 2.0 1.8 1.6 1.1% 1.3% 1.4% 0% 0% 0%Average 11.1 10.4 9.5 1.5 1.3 1.2 3.7% 4.0% 4.3% 13% 11% 11% Real Estate Agile Property 3383.HK 7.70 8.27 -6% UW 28,527 5.0 4.3 3.8 0.8 0.7 0.6 4.9% 5.7% 6.4% 18% 18% 17%Greentown China 3900.HK 12.40 12.40 0% UW 26,718 4.2 3.6 3.4 0.9 0.8 0.6 6.0% 7.0% 7.4% 24% 23% 21%Guangzhou R&F Properties 2777.HK 13.90 11.72 18% EW 37,766 5.4 4.8 4.3 1.0 0.9 0.8 7.4% 8.3% 9.4% 19% 19% 19%Longfor Properties 0960.HK 12.10 11.20 8% EW 60,831 7.7 6.4 5.2 1.4 1.2 1.0 2.6% 3.1% 3.9% 19% 20% 21%Sino-Ocean Land 3377.HK 4.70 5.11 -8% EW 36,820 7.5 7.7 6.8 0.8 0.8 0.7 4.4% 4.7% 5.4% 8% 9% 10%Sunac China 1918.HK 6.45 4.86 32% OW 0 3.9 3.1 2.5 0.9 0.7 0.6 2.6% 3.2% 3.9% 27% 25% 25%Champion REIT 2778.HK 3.31 3.52 -5% EW 20,113 9.9 21.5 23.9 0.5 0.5 0.5 5.4% 4.9% 4.4% 3% 2% 2%Cheung Kong 0001.HK 135.00 122.50 10% OW 283,730 10.1 10.4 8.9 0.8 0.8 0.7 2.7% 2.8% 2.8% 8% 8% 8%China Overseas Grand Oceans Group 0081.HK 7.30 7.56 -3% UW 17,254 6.7 5.4 4.6 1.7 1.3 1.0 1.9% 2.3% 2.7% 28% 27% 25%China Overseas Land & Investment 0688.HK 26.80 22.95 16% OW 187,559 10.0 8.1 6.8 1.8 1.5 1.3 2.0% 2.5% 2.9% 20% 21% 21%China Resources Land 1109.HK 23.20 20.20 14% EW 117,713 13.5 11.2 9.6 1.6 1.4 1.3 1.9% 2.2% 2.6% 12% 13% 14%Country Garden 2007.HK 5.00 4.85 3% EW 88,414 8.3 6.6 5.4 1.6 1.4 1.2 4.8% 6.0% 7.4% 21% 22% 23%Evergrande Real Estate Group 3333.HK 3.30 3.09 6% EW 0 4.9 4.2 3.6 0.8 0.7 0.6 5.1% 5.9% 6.9% 17% 17% 17%Hang Lung Properties 0101.HK 27.95 25.25 10% OW 113,090 28.7 16.0 14.7 0.9 0.9 0.8 2.9% 2.9% 2.9% 3% 6% 6%Henderson Land Development 0012.HK 46.70 43.80 6% EW 118,216 14.1 13.0 12.5 0.5 0.5 0.5 2.4% 2.4% 2.4% 4% 4% 4%Hysan Development 0014.HK 33.32 34.50 -3% EW 36,695 17.9 17.0 16.4 0.6 0.6 0.6 3.4% 3.6% 3.7% 4% 4% 4%Kerry Properties 0683.HK 28.06 27.75 1% UW 40,029 9.2 12.0 10.8 0.5 0.5 0.5 3.2% 3.2% 3.2% 6% 4% 5%KWG Property Holding 1813.HK 6.30 4.54 38% OW 13,135 4.8 4.2 3.4 0.6 0.5 0.5 5.2% 6.0% 7.2% 13% 14% 15%Link REIT 0823.HK 37.94 38.15 0% EW 88,160 4.1 24.1 22.6 1.1 1.0 1.0 3.8% 4.2% 4.4% 5% 4% 4%Midland 1200.HK 2.25 3.28 -31% UW 2,355 -9.4 -59.6 192.9 1.8 1.9 1.9 0.0% 0.0% 0.4% -17% -3% 1%New World Development 0017.HK 8.52 10.12 -15% UW 63,875 4.4 8.6 9.1 0.5 0.4 0.4 4.2% 4.2% 4.2% 5% 5% 5%Poly Property Group 0119.HK 3.80 4.32 -12% UW 15,588 5.8 4.7 3.7 0.5 0.5 0.4 5.2% 6.4% 8.2% 10% 11% 13%Shimao Property 0813.HK 22.60 18.22 24% OW 63,270 8.3 6.0 4.8 1.2 1.1 0.9 3.5% 4.9% 6.1% 16% 19% 20%Sino Land 0083.HK 9.69 10.38 -6% UW 61,738 5.3 11.3 9.7 0.6 0.6 0.6 4.8% 4.8% 4.8% 7% 5% 6%Sun Hung Kai Properties 0016.HK 84.00 97.40 -13% UW 260,151 6.4 14.1 13.6 0.7 0.7 0.6 3.4% 3.4% 3.4% 5% 5% 5%Swire Properties 1972.HK 18.65 20.10 -7% UW 117,585 20.8 17.8 14.9 0.6 0.6 0.6 2.6% 2.8% 3.0% 3% 3% 4%Wharf (Holdings) Ltd. 0004.HK 59.50 61.85 -3% UW 187,407 16.5 16.3 12.7 0.7 0.7 0.7 2.8% 3.0% 3.5% 4% 4% 5%Average 8.7 7.5 15.9 0.9 0.8 0.8 3.7% 4.1% 4.6% 11% 11% 12% Industrials China Communications Construction 1800.HK 11.31 6.48 74% OW 104,814 5.7 5.1 4.9 0.8 0.7 0.6 6.8 7.2 7.7 16% 15% 15%China Railway Construction 1186.HK 11.85 8.66 36% OW 106,843 8.5 7.2 6.4 1.0 0.9 0.8 5.9 5.5 5.2 13% 14% 14%China Railway Group 0390.HK 6.04 4.44 36% OW 94,572 8.5 6.7 5.8 0.8 0.7 0.6 7.7 6.5 5.5 11% 12% 13%Beijing Capital International Airport 0694.HK 6.97 6.75 3% OW 29 14.8 13.5 12.3 1.4 1.3 1.2 2.8 2.7 2.0 10% 10% 10%China COSCO 1919.HK 3.35 4.01 -16% UW 40,967 668.3 -8.6 -9.6 1.3 1.5 1.8 21.7 1,510.8 179.6 0% -9% -9%China Rongsheng Heavy Ind. 1101.HK 0.54 1.12 -52% UW 7,840 -7.0 -5.8 -5.6 0.5 0.5 0.6 60.6 41.3 36.8 -6% -8% -9%China Shipping Container Lines 2866.HK 2.50 2.08 19% EW 24,301 23.9 11.9 15.4 0.7 0.6 0.6 11.4 8.6 9.4 3% 6% 4%China Shipping Development 1138.HK 4.90 5.30 -7% EW 18,044 -14.5 407.7 24.1 0.6 0.6 0.6 31.8 18.2 14.0 -4% 0% 3%China State Construction 3311.HK 10.13 13.42 -24% UW 52,170 20.2 15.9 12.9 3.3 2.9 2.5 18.8 16.2 14.5 18% 20% 21%Air China 0753.HK 5.65 5.93 -4% EW 69,052 13.2 9.9 6.7 1.1 1.0 0.9 7.6 6.8 5.4 8% 10% 14%Anhui Expressway 0995.HK 5.90 4.50 31% OW 7,464 7.4 7.6 6.7 0.8 0.8 0.7 4.6 4.4 3.9 11% 10% 11%Cathay Pacific Airways 0293.HK 17.51 16.26 7% OW 63,967 23.4 11.5 8.1 1.1 1.0 0.9 7.7 5.7 4.5 5% 9% 12%





Pot. Up/

DownsideMktCap.(mn in P/E P/B EV/EBITDA ROE %

Company Ticker PT Price (%) Rating local curr) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E China Eastern Airlines 0670.HK 3.41 3.04 12% OW 34,281 13.6 6.6 4.5 1.0 0.9 0.7 7.4 5.9 4.7 8% 14% 18%China Merchants(International) 0144.HK 28.62 28.80 0% OW 71,256 14.7 13.5 12.6 1.5 1.4 1.3 15.1 13.5 12.4 10% 11% 11%China Southern Airlines 1055.HK 4.24 3.33 27% OW 32,694 13.1 10.6 6.2 0.7 0.7 0.6 7.4 7.0 5.8 6% 7% 11%COSCO Pacific Limited 1199.HK 15.15 11.08 36% OW 30,047 5.7 11.7 9.8 0.9 0.9 0.8 20.3 17.6 16.9 17% 8% 9%Hopewell Highway Infrastructure 0737.HK 3.56 3.74 -4% UW 11,526 15.5 15.1 15.1 1.2 1.2 1.2 8.2 7.4 7.0 8% 8% 8%Jiangsu Expressway 0177.HK 10.53 9.89 6% OW 49,823 14.5 12.5 11.0 2.0 1.9 1.8 9.2 8.1 7.4 14% 16% 17%Orient Overseas(International) 0316.HK 53.45 40.55 31% OW 25,376 22.3 14.8 11.9 0.7 0.7 0.7 10.5 9.1 8.2 3% 5% 6%Pacific Basin Shipping 2343.HK 4.53 5.36 -15% EW 10,368 19.3 15.2 11.4 1.0 0.9 0.9 9.7 9.7 8.2 5% 6% 8%Shenzhen Expressway 0548.HK 3.64 3.62 0% OW 7,894 10.3 9.2 8.7 0.6 0.6 0.6 7.8 7.3 7.0 6% 7% 7%Sichuan Expressway 0107.HK 2.96 2.39 24% OW 7,309 5.3 5.9 7.2 0.5 0.5 0.5 8.5 11.0 10.1 10% 8% 7%Singamas Container 0716.HK 1.83 1.79 2% EW 4,328 15.8 9.1 8.2 0.9 0.9 0.8 5.9 3.8 3.4 6% 10% 11%Sinotrans Shipping 0368.HK 2.17 2.58 -15% EW 10,300 46.1 41.0 24.8 0.6 0.6 0.6 7.1 6.8 5.8 1% 1% 2%Zhejiang Expressway 0576.HK 8.24 7.22 14% OW 31,357 14.8 14.4 13.3 1.5 1.5 1.5 7.4 7.2 6.8 11% 11% 11%Average 39.3 26.5 9.3 1.1 1.0 1.0 12.5 69.9 15.7 8% 8% 9% Internet & Media Baidu, Inc. BIDU 198.00 168.71 17% OW 58,986 34.7 27.2 20.6 7.5 5.5 4.2 23.4 16.9 12.7 23% 21% 22%Changyou.com CYOU 32.00 29.83 7% EW 1,577 6.5 6.5 5.0 1.7 1.3 0.9 2.6 1.8 0.4 26% 20% 19%Ctrip.com International CTRP 62.00 47.39 30% OW 6,959 46.1 36.9 30.1 3.4 3.3 2.9 37.6 23.0 16.2 11% 13% 14%E-Commerce China Dangdang Inc. DANG 6.50 9.09 -28% UW 727 -25.0 -129.9 649.3 4.3 3.3 2.6 -19.9 -187.3 152.1 -16% -2% 2%Giant Interactive Group GA 9.20 11.33 -18% OW 2,750 12.5 10.3 8.4 4.8 3.7 3.1 8.9 6.4 5.2 40% 37% 34%NetEase, Inc. NTES 75.00 70.71 6% OW 9,183 13.2 12.0 10.7 3.0 2.7 2.3 7.4 5.9 4.5 24% 24% 23%Perfect World PWRD 21.00 18.29 14% EW 887 11.9 9.3 8.7 1.2 1.0 0.9 4.8 2.6 1.4 11% 13% 12%Qihoo360Technology QIHU 95.00 82.76 14% OW 10,538 86.4 47.8 31.5 16.0 10.3 6.7 53.0 27.6 17.6 28% 30% 28%Qunar QUNR 30.00 27.51 9% OW 3,828 -147.1 -254.7 -13,755.0 16.8 25.5 25.8 -237.6 -260.9 697.8 -8% -3% 10%Renren Inc. RENN 3.20 3.01 6% EW 1,172 75.3 -5.3 -8.8 1.0 1.3 1.5 -2.1 -2.1 -3.7 -6% -21% -13%ShandaGames GAME 3.50 4.05 -13% UW 1,123 4.7 5.1 5.1 3.5 3.5 2.3 4.0 3.5 3.4 80% 74% 49%Sina Corp. SINA 84.00 77.31 8% OW 5,117 164.5 34.4 20.6 4.0 3.7 3.5 54.8 18.6 11.1 6% 12% 18%Sohu.com Inc. SOHU 79.00 68.80 14% OW 2,649 -87.4 46.8 20.2 2.2 2.4 2.4 8.5 7.9 4.5 4% 7% 13%YoukuTudou Inc. YOKU 30.00 30.25 0% OW 3,349 -51.0 175.9 39.6 3.8 3.8 3.4 -30.5 54.7 14.7 -5% 4% 11%Television Broadcasts 0511.HK 57.50 48.80 17% OW 21,374 13.0 12.8 13.1 2.6 2.4 2.3 7.7 7.5 7.5 21% 20% 19%Tencent 0700.HK 450.00 462.40 -2% OW 840,160 45.1 33.4 27.0 13.9 11.7 9.4 28.4 21.3 17.0 34% 38% 38%Average 12.7 4.3 -804.6 5.6 5.3 4.6 -3.0 -15.8 60.2 17% 18% 19% Retail Anta Sports Products 2020.HK 7.20 10.38 -30% UW 25,886 18.0 16.4 14.4 2.8 2.7 2.5 15.5 13.8 11.5 16% 17% 18%Belle International 1880.HK 15.10 9.28 62% OW 78,270 13.5 11.9 10.5 2.4 2.1 1.8 11.2 9.4 8.0 19% 19% 19%Golden Eagle Retail Group 3308.HK 16.00 10.10 58% OW 19,820 12.0 10.6 9.2 2.4 2.1 1.8 25.2 21.6 18.8 22% 21% 21%Li Ning 2331.HK 4.70 7.18 -34% EW 7,547 -22.2 26.6 16.7 2.4 2.2 1.9 75.2 16.2 12.0 -13% 9% 12%Parkson Retail Group 3368.HK 2.10 2.49 -15% UW 6,998 12.1 11.6 11.0 1.0 1.0 0.9 7.9 7.7 7.1 8% 8% 8%China Dongxiang(Group) 3818.HK 0.90 1.21 -25% UW 6,804 27.5 26.3 21.6 0.8 0.7 0.7 39.9 48.6 37.7 3% 3% 3%Chow Tai Fook Jewellery Group 1929.HK 14.00 11.80 18% OW 118,000 21.4 15.8 13.3 3.6 3.2 2.8 14.3 11.5 9.7 18% 21% 22%Esprit Limited 0330.HK 9.80 15.94 -38% UW 20,570 -6.4 -150.4 30.8 1.7 1.7 1.7 -4.9 16.9 7.3 -28% -1% 6%Gome Electrical Appliances 0493.HK 1.30 1.25 4% EW 6,890 21.2 14.5 13.4 1.1 1.0 0.0 -0.1 -0.5 -1.1 5% 7% 7%L'Occitane International 0973.HK 17.27 17.94 -3% EW 26,458 20.2 23.8 20.5 3.4 3.2 2.8 11.3 11.6 10.2 19% 14% 15%Li & Fung Limited 0494.HK 12.20 10.30 18% EW 83,526 19.5 14.9 12.2 2.1 2.0 2.0 11.6 9.5 8.0 12% 16% 19%Lifestyle International 1212.HK 19.70 15.84 24% EW 26,389 12.7 11.9 11.0 2.4 2.1 1.9 10.5 10.0 9.2 22% 20% 20%New World Department Store China 0825.HK 5.20 4.26 22% EW 7,183 11.5 9.8 0.0 1.1 1.0 0.0 3.1 2.9 0.0 10% 11% 0%PRADA S.p.A. 1913.HK 74.00 71.40 3% EW 181,055 27.5 24.0 21.0 7.4 6.4 5.6 173.0 151.5 133.3 30% 29% 28%SaSa International 0178.HK 9.45 8.94 5% OW 25,227 30.7 24.6 20.9 12.8 10.5 8.7 21.3 17.1 14.4 33% 37% 35%Samsonite International 1910.HK 21.83 22.55 -3% OW 31,731 23.7 20.3 17.7 3.3 2.9 2.6 12.2 10.5 8.9 18% 19% 19%Trinity 0891.HK 2.73 2.78 -1% UW 4,798 14.5 12.3 10.3 1.4 1.3 1.3 7.9 6.5 5.4 10% 11% 13%Average 15.1 7.3 15.0 3.1 2.7 2.3 25.6 21.5 17.7 12% 15% 16%





Pot. Up/

Downside MktCap.(mn in P/E P/B EV/EBITDA ROE %

Company Ticker PT Price (%) Rating local curr) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Gaming Galaxy 0027.HK 66.70 63.95 4% OW 269,485 25.7 20.3 17.1 8.3 5.9 4.4 20.9 17.1 14.0 48% 41% 35%MGM China 2282.HK 32.20 29.20 10% OW 110,960 21.7 18.3 17.2 15.5 11.5 8.1 17.4 15.1 14.6 86% 85% 67%Sands China 1928.HK 60.30 62.90 -4% OW 506,722 29.6 21.6 18.7 10.2 8.3 6.8 23.0 17.6 15.4 39% 47% 44%SJM 0880.HK 27.90 25.70 8% OW 142,609 19.1 17.7 17.3 6.4 5.7 5.3 13.8 13.5 15.0 38% 36% 33%Wynn Macau 1128.HK 30.50 33.30 -8% EW 172,745 23.7 22.7 21.4 15.2 12.8 10.2 20.1 19.1 19.1 69% 67% 60%Average 24.0 20.1 18.3 11.1 8.8 6.9 19.0 16.5 15.6 56% 55% 48% Technology Sunny Optical Technology 2382.HK 10.00 7.28 37% OW 7,028 13.6 10.7 10.8 2.1 1.8 1.6 8.0 6.5 6.3 18% 18% 16%ZTE Corporation 0763.HK 20.60 17.16 20% OW 58,179 22.6 15.4 14.9 2.0 1.8 1.6 17.1 12.4 11.9 9% 12% 11%Digital China 0861.HK 16.90 9.35 80% OW 10,006 7.2 6.2 5.2 1.3 1.1 1.0 6.9 4.8 3.7 17% 18% 19%Lenovo Group 0992.HK 10.00 9.48 5% OW 96,063 19.8 16.4 13.1 4.7 4.1 3.4 8.4 5.8 4.2 25% 27% 28%Skyworth Digital 0751.HK 5.10 4.36 16% OW 11,487 7.6 6.3 5.5 1.2 1.1 1.0 6.9 5.5 4.7 17% 18% 18%TPV Technology 0903.HK 2.00 1.65 21% EW 3,870 4.2 3.9 0.0 0.3 0.2 0.0 3.6 2.6 0.0 6% 6% 0%AAC Technologies 2018.HK 42.00 37.30 12% OW 45,804 14.0 13.9 12.5 4.7 3.9 3.3 12.8 11.2 9.8 37% 30% 29%BYD Electronics 0285.HK 4.43 4.53 -2% OW 10,207 14.6 12.0 10.2 0.9 0.9 0.8 4.7 4.0 3.5 6% 7% 8%FIH Mobile 2038.HK 4.10 4.02 1% UW 28,963 23.1 14.7 12.6 1.0 0.9 0.9 4.6 2.9 1.8 4% 7% 7%Average 14.1 11.1 9.4 2.0 1.8 1.5 8.1 6.2 5.1 16% 16% 15% Telecom Services China Mobile 0941.HK 76.00 84.65 -10% UW 1,704,119 11.0 11.3 11.0 1.7 1.6 1.4 3.8 3.6 3.2 18% 16% 15%China Telecom 0728.HK 4.50 4.04 -4% EW 326,967 14.5 12.3 10.2 0.9 0.9 0.8 4.5 4.0 3.7 7% 8% 9%China Unicom 0762.HK 14.00 11.96 14% EW 282,768 21.0 15.2 11.3 1.0 1.0 0.9 3.9 3.4 2.9 5% 7% 9%HKT Trust and HKT Limited 6823.HK 8.40 6.86 22% OW 44,019 19.3 15.9 11.0 1.4 1.4 1.4 8.3 7.9 7.6 11% 11% 13%Hutchison Telecom HK 0215.HK 3.50 2.66 31% EW 12,816 13.4 12.7 11.9 1.2 1.1 1.1 6.2 5.7 5.2 9% 9% 9%PCCW Limited 0008.HK 4.30 3.38 27% OW 24,580 13.2 11.7 12.2 2.6 2.5 2.4 5.7 5.6 5.3 18% 22% 20%Smar Tone Telecommunications 0315.HK 8.40 8.12 3% EW 8,418 10.0 11.7 10.6 2.8 2.6 2.3 2.9 3.3 3.2 27% 24% 24%Average 14.5 12.8 11.0 1.7 1.6 1.5 5.0 4.8 4.5 13% 14% 14% Capital Goods CSR Corporation 1766.HK 8.20 7.05 16% OW 97,311 18.0 12.9 11.8 2.1 1.9 1.6 3.8 4.8 4.7 12% 14% 14%Dongfang Electric 1072.HK 10.70 14.22 -24% UW 28,495 11.1 12.5 12.8 1.3 1.2 1.1 2.7 2.4 2.4 1215% 975% 879%Harbin Electric 1133.HK 4.50 5.42 -16% UW 7,462 6.7 7.1 8.7 0.5 0.4 0.4 1.6 1.6 1.4 7% 6% 5%Lonking 3339.HK 1.80 1.65 9% EW 7,062 10.4 9.4 8.3 0.8 0.8 0.7 381.4 394.1 423.0 825% 847% 905%Sany Heavy Equipment Int'l 0631.HK 1.90 2.65 -28% UW 8,248 12.2 14.9 15.1 1.1 1.0 1.0 6.7 5.4 5.2 9% 7% 7%Shanghai Electric Group 2727.HK 2.50 2.95 -15% UW 37,830 10.8 11.9 12.6 0.9 0.9 0.8 2.3 2.1 2.0 9% 7% 7%Sinotruk (Hong Kong) 3808.HK 4.00 4.70 -14% UW 12,977 22.3 25.3 17.5 0.5 0.5 0.5 1.0 0.9 1.2 2% 2% 3%Weichai Power 2338.HK 26.50 34.90 -24% UW 69,776 14.7 16.1 14.0 2.0 1.8 1.6 5.2 4.4 4.8 14% 12% 12%Xinjiang Goldwind 2208.HK 6.20 7.56 -17% EW 20,371 43.7 42.0 30.5 1.2 1.2 1.2 1.1 1.1 1.4 3% 3% 4%Zhuzhou CSR Times Electric 3898.HK 35.20 28.70 22% OW 0 18.1 13.8 11.3 3.2 2.9 0.0 13.0 15.9 16.7 20% 23% 24%Zoomlion Heavy Industry 1157.HK 9.10 7.66 18% OW 59,028 11.0 9.3 6.7 1.1 1.0 0.9 5.2 6.2 8.2 10% 11% 14%Average 16.3 15.9 13.6 1.3 1.2 0.9 38.6 39.9 42.8 193% 173% 170%Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Wireless Equipment & Products industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Bloomberg, Barclays Research estimates




FIGURE 148 Taiwan coverage universe

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Company Ticker PT Price (%) Rating local curr) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E

Hardware Acer 2353.TW 12 16.6 -27% UW 43,195 -3.20 95.40 23.60 0.73 0.70 0.68 -9.44 3.40 2.03 -21% 1% 3% Asustek Computer 2357.TW 265 266.5 0% OW 200,611 9.30 11.00 11.00 1.50 1.43 1.37 8.63 9.38 10.17 17% 13% 13% Compal Electronics 2324.TW 17 22.35 -23% UW 97,085 43.70 10.50 10.40 0.92 0.85 0.82 11.51 9.34 8.65 2% 8% 7% Hon Hai Precision Industry 2317.TW 68 79.6 -14% EW 1,025,997 9.90 10.60 10.10 1.40 1.26 1.14 4.82 4.34 3.78 14% 12% 11% Pegatron 4938.TW 40 36.2 10% EW 82,826 9.20 8.10 6.80 0.82 0.78 0.74 8.79 7.86 7.15 7% 8% 9% Quanta Computer 2382.TW 55 67.4 -18% UW 258,590 13.90 12.20 12.40 2.02 1.88 1.78 21.47 20.35 21.12 14% 15% 14% Synnex Technology International 2347.TW 47 44 6% EW 69,111 12.90 11.30 10.80 1.62 1.51 1.41 41.18 34.68 32.22 13% 14% 13% Wistron Corporation 3231.TW 23 26.4 -12% UW 61,169 9.30 9.20 8.70 0.94 0.90 0.86 9.09 8.28 7.42 10% 10% 10% Average 13.1 21.0 11.7 1.2 1.2 1.1 12.0 12.2 11.6 7% 10% 10% WirelessEquipmentandProducts Career Technology 6153.TW 26 27.3 -4% UW 8,867 8.60 8.30 7.10 1.10 1.05 0.98 4.44 4.22 3.75 13% 13% 14% Compal Communications 8078.TW 26 50.3 -48% UW 30,569 72.30 19.00 21.10 2.90 2.68 2.53 29.32 9.73 9.71 4% 15% 12% Flexium Interconnect 6269.TW 87 91.8 -5% UW 17,495 10.20 9.50 8.90 1.88 1.68 1.51 4.74 4.28 3.64 23% 19% 18% HTC 2498.TW 112 147.5 -24% UW 125,678 -417.80 50.60 -257.00 1.58 1.53 1.55 94.96 11.92 24.61 0% 3% -1% Largan Precision 3008.TW 1300 1105 17% OW 148,225 16.20 13.60 12.30 5.17 4.20 3.48 11.38 8.66 7.32 35% 34% 31% TXC 3042.TW 65 31.35 107% OW 9,475 6.30 5.50 - 1.13 1.03 - 3.53 2.93 - 19% 19% 0% Unimicron Technology 3037.TW 27 22.1 22% EW 34,003 15.60 13.70 12.20 0.67 0.66 0.64 3.08 2.61 1.98 4% 5% 5% Zhen Ding Technology 4958.TW 92 71.2 29% OW 47,699 10.80 9.30 8.70 2.18 1.93 1.74 5.89 4.97 4.28 22% 22% 21% Average -34.7 16.2 -23.3 2.1 1.8 1.6 19.7 6.2 6.9 15% 16% 13% Components Catcher Technology 2474.TW 205 192.5 6% OW 144,498 10.80 11.30 10.40 2.06 1.84 1.66 7.12 5.91 4.94 20% 17% 17% Delta Electronics 2308.TW 175 158 10% OW 383,524 22.00 17.20 15.20 4.81 4.39 4.01 26.86 21.81 18.19 21% 27% 28% Epistar Corporation 2448.TW 67 53.2 25% OW 45,696 50.20 22.80 23.70 1.07 1.04 1.00 7.65 5.84 5.44 2% 4% 4% Dynapack Int'l Technology 3211.TWO 125 79.2 57% EW 12,018 7.60 7.10 - 1.65 1.51 - 2.81 2.56 - 23% 22% 0% Foxconn Technology 2354.TW 70 69.4 0% UW 85,849 12.60 11.30 11.70 1.29 1.18 1.09 11.32 9.56 8.70 11% 11% 10% Lite-On Technology 2301.TW 54 47.85 12% EW 110,533 11.90 10.70 9.80 1.42 1.35 1.27 4.10 3.37 2.95 12% 13% 13% Simplo Technology 6121.TWO 110 133.5 -17% UW 41,156 12.50 11.90 13.20 2.19 2.00 1.87 4.08 3.87 3.94 18% 18% 15% Tripod Technology 3044.TW 56 50.1 11% UW 26,333 9.90 8.90 8.30 1.03 0.98 0.93 3.63 3.10 2.51 11% 11% 11% Wistron NeWeb 6285.TW 82 76.7 6% OW 22,236 15.80 14.00 12.60 2.37 2.20 2.03 8.12 6.96 5.79 15% 16% 17% Average 17.0 12.8 11.7 2.0 1.8 1.5 8.4 7.0 5.8 15% 16% 13% Semiconductors Chroma ATE 2360.TW 75 61.2 22% OW 23,058 19.30 16.20 13.90 2.80 2.61 2.43 47.39 33.39 25.89 15% 17% 18% Hermes Microvision 3658.TWO 1250 918 36% OW 60,588 26.70 20.00 15.60 11.11 8.50 6.60 48.09 33.55 25.52 48% 48% 48% Inotera Memories, 3474.TW 33 21.95 50% OW 118,641 7.20 4.50 6.80 3.02 1.70 1.36 4.17 2.53 2.67 57% 47% 22% Phison Electronics 8299.TWO 210 181 16% EW 32,773 10.00 10.50 9.10 2.32 2.16 1.98 6.16 6.30 5.20 25% 21% 23% Powertech Technology 6239.TW 35 45.05 -22% UW 35,101 16.40 13.60 11.20 0.97 0.94 0.92 2.37 2.14 2.00 6% 7% 8% Visual Photonics Epitaxy 2455.TW 32 28.1 13% EW 6,915 12.80 13.20 12.90 1.92 1.88 1.85 6.16 5.63 5.19 15% 14% 14% Win Semiconductors 3105.TWO 25 26.3 -4% UW 19,900 10.20 10.50 9.60 1.31 1.26 1.19 5.39 4.57 3.75 13% 12% 13% Advanced Semiconductor Eng. 2311.TW 35 29.75 17% OW 226,493 15.00 12.30 10.90 1.94 1.82 1.71 5.98 5.26 4.68 13% 15% 16% Kinsus Interconnect Technology 3189.TW 139 101.5 36% OW 45,269 13.80 10.60 9.00 1.67 1.54 1.42 5.48 4.74 3.89 13% 15% 16% MediaTek 2454.TW 445 428 3% OW 577,535 21.80 18.00 16.60 3.53 3.18 2.91 17.46 10.94 9.58 14% 19% 18% MStar Semiconductor 3697.TW 220 335 -34% OW 177,352 22.50 19.80 - 4.72 4.33 - 15.41 13.46 - 22% 23% 0%




FIGURE 148 (CONTINUED) Taiwan coverage universe

Pot. Up/


Company Ticker PT Price (%) Rating local curr) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Nan Ya Printed Circuit Board 8046.TW 31 35.55 -12% UW 22,971 -45.30 35.50 29.60 0.76 0.74 0.74 8.35 4.07 3.88 -2% 2% 2% Siliconware Precision Industries 2325.TW 42 34.4 22% OW 107,203 19.50 13.90 12.80 1.79 1.69 1.64 6.05 5.31 4.89 9% 13% 13% TSMC 2330.TW 139 105 32% OW 2,721,266 14.90 13.20 11.60 3.28 2.84 2.44 7.47 6.50 5.57 23% 23% 23% United Microelectronics 2303.TW 13 12.2 6% EW 158,016 12.60 13.60 15.70 0.75 0.74 0.74 2.62 2.26 2.32 6% 5% 5% Vanguard Int’l Semiconductor 5347.TWO 28 34.65 -19% UW 56,427 13.20 13.20 12.20 2.39 2.24 2.09 5.89 5.73 5.12 19% 18% 18% Average 11.9 14.9 12.3 2.8 2.4 1.9 12.2 9.1 6.9 19% 19% 16% TFT-LCDs AU Optronics 2409.TW 13 9.13 42% OW 80,591 26.80 24.00 25.00 0.27 0.48 0.47 4.33 4.07 3.26 2% 2% 2% G-TECH Optoelectronics 3149.TW 51 31.8 60% EW 7,380 16.30 7.50 7.10 1.56 1.41 1.27 18.65 12.04 11.32 10% 20% 19% Richtek Technology 6286.TW 177 130.5 35% OW 19,512 12.80 11.10 10.40 2.88 2.59 2.36 17.69 15.46 14.35 23% 25% 24% Chipbond Technology 6147.TWO 72 61.4 17% OW 36,668 13.70 11.60 9.00 1.91 1.89 1.72 12.63 9.49 7.69 14% 17% 20% Elan Microelectronics 2458.TW 40 44.8 -10% UW 18,652 13.50 13.70 13.30 2.67 2.63 2.57 18.63 18.19 17.35 20% 19% 20% Novatek Microelectronics 3034.TW 141 124.5 13% OW 75,247 16.40 14.80 12.00 2.98 2.85 2.69 22.43 19.71 15.90 19% 20% 23% Innolux 3481.TW 10.5 10.85 -3% UW 98,061 15.40 28.90 22.10 0.52 0.51 0.50 4.21 5.28 5.38 3% 2% 2% Radiant Opto-Electronics 6176.TW 122 107 14% OW 48,443 10.90 9.20 8.40 2.35 2.11 1.91 13.40 11.02 9.69 22% 24% 24% TPK 3673.TW 153 168 -8% UW 54,891 6.70 14.90 15.40 1.48 1.61 1.78 8.65 10.10 9.74 23% 10% 10% Wintek Corporation 2384.TW 6.5 10.25 -36% UW 16,890 -2.50 -4.20 -4.30 0.67 0.79 0.97 -112.65 37.93 34.05 -23% -17% -20% Average 13.0 13.2 11.8 1.7 1.7 1.6 0.8 14.3 12.9 11% 12% 12% BasicIndustriesandEnergy China Steel 2002.TW 21 25.4 -17% UW 382,174 23.80 22.00 21.10 1.36 1.36 1.36 12.50 11.30 10.81 6% 6% 6% China Steel Chemical 1723.TW 174 164.5 5% EW 38,971 17.20 16.80 16.60 5.50 5.21 4.96 13.82 13.28 13.08 33% 32% 31% Formosa Chemicals 1326.TW 100.6 85.2 18% OW 499,373 18.20 16.70 14.80 1.68 1.61 1.54 13.15 11.29 10.21 10% 10% 11% Formosa Petrochemical 6505.TW 80.5 81 0% EW 771,603 31.70 25.30 23.80 3.37 3.22 3.11 19.63 16.45 16.04 11% 13% 13% Formosa Plastics 1301.TW 74.1 78.9 -6% EW 482,939 27.50 23.40 21.50 2.11 2.02 1.94 42.40 37.77 34.64 8% 9% 9% Nan Ya Plastics 1303.TW 77.6 68.4 13% OW 542,468 22.80 18.50 16.10 1.94 1.85 1.76 19.60 15.98 13.96 9% 10% 11% TSRC 2103.TW 67.8 43.5 55% OW 34,208 18.60 10.70 8.60 1.91 1.73 1.60 10.24 7.01 5.82 10% 17% 19% Average 22.8 19.1 17.5 2.6 2.4 2.3 18.8 16.2 14.9 12% 14% 14% Consumer Giant Manufacturing 9921.TW 238.3 213 11% OW 79,889 22.40 19.70 17.60 4.63 4.25 3.90 15.62 13.93 12.20 22% 23% 23% Ginko International 8406.TWO 585 623 -6% EW 56,259 38.80 28.80 22.40 8.68 7.16 5.87 31.00 22.71 18.37 23% 27% 29% Merida Industry 9914.TW 243.7 232 5% OW 66,061 22.50 20.00 17.50 6.52 5.77 5.08 24.19 19.79 16.97 31% 31% 31% St. Shine Optical 1565.TWO 822 876 -6% EW 44,165 28.50 23.40 19.00 14.74 11.64 9.21 21.88 18.38 15.17 50% 55% 54% Uni-President Enterprises 1216.TW 57.1 53.3 7% EW 274,720 20.00 19.30 18.00 2.02 1.96 1.88 9.40 8.43 7.59 10% 10% 11% Gourmet Master 2723.TW 223 208.5 6% OW 29,424 43.40 21.50 16.50 4.79 4.31 3.81 15.80 10.20 8.02 11% 21% 25% President Chain Store 2912.TW 197.9 208 -4% EW 216,241 27.40 24.80 22.50 7.33 6.78 6.34 12.30 11.14 10.33 28% 28% 29% Wowprime 2727.TW 440 475 -7% EW 32,276 29.60 24.80 21.40 7.85 7.17 6.72 14.26 11.54 9.73 26% 33% 36% Cheng Shin Rubber Industry 2105.TW 88.4 76.5 15% OW 215,625 13.60 12.30 11.90 3.20 2.78 2.49 8.49 7.78 6.92 26% 24% 22% Average 27.4 21.6 18.5 6.6 5.8 5.0 17.0 13.8 11.7 25% 28% 29% RealEstate Chong Hong Construction Co. 5534.TW 94.9 89.1 6% EW 21,795 5.20 12.00 - 1.82 1.96 - 5.14 12.59 - 41% 16% 0% Far Eastern New Century 1402.TW 36.5 34.3 6% EW 167,975 18.10 16.80 - 1.46 1.43 - 163.30 124.00 - 8% 9% 0% Farglory Land Development 5522.TW 61.8 51.8 19% EW 39,960 5.70 7.60 - 1.13 1.04 - 7.04 12.39 - 21% 14% 0%




FIGURE 148 (CONTINUED) Taiwan coverage universe

Pot. Up/


Company Ticker PT Price (%) Rating local curr) 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Huaku Development 2548.TW 108.5 86 26% OW 23,806 8.10 7.40 7.60 1.71 1.53 1.44 10.37 7.89 8.45 22% 22% 19% Hung Poo Real Estate Development 2536.TW 43.7 31.05 40% OW 9,909 7.70 6.30 6.10 0.86 0.81 0.77 11.02 7.90 5.54 12% 13% 13% Kindom Construction 2520.TW 50.5 38 32% OW 18,951 17.70 4.60 5.50 1.70 1.29 1.17 35.74 8.66 8.82 10% 32% 22% Prince Housing & Development 2511.TW 23.3 17.5 33% EW 20,903 12.80 10.80 9.20 1.16 1.09 1.04 21.92 27.88 18.62 9% 10% 12% Taiwan Fertilizer 1722.TW 89 67.7 31% OW 66,346 21.00 14.10 12.20 1.25 1.20 1.17 38.04 21.07 17.67 6% 9% 10% Average 12.0 10.0 5.1 1.4 1.3 0.7 36.6 27.8 7.4 16% 16% 9% IndustrialsandTransportation Evergreen Marine Corp Ltd. 2603.TW 17.06 17.5 -2% EW 60,805 -23.70 95.60 53.40 1.03 1.03 1.01 24.46 12.72 10.22 -4% 1% 2% Hiwin Technologies 2049.TW 264 252 4% OW 63,963 33.10 25.20 20.90 5.50 4.80 4.16 21.85 16.57 13.91 18% 20% 21% Wan Hai Lines 2615.TW 15.272 15.15 0% EW 33,621 24.00 23.30 25.70 1.10 1.09 1.09 5.06 4.94 5.19 5% 5% 4% Yang Ming Marine Transport 2609.TW 12.481 12.8 -2% EW 36,080 -7.80 34.70 25.90 1.28 1.23 1.17 -102.61 16.85 12.91 -15% 4% 5% Airtac International Group 1590.TW 255 253 0% OW 40,607 26.40 21.60 18.30 4.64 4.34 3.85 16.08 12.79 10.85 23% 21% 22% Average 10.4 40.1 28.8 2.7 2.5 2.3 -7.0 12.8 10.6 5% 10% 11% Telecommunications Chunghwa Telecom 2412.TW 86 92.7 -7% UW 719,115 19.10 18.20 17.40 2.19 2.15 2.12 8.48 8.32 8.15 12% 12% 12% Far EasTone 4904.TW 72 64.2 12% OW 209,196 16.90 15.30 14.00 2.83 2.78 2.74 7.63 7.20 6.77 17% 19% 20% Taiwan Mobile 3045.TW 105 95.8 9% EW 257,712 16.20 14.70 14.00 5.10 4.96 4.92 8.45 8.17 7.89 34% 35% 35% Average 17.4 16.1 15.1 3.4 3.3 3.3 8.2 7.9 7.6 21% 22% 23% FinancialServices CTBC Financial 2891.TW 22 19.45 13% OW 271,566 13.40 10.40 9.80 1.39 1.30 1.23 1.9% 3.9% 4.5% 12% 13% 13% E.Sun Financial 2884.TW 20 19.75 1% OW 90,356 13.20 11.80 11.00 1.35 1.27 1.21 0.9% 1.3% 1.8% 11% 12% 12% First Financial 2892.TW 17.5 18 -2% EW 137,978 13.10 12.90 - 1.07 1.05 - 2.1% 1.3% 1.5% 8% 8% 0% Mega Financial 2886.TW 27 24.65 9% OW 278,067 11.90 10.90 - 1.24 1.18 - 3.4% 4.2% 5.0% 11% 11% 0% SinoPac Financials 2890.TW 15.6 14.55 7% OW 109,740 11.00 10.50 - 1.08 1.05 - 0.9% 2.5% 3.1% 11% 11% 0% Cathay Financial 2882.TW 50.7 46.4 9% OW 520,533 18.40 17.10 15.50 2.05 1.93 1.81 1.1% 1.5% 1.6% 12% 12% 12% Fubon Financial 2881.TW 47.9 42.1 13% OW - 12.10 11.40 10.50 1.35 1.29 1.21 2.3% 2.2% 2.9% 11% 12% 12% ShinKong Financial 2888.TW 12.3 10.3 19% OW 93,594 8.90 14.10 9.20 0.97 0.89 0.80 0.0% 0.3% 0.3% 11% 7% 9% Average 12.8 12.4 7.0 1.3 1.2 0.8 1.6% 2.1% 2.6% 11% 11% 7% Notes: Prices as of the market close on 9 December 2013 in local currency. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Industry views: Pos: Positive; Neu: Neutral; Neg: Negative. Asia ex-Japan Wireless Equipment & Products industry view is Positive. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Bloomberg, Barclays Research estimates




TAIWAN EQUITY MODEL PORTFOLIO METHODOLOGY

The Barclays Research Taiwan Equity Model Portfolio is an actively managed portfolio of long-only Taiwan-listed stocks, assuming US$100mn in assets under management. Stocks selected for this portfolio reflect a fundamental-driven selection process that combines our sector views and our analysts’ bottom-up research.

Methodology for the model portfolio • Actively managed, long-only model portfolio: We include long-only stocks selected

from our current Taiwan equity research coverage universe. We will maintain at least 10 stocks in our model portfolio.

• Portfolio size: We assume a portfolio size of US$100mn on 7 February 2012.

• Sector weightings/sector preference: We use a number of qualitative and quantitative factors to form our sector weightings, which are mainly theme-driven. The Taiwan Strategy Team identifies multiple short-term trends that are driven by a combination of valuations; price and profitability momentums; infliction points; and macro environment and liquidity factors. We look for candidates using a bottom-up approach and do not apply sector ratings. The model portfolio does not incorporate sectors and stocks that Barclays Research currently does not cover or rate.

• Stock selection: We will use a bottom-up approach to choose candidates for the model portfolio once we have determined our key investment themes. We will only incorporate stocks within the portfolio that are within the Barclays Research coverage universe and are rated Overweight or Equal Weight by our analysts.

• Performance tracking: Model portfolio performance is tracked over time based on actual stock price performance and relative to performance of the MSCI Taiwan index. The model portfolio delta percentage change (since the portfolio initiation date) is compared with the MSCI Taiwan index percentage change to determine the relative outperformance or underperformance since the portfolio initiation date and at various stages. Single stock performance and portfolio performance before and after execution costs and stamp costs will be shown.

• Transaction costs: We assume an 18bps execution cost for theoretical transactions in the portfolio and a 30bps stamp duty upon exit. Each theoretical transaction size cannot exceed one-third of daily trading volume in the respective stock.

• Currency: The model portfolio is documented in USD except for current prices and price targets, which are represented in local currency. Currency conversion from TWD to USD is made using the forex rate on the trading date.

• Dividends: We assume dividends are reinvested.

• Delta: Delta is cumulative and builds as we change portfolio composition. Delta refers to the difference between the total cost of the portfolio (in USD) and the market value (in TWD).

Changes in portfolio composition Frequency: We will publish a report each time we make a change to the portfolio composition, and at least one per quarter. Changes may be triggered by the following:

• A change in an analyst’s stock rating or sector view.

• A change in our strategy investment themes.



Frequently used terms • Cost or Volume Weighted Average Price (VWAP): The average price for a stock for a

specific date and time. Calculated as (price x volume)/total volume for the time and date specified. For example, VWAP on 16 January 2012 refers to the average price during 16 January 2012.

• Current Price: The closing price of the stock on the closest day before the research publication date.

• Rating: Refers to Barclays Research’s stock and industry ratings.

• Execution Costs: The 18bps cost charged upon executing a stock position in the theoretical portfolio.

• Sell stamp: The 30bps cost charged upon exiting a stock position in the theoretical portfolio.

• Shares: The number of shares within the portfolio for each stock.

• 90-day volatility: The measure of the risk of price moves for a security calculated from standard deviation of daily historical price changes. The 90-day price volatility equals the annualized standard deviation of the relative price change for the 90 most recent trading days’ closing prices.

• Total cost: Calculated as [(VWAP x shares)/USD:TWD] + execution cost of 0.18bps + sell stamp of 30bps.

• Market value: Calculated as (current price x shares)/USD:TWD.

• Delta: The difference between total cost and market value.



ANALYST(S) CERTIFICATION(S):

We, Kent Chan, Emily Huang, May Yan, Noel Chan, Yang Song, Phoebe Tse, Jon Windham, CFA, Alicia Yap, CFA, Kirk Yang, Jamie Yeh, EphremRavi, Somshankar Sinha, Paul Louie, Sidney Yeh, Andrew Lu, Vineet Sharma, CFA, Anand Ramachandran, CFA, Dale Gai, Clement Chen, Ada Dai, Sebastian Hou, Candy Huang, William Huang, Grace Li, Alvin Wong, Sharnie Wong and Patrick Xu., hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a writtenrequest to: Barclays Research Compliance, 745 Seventh Avenue, 14th Floor, New York, NY 10019 or refer to http://publicresearch.barclays.com or call 212-526-1072.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities.

Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account.

Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits.

In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer tohttps://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. In order to access Barclays Research Conflict Management Policy Statement, please refer to: http://group.barclays.com/corporates-and-institutions/research/research-policy.

The Corporate and Investment Banking division of Barclays produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.

Materially Mentioned Stocks (Ticker, Date, Price)

Advanced Semiconductor Engineering (2311.TW, 11-Dec-2013, TWD 28.05), Overweight/Positive, C/D/J/K/L/M

AIA Group Ltd. (1299.HK, 11-Dec-2013, HKD 37.70), Overweight/Neutral, A/C/D/J/K/L/M

Airtac International Group (1590.TW, 11-Dec-2013, TWD 252.00), Overweight/Neutral, C/J

Aluminum Corporation of China Ltd. (2600.HK, 11-Dec-2013, HKD 2.74), Underweight/Neutral, D/J/L

Anhui Conch Cement Co., Ltd. (0914.HK, 11-Dec-2013, HKD 29.20), Overweight/Neutral, J

Anton Oilfield Services (3337.HK, 11-Dec-2013, HKD 4.85), Overweight/Positive, J

Asustek Computer Inc. (2357.TW, 11-Dec-2013, TWD 261.50), Overweight/Neutral, J

Baidu, Inc. (BIDU, 11-Dec-2013, USD 173.24), Overweight/Positive, C/F/J

Bank of China Limited (3988.HK, 11-Dec-2013, HKD 3.62), Overweight/Neutral, C/D/J/K/L/M/N

Bank of East Asia Ltd. (0023.HK, 11-Dec-2013, HKD 32.90), Underweight/Neutral, J/K/M/N

Beijing Capital International Airport (0694.HK, 11-Dec-2013, HKD 6.48), Overweight/Neutral, J

Belle International Holdings Ltd. (1880.HK, 11-Dec-2013, HKD 8.99), Overweight/Neutral, J

Catcher Technology Co., Ltd. (2474.TW, 11-Dec-2013, TWD 197.00), Overweight/Positive, J

Cathay Financial Holding (2882.TW, 11-Dec-2013, TWD 46.60), Overweight/Neutral, D/J/K/L/M/N

Cheng Shin Rubber Industry Co., Ltd. (2105.TW, 11-Dec-2013, TWD 76.50), Overweight/Neutral, J

China Hongqiao Group Ltd. (1378.HK, 11-Dec-2013, HKD 4.79), Overweight/Neutral, D/J/L

China Life (2628.HK, 11-Dec-2013, HKD 24.65), Equal Weight/Neutral, C/J/O

China Merchants Holdings (International) Co., Ltd. (0144.HK, 11-Dec-2013, HKD 28.80), Overweight/Neutral, E/J/K/L/M/N

China Mobile (0941.HK, 11-Dec-2013, HKD 81.40), Underweight/Neutral, C/J

China Railway Construction Corp., Ltd. (1186.HK, 11-Dec-2013, HKD 8.17), Overweight/Positive, D/J/K/L/M/N

China Railway Group Ltd. (0390.HK, 11-Dec-2013, HKD 4.30), Overweight/Positive, E/J/L

China Shenhua Energy Co., Ltd. (1088.HK, 11-Dec-2013, HKD 24.55), Overweight/Neutral, C/D/J/K/L/M/N

China Southern Airlines (1055.HK, 11-Dec-2013, HKD 3.06), Overweight/Neutral, C/J/O

China Taiping (0966.HK, 11-Dec-2013, HKD 15.56), Underweight/Neutral, J/K/M

China Unicom (0762.HK, 11-Dec-2013, HKD 11.74), Equal Weight/Neutral, C/J




Chipbond Technology (6147.TWO, 11-Dec-2013, TWD 56.30), Overweight/Positive, J

Chongqing Rural Commercial Bank (3618.HK, 11-Dec-2013, HKD 3.78), Underweight/Neutral, J

Chow Tai Fook Jewellery Group Ltd. (1929.HK, 11-Dec-2013, HKD 11.68), Overweight/Neutral, J

Chunghwa Telecom (2412.TW, 11-Dec-2013, TWD 92.90), Underweight/Neutral, C/D/J/K/L/M

CNOOC (0883.HK, 11-Dec-2013, HKD 15.44), Overweight/Positive, C/D/E/J/K/L/M/N

Other Material Conflicts: The Corporate and Investment Banking division of Barclays is providing investment banking services to BG Group PLC in connection with the sale of certain interests in Queensland Curtis LNG to China National Offshore Oil Corporation (CNOOC). The effects of thistransaction has not been incorporated into the analysts views due to Barclays role in this potential transaction.

COSCO Pacific Limited (1199.HK, 11-Dec-2013, HKD 10.94), Overweight/Neutral, J/K/N

CSR Corporation Ltd. (1766.HK, 11-Dec-2013, HKD 6.59), Overweight/Neutral, J

Other Material Conflicts: The Corporate and Investment Banking Division of Barclays is providing investment banking services to Zhuzhou Times New Material Technology Co Ltd, a subsidiary of CSR Corp Ltd., for its proposed acquisition of the Rubber & Plastics Business Unit from ZF Friedrichshafen AG.

CTBC Financial Holding (2891.TW, 11-Dec-2013, TWD 19.60), Overweight/Neutral, D/J/K/L/M/N

Ctrip.com International Ltd. (CTRP, 11-Dec-2013, USD 46.83), Overweight/Positive, C/F/J

Delta Electronics Inc. (2308.TW, 11-Dec-2013, TWD 161.50), Overweight/Neutral, J

Far EasTone (4904.TW, 11-Dec-2013, TWD 64.00), Overweight/Neutral, J/K/M

First Financial Holding (2892.TW, 11-Dec-2013, TWD 18.05), Equal Weight/Neutral, D/J/K/L/M/N

Formosa Chemicals (1326.TW, 11-Dec-2013, TWD 85.60), Overweight/Positive, J/K/M

Galaxy (0027.HK, 11-Dec-2013, HKD 63.45), Overweight/Positive, J

Golden Eagle Retail Group Ltd. (3308.HK, 11-Dec-2013, HKD 10.26), Overweight/Neutral, J

Gourmet Master (2723.TW, 11-Dec-2013, TWD 202.00), Overweight/Neutral, A/D/J/L

Hang Lung Properties Ltd. (0101.HK, 11-Dec-2013, HKD 24.90), Overweight/Negative, J

Hang Seng Bank Ltd. (0011.HK, 11-Dec-2013, HKD 124.50), Overweight/Neutral, C/D/J/K/L/M/N

Hengan International Group Co., Ltd. (1044.HK, 11-Dec-2013, HKD 95.80), Overweight/Neutral, J

Hermes Microvision Inc. (3658.TWO, 11-Dec-2013, TWD 929.00), Overweight/Positive, A/D/J/L

Hiwin Technologies Corp. (2049.TW, 11-Dec-2013, TWD 250.00), Overweight/Neutral, C/J

Huaku Development Co., Ltd. (2548.TW, 11-Dec-2013, TWD 86.20), Overweight/Negative, J

Jiangsu Expressway Co., Ltd. (0177.HK, 11-Dec-2013, HKD 9.62), Overweight/Neutral, J

Kindom Construction (2520.TW, 11-Dec-2013, TWD 36.70), Overweight/Negative, J

Kinsus Interconnect Technology (3189.TW, 11-Dec-2013, TWD 93.50), Overweight/Positive, J

KWG Property Holding (1813.HK, 11-Dec-2013, HKD 4.47), Overweight/Negative, D/J/L

Largan Precision Co., Ltd. (3008.TW, 11-Dec-2013, TWD 1170.00), Overweight/Positive, C/J

Lenovo Group Ltd. (0992.HK, 11-Dec-2013, HKD 9.45), Overweight/Neutral, D/J/K/L/M

MediaTek Inc. (2454.TW, 11-Dec-2013, TWD 430.00), Overweight/Positive, J

Mega Financial Holding (2886.TW, 11-Dec-2013, TWD 25.25), Overweight/Neutral, D/J/K/L/M/N

Merida Industry (9914.TW, 11-Dec-2013, TWD 223.00), Overweight/Neutral, J

MGM China (2282.HK, 11-Dec-2013, HKD 28.45), Overweight/Positive, C/J

Nan Ya Plastics (1303.TW, 11-Dec-2013, TWD 69.60), Overweight/Positive, J/K/M

Nan Ya Printed Circuit Board (8046.TW, 11-Dec-2013, TWD 34.85), Underweight/Positive, J/K/M

New World Development Co., Ltd. (0017.HK, 11-Dec-2013, HKD 9.96), Underweight/Negative, J

Novatek Microelectronics Corp. (3034.TW, 11-Dec-2013, TWD 119.50), Overweight/Positive, J

Parkson Retail Group Ltd. (3368.HK, 11-Dec-2013, HKD 2.48), Underweight/Neutral, J

PetroChina (0857.HK, 11-Dec-2013, HKD 8.76), Overweight/Positive, C/D/J/K/L/M/N/O/R

PICC Property & Casualty (2328.HK, 11-Dec-2013, HKD 12.36), Overweight/Neutral, J/K/M

Ping An (2318.HK, 11-Dec-2013, HKD 72.70), Overweight/Neutral, C/J/K/M

Qihoo 360 Technology Co., Ltd. (QIHU, 11-Dec-2013, USD 79.91), Overweight/Positive, J

Quanta Computer Inc. (2382.TW, 11-Dec-2013, TWD 66.80), Underweight/Neutral, J

Radiant Opto-Electronics Corp. (6176.TW, 11-Dec-2013, TWD 105.00), Overweight/Positive, J




Sands China Ltd. (1928.HK, 11-Dec-2013, HKD 61.40), Overweight/Positive, D/J/K/L/M

Sany Heavy Equipment Int'l Holdings Co., Ltd. (0631.HK, 11-Dec-2013, HKD 2.53), Underweight/Neutral, J

Shanda Games Ltd. (GAME, 11-Dec-2013, USD 4.10), Underweight/Positive, J

Shimao Property Holdings Ltd. (0813.HK, 11-Dec-2013, HKD 18.54), Overweight/Negative, J

Shin Kong Financial Holding (2888.TW, 11-Dec-2013, TWD 10.20), Overweight/Neutral, C/J/K/M

Siliconware Precision Industries (2325.TW, 11-Dec-2013, TWD 35.80), Overweight/Positive, J

Taiwan Mobile (3045.TW, 11-Dec-2013, TWD 96.20), Equal Weight/Neutral, J

Tencent Holdings Ltd. (0700.HK, 11-Dec-2013, HKD 474.60), Overweight/Positive, C/D/J/L

TSMC (2330.TW, 11-Dec-2013, TWD 105.00), Overweight/Positive, D/J/K/L/M

Uni-President Enterprises (1216.TW, 11-Dec-2013, TWD 53.40), Equal Weight/Neutral, C/J

Want Want China Holdings Ltd. (0151.HK, 11-Dec-2013, HKD 11.18), Overweight/Neutral, J

Wintek Corporation (2384.TW, 11-Dec-2013, TWD 9.79), Underweight/Positive, J

Yangzijiang Shipbuilding (Holdings) Ltd. (YAZG.SI, 11-Dec-2013, SGD 1.13), Overweight/Neutral, D/J/L

Zhuzhou CSR Times Electric (3898.HK, 11-Dec-2013, HKD 28.35), Overweight/Neutral, J

Zoomlion Heavy Industry Science and Technology Co., Ltd. (1157.HK, 11-Dec-2013, HKD 7.36), Overweight/Neutral, E/J/L

Disclosure Legend:

A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of the issuer in theprevious 12 months.

B: An employee of Barclays Bank PLC and/or an affiliate is a director of this issuer.

C: Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in securities issued by this issuer or one of its affiliates.

D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months.

E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuerwithin the next 3 months.

F: Barclays Bank PLC and/or an affiliate beneficially owned 1% or more of a class of equity securities of the issuer as of the end of the month prior to the research report's issuance.

G: One of the analysts on the coverage team (or a member of his or her household) owns shares of the common stock of this issuer.

H: This issuer beneficially owns 5% or more of any class of common equity securities of Barclays Bank PLC.

I: Barclays Bank PLC and/or an affiliate has a significant financial interest in the securities of this issuer.

J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of this issuer.

K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from this issuer within the past 12 months.

L: This issuer is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.

M: This issuer is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLCand/or an affiliate.

N: This issuer is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate.

O: Barclays Capital Inc., through Barclays Market Makers, is a Designated Market Maker in this issuer's stock, which is listed on the New York Stock Exchange. At any given time, its associated Designated Market Maker may have "long" or "short" inventory position in the stock; and its associated Designated Market Maker may be on the opposite side of orders executed on the floor of the New York Stock Exchange in the stock.

P: A partner, director or officer of Barclays Capital Canada Inc. has, during the preceding 12 months, provided services to the subject company for remuneration, other than normal course investment advisory or trade execution services.

Q: The Corporate and Investment Banking division of Barclays Bank PLC, is a Corporate Broker to this issuer.

R: Barclays Capital Canada Inc. and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months.

S: Barclays Capital Canada Inc. is a market-maker in an equity or equity related security issued by this issuer.

The MSCI sourced information is the exclusive property of MSCI Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, inno event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for




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Guide to the Barclays Fundamental Equity Research Rating System:

Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe").

In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral orNegative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating

Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon.

Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12-month investment horizon.

Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon.

Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or tocomply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking Division of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company.

Industry View

Positive - industry coverage universe fundamentals/valuations are improving.

Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.

Negative - industry coverage universe fundamentals/valuations are deteriorating.

Below is the list of companies that constitute the "industry coverage universe":

Asia ex-Japan Autos & Auto Parts

Ashok Leyland Ltd. (ASOK.NS) Bajaj Auto Ltd. (BAJA.NS) Bharat Forge (BFRG.NS)

Cheng Shin Rubber Industry Co., Ltd. (2105.TW)

Exide Industries (EXID.NS) Hankook Tire Co., Ltd. (161390.KS)

Hero Motocorp Ltd. (HROM.NS) Hyundai Glovis Co., Ltd. (086280.KS) Hyundai Mobis (012330.KS)

Hyundai Motor Company (005380.KS) Hyundai Wia Corp. (011210.KS) Kia Motors Corporation (000270.KS)

Mahindra & Mahindra Ltd. (MAHM.NS) Mando Corp. (060980.KS) Maruti Suzuki India Limited (MRTI.NS)

Motherson Sumi Systems (MOSS.NS) Nexen Tire Corp. (002350.KS) Tata Motors Ltd. (TAMO.NS)

TVS Motor Co., Ltd. (TVSM.NS)

Asia ex-Japan Banks

Agricultural Bank of China Limited (1288.HK)

Axis Bank (AXBK.NS) Bank Central Asia (BBCA.JK)

Bank Mandiri (BMRI.JK) Bank Negara Indonesia (BBNI.JK) Bank of Baroda (BOB.NS)

Bank of China (Hong Kong) Ltd. (2388.HK) Bank of China Limited (3988.HK) Bank of Communications Co., Ltd. (3328.HK)

Bank of East Asia Ltd. (0023.HK) Bank of India (BOI.NS) Bank Rakyat Indonesia (BBRI.JK)

Bank Tabungan Negara (BBTN.JK) BS Financial Group (138930.KS) China CITIC Bank Corporation (0998.HK)

China Construction Bank Corp. (0939.HK) China Merchants Bank Co., Ltd. (3968.HK) China Minsheng Banking Corp., Ltd. (1988.HK)

Chongqing Rural Commercial Bank (3618.HK)

CTBC Financial Holding (2891.TW) Dah Sing Banking Group Ltd. (2356.HK)

Dah Sing Financial Holdings Ltd. (0440.HK) DBS Group Holdings, Ltd. (DBSM.SI) DGB Financial Group (139130.KS)

E.Sun Financial Holding (2884.TW) Federal Bank (FED.NS) First Financial Holding (2892.TW)

Hana Financial Group (086790.KS) Hang Seng Bank Ltd. (0011.HK) HDFC Bank (HDBK.NS)

HSBC Holdings PLC (0005.HK) ICICI Bank (ICBK.NS) Indusind Bank (INBK.NS)

Industrial & Commercial Bank of China Ltd. (1398.HK)

Industrial Bank of Korea (024110.KS) ING Vysya Bank (VYSA.NS)

KB Financial Group (105560.KS) Kotak Mahindra Bank Ltd. (KTKM.NS) Mega Financial Holding (2886.TW)

OCBC Group (OCBC.SI) Punjab National Bank (PNBK.NS) Shinhan Financial Group (055550.KS)

SinoPac Financial Holdings (2890.TW) Standard Chartered PLC (2888.HK) State Bank of India (SBI.NS)




UOB Group (UOBH.SI) Wing Hang Bank Ltd. (0302.HK) Woori Finance Holdings (053000.KS)

Yes Bank (YESB.NS)

Asia ex-Japan Capital Goods

ABB Ltd. (ABB.NS) Airtac International Group (1590.TW) Alstom T&D India Ltd. (ALST.NS)

BGR Energy Systems Ltd. (BGRE.NS) Bharat Heavy Electricals Ltd. (BHEL.NS) Crompton Greaves Ltd. (CROM.NS)

CSR Corporation Ltd. (1766.HK) Cummins India Ltd. (CUMM.NS) Dongfang Electric Corp., Ltd. (1072.HK)

Doosan Heavy Industries & Construction (034020.KS)

Harbin Electric Co., Ltd. (1133.HK) Havells India Ltd. (HVEL.NS)

Hiwin Technologies Corp. (2049.TW) KEC International Ltd. (KECL.NS) Larsen & Toubro Ltd. (LART.NS)

Lonking Holdings Limited. (3339.HK) Sany Heavy Equipment Int'l Holdings Co., Ltd. (0631.HK)

Shanghai Electric Group Co., Ltd. (2727.HK)

Siemens Ltd. (SIEM.NS) Sinotruk (Hong Kong) Limited. (3808.HK) Thermax Ltd. (THMX.NS)

Voltas Ltd. (VOLT.NS) Weichai Power Co., Ltd. (2338.HK) Xinjiang Goldwind Science & Technology Co., Ltd. (2208.HK)

Zhuzhou CSR Times Electric (3898.HK) Zoomlion Heavy Industry Science and Technology Co., Ltd. (1157.HK)

Asia ex-Japan Cosmetics and HPC

Able C&C (078520.KS) Amorepacific (090430.KS) Cosmax (044820.KS)

Dabur India Ltd. (DABU.NS) Godrej Consumer Products Ltd. (GOCP.NS) Hengan International Group Co., Ltd. (1044.HK)

Hindustan Unilever Ltd. (HLL.NS) Korea Kolmar (161890.KS) LG Household & Healthcare (051900.KS)

Asia ex-Japan Engineering & Construction

China Communications Construction Co., Ltd. (1800.HK)

China Railway Construction Corp., Ltd. (1186.HK) China Railway Group Ltd. (0390.HK)

China State Construction International (3311.HK)

Asia ex-Japan Gaming & Leisure

Galaxy (0027.HK) Grand Korea Leisure Co., Ltd. (114090.KS) Kangwon Land Inc. (035250.KS)

MGM China (2282.HK) Paradise Co., Ltd. (034230.KQ) Sands China Ltd. (1928.HK)

SJM (0880.HK) Wynn Macau (1128.HK)

Asia ex-Japan General Retail

Anta Sports Products Ltd. (2020.HK) Belle International Holdings Ltd. (1880.HK) China Dongxiang (Group) Co., Ltd. (3818.HK)

Chow Tai Fook Jewellery Group Ltd. (1929.HK)

CJ O Shopping (035760.KQ) E-Mart (139480.KS)

Esprit Holdings Limited (0330.HK) Golden Eagle Retail Group Ltd. (3308.HK) Gome Electrical Appliances (0493.HK)

Gourmet Master (2723.TW) GS Home Shopping (028150.KQ) GS Retail (007070.KS)

Hyundai Department Store (069960.KS) Hyundai Home Shopping (057050.KS) L'Occitane International (0973.HK)

Li & Fung Limited (0494.HK) Li Ning Co., Ltd. (2331.HK) Lifestyle International Holdings Ltd. (1212.HK)

Lotte Shopping (023530.KS) New World Department Store China Ltd. (0825.HK) Parkson Retail Group Ltd. (3368.HK)

PRADA S.p.A. (1913.HK) President Chain Store (2912.TW) Sa Sa International (0178.HK)

Samsonite International (1910.HK) Shinsegae (004170.KS) Trinity Ltd. (0891.HK)

Wowprime (2727.TW)

Asia ex-Japan Infrastructure & Transport

Adani Ports and SEZ Ltd. (APSE.NS) Air China (0753.HK) AirAsia Bhd (AIRA.KL)

AirAsia X Bhd (AIRX.KL) Anhui Expressway Co., Ltd. (0995.HK) Asia Aviation PCL (AAV.BK)

Beijing Capital International Airport (0694.HK)

Cathay Pacific Airways (0293.HK) China COSCO Holdings Co., Ltd. (1919.HK)

China Eastern Airlines (0670.HK) China Merchants Holdings (International) Co., Ltd. (0144.HK)

China Rongsheng Heavy Ind. (1101.HK)

China Shipping Container Lines Co., Ltd. (2866.HK)

China Shipping Development Co., Ltd. (1138.HK) China Southern Airlines (1055.HK)




ComfortDelGro (CMDG.SI) COSCO Pacific Limited (1199.HK) Essar Ports Ltd. (ESRS.NS)

Evergreen Marine Corp Ltd. (2603.TW) GMR Infrastructure Ltd. (GMRI.NS) Gujarat Pipavav Port Ltd. (GPPL.NS)

GVK Power & Infrastructure Ltd. (GVKP.NS) Hopewell Highway Infrastructure Ltd. (0737.HK) Hutchison Port Holdings Trust (HPHT.SI)

IL&FS Transportation Networks Ltd. (ILFT.NS)

International Container Terminal Services Inc. (ICT.PS)

IRB Infrastructure Developers Ltd. (IRBI.NS)

Jaiprakash Associates Ltd. (JAIA.NS) Jiangsu Expressway Co., Ltd. (0177.HK) Malaysia Airports Holdings Bhd (MAHB.KL)

Neptune Orient Lines Ltd. (NEPS.SI) Orient Overseas (International) Ltd. (0316.HK) Pacific Basin Shipping Ltd. (2343.HK)

Reliance Infrastructure Ltd. (RLIN.NS) Shenzhen Expressway Co., Ltd. (0548.HK) Sichuan Expressway Co., Ltd. (0107.HK)

Singamas Container Holdings Ltd. (0716.HK) Sinotrans Shipping Ltd. (0368.HK) Wan Hai Lines (2615.TW)

Westports Holdings Bhd (WPHB.KL) Yang Ming Marine Transport (2609.TW) Yangzijiang Shipbuilding (Holdings) Ltd. (YAZG.SI)

Zhejiang Expressway Co., Ltd. (0576.HK)

Asia ex-Japan Insurance

AIA Group Ltd. (1299.HK) Bajaj Finserv (BJFS.NS) Cathay Financial Holding (2882.TW)

China Life (2628.HK) China Pacific Insurance (2601.HK) China Taiping (0966.HK)

Dongbu Insurance (005830.KS) Fubon Financial Holding (2881.TW) Hanwha Life (088350.KS)

Hyundai Marine & Fire (001450.KS) LIG Insurance (002550.KS) Max India (MAXI.NS)

PICC Property & Casualty (2328.HK) Ping An (2318.HK) Reliance Capital Ltd. (RLCP.NS)

Samsung Fire & Marine (000810.KS) Samsung Life (032830.KS) Shin Kong Financial Holding (2888.TW)

Asia ex-Japan Internet & Media

Baidu, Inc. (BIDU) Changyou.com Ltd. (CYOU) CJ CGV (079160.KS)

Ctrip.com International Ltd. (CTRP) Daum Communications (035720.KQ) E-Commerce China Dangdang Inc. (DANG)

Giant Interactive Group (GA) Naver Corp. (035420.KS) NetEase, Inc. (NTES)

Perfect World Co., Ltd. (PWRD) Qihoo 360 Technology Co., Ltd. (QIHU) Qunar (QUNR)

Renren Inc. (RENN) Shanda Games Ltd. (GAME) Sina Corp. (SINA)

Sohu.com Inc. (SOHU) Television Broadcasts Ltd. (0511.HK) Tencent Holdings Ltd. (0700.HK)

Youku Tudou Inc. (YOKU)

Asia ex-Japan IT Hardware

Acer Inc. (2353.TW) Asustek Computer Inc. (2357.TW) Compal Electronics Inc. (2324.TW)

Delta Electronics Inc. (2308.TW) Digital China Holdings Ltd. (0861.HK) Dynapack Int'l Technology Corp. (3211.TWO)

Epistar Corporation (2448.TW) Foxconn Technology Co., Ltd. (2354.TW) Hon Hai Precision Industry Co., Ltd. (2317.TW)

Lenovo Group Ltd. (0992.HK) LG Innotek (011070.KS) Pegatron Corp. (4938.TW)

Quanta Computer Inc. (2382.TW) Samsung Electro-Mechanics (009150.KS) Samsung SDI (006400.KS)

Simplo Technology Co., Ltd. (6121.TWO) Skyworth Digital Holdings Ltd. (0751.HK) Synnex Technology International (2347.TW)

TPV Technology Ltd. (0903.HK) Wistron Corporation (3231.TW)

Asia ex-Japan LCD Displays

Advanced Process Systems (054620.KQ) AU Optronics Corp. (2409.TW) Cheil Industries (001300.KS)

G-TECH Optoelectronics Corp. (3149.TW) Iljin Display (020760.KS) Innolux Corp. (3481.TW)

LG Display (034220.KS) Melfas (096640.KS) Radiant Opto-Electronics Corp. (6176.TW)

SFA Engineering (056190.KQ) TPK Holding Co., Ltd. (3673.TW) Wintek Corporation (2384.TW)

Asia ex-Japan Metals & Mining

ACC Limited (ACC.NS) Adaro Energy Tbk PT. (ADRO.JK) Aluminum Corporation of China Ltd. (2600.HK)

Ambuja Cements (ABUJ.NS) Angang Steel Co., Ltd. (0347.HK) Anhui Conch Cement Co., Ltd. (0914.HK)

Banpu PCL (BANP.BK) BHP Billiton Ltd. (BHP.AX) Bumi Resources Tbk PT. (BUMI.JK)

China Coal Energy Co., Ltd. (1898.HK) China Hongqiao Group Ltd. (1378.HK) China National Building Material Co., Ltd. (3323.HK)

China Resources Cement Holdings Ltd. (1313.HK)

China Shanshui Cement Group Ltd. (0691.HK) China Shenhua Energy Co., Ltd. (1088.HK)




China Steel Corp. (2002.TW) Coal India (COAL.NS) CST Mining Group Ltd. (0985.HK)

Fortescue Metals Group Ltd. (FMG.AX) Harum Energy Tbk PT. (HRUM.JK) Hindalco Industries Ltd. (HALC.NS)

Hindustan Zinc Ltd. (HZNC.NS) Hyundai Steel Co. (004020.KS) Indo Tambangraya Megah Tbk PT. (ITMG.JK)

IRC Ltd. (1029.HK) Jiangxi Copper Co., Ltd. (0358.HK) Jindal Steel & Power (JNSP.NS)

JSW Steel (JSTL.NS) Korea Zinc Co., Ltd. (010130.KS) Maanshan Iron & Steel Co., Ltd. (0323.HK)

MMG Limited. (1208.HK) National Aluminium Co., Ltd. (NALU.NS) NMDC Ltd. (NMDC.NS)

POSCO (005490.KS) Sesa Sterlite Ltd (SESA.NS) Shree Cement (SHCM.NS)

Steel Authority of India (SAIL.NS) Tata Steel (TISC.NS) TB Bukit Asam Tbk PT. (PTBA.JK)

UC Rusal (0486.HK) Yanzhou Coal Mining Co., Ltd. (1171.HK)

Asia ex-Japan Oil & Gas

Anton Oilfield Services (3337.HK) Bharat Petroleum Corp., Ltd. (BPCL.NS) Cairn India (CAIL.NS)

China Oilfield Services (COSL) (2883.HK) China Steel Chemical (1723.TW) CNOOC (0883.HK)

EZRA Holdings (EZRA.SI) Formosa Chemicals (1326.TW) Formosa Petrochemical (6505.TW)

Formosa Plastics (1301.TW) Gail India (GAIL.NS) Hilong Holding, Ltd. (1623.HK)

Hindustan Petroleum Corp., Ltd. (HPCL.NS) Honghua Group (0196.HK) Indian Oil Corp., Ltd. (IOC.NS)

Keppel Corp. (KPLM.SI) Nan Ya Plastics (1303.TW) Oil & Natural Gas Corp., Ltd. (ONGC.NS)

Oil India (OILI.NS) PetroChina (0857.HK) PETRONAS Chemicals (PCGB.KL)

Petronet LNG (PLNG.NS) Reliance Industries (RELI.NS) Sembcorp Marine (SCMN.SI)

Sinopec (0386.HK) SPT Energy Group (1251.HK) TSRC Corp. (2103.TW)

Asia ex-Japan Real Estate

Agile Property Holdings (3383.HK) Ananda Development PCL (ANAN.BK) Ascendas REIT (AEMN.SI)

CapitaCommercial Trust (CACT.SI) CapitaLand (CATL.SI) CapitaMall Trust (CMLT.SI)

CapitaMalls Asia (CMAL.SI) Champion REIT (2778.HK) Cheung Kong (Holdings) Ltd. (0001.HK)

China Overseas Grand Oceans Group (0081.HK)

China Overseas Land & Investment (0688.HK) China Resources Land (1109.HK)

Chong Hong Construction Co. (5534.TW) City Developments (CTDM.SI) Country Garden Holdings (2007.HK)

DLF Ltd. (DLF.NS) Evergrande Real Estate Group (3333.HK) Far Eastern New Century Corp. (1402.TW)

Farglory Land Development Co., Ltd. (5522.TW)

Godrej Properties Ltd. (GODR.NS) Greentown China Holdings Ltd. (3900.HK)

Guangzhou R&F Properties Co., Ltd. (2777.HK)

Hang Lung Properties Ltd. (0101.HK) Henderson Land Development Co., Ltd. (0012.HK)

Hongkong Land Holdings Ltd. (HKLD.SI) Huaku Development Co., Ltd. (2548.TW) Hung Poo Real Estate Development Corp. (2536.TW)

Hysan Development Co., Ltd. (0014.HK) Keppel Land (KLAN.SI) Keppel REIT (KASA.SI)

Kerry Properties Ltd. (0683.HK) Kindom Construction (2520.TW) KWG Property Holding (1813.HK)

Link REIT (0823.HK) Longfor Properties (0960.HK) Mapletree Industrial Trust (MAPI.SI)

Mapletree Logistics Trust (MAPL.SI) Midland Holdings Ltd. (1200.HK) New World Development Co., Ltd. (0017.HK)

Oberoi Realty Ltd. (OEBO.NS) Poly Property Group Co., Ltd. (0119.HK) Prestige Estates Projects Ltd. (PREG.NS)

Prince Housing & Development Corp. (2511.TW)

Shimao Property Holdings Ltd. (0813.HK) Sino Land Co., Ltd. (0083.HK)

Sino-Ocean Land Holdings Ltd. (3377.HK) Sobha Developers Ltd. (SOBH.NS) Sun Hung Kai Properties Ltd. (0016.HK)

Sunac China Holdings Ltd. (1918.HK) Suntec REIT (SUNT.SI) Swire Properties Ltd. (1972.HK)

Taiwan Fertilizer Co., Ltd. (1722.TW) Wharf (Holdings) Ltd. (0004.HK)

Asia ex-Japan Semiconductors

Advanced Semiconductor Engineering (2311.TW)

Chipbond Technology (6147.TWO) Chroma ATE Inc. (2360.TW)

Elan Microelectronics (2458.TW) Hermes Microvision Inc. (3658.TWO) Inotera Memories, Inc. (3474.TW)

Kinsus Interconnect Technology (3189.TW) MediaTek Inc. (2454.TW) MStar Semiconductor, Inc. (3697.TW)

Nan Ya Printed Circuit Board (8046.TW) Novatek Microelectronics Corp. (3034.TW) Phison Electronics (8299.TWO)

Powertech Technology (6239.TW) Richtek Technology (6286.TW) Samsung Electronics (005930.KS)




Siliconware Precision Industries (2325.TW) SK Hynix (000660.KS) TSMC (2330.TW)

United Microelectronics Corp. (2303.TW) Vanguard International Semiconductor (5347.TWO) Visual Photonics Epitaxy Co., Ltd. (2455.TW)

Win Semiconductors Corp. (3105.TWO)

Asia ex-Japan Staples

Ajisen (China) Holdings Ltd. (0538.HK) China Mengniu Dairy Co., Ltd. (2319.HK) China Resources Enterprise, Ltd. (0291.HK)

Giant Manufacturing (9921.TW) Ginko International (8406.TWO) Hop Hing Group Holdings (0047.HK)

ITC Ltd. (ITC.NS) KT&G (033780.KS) Merida Industry (9914.TW)

Nestle India Ltd. (NEST.NS) St. Shine Optical (1565.TWO) Sun Art Retail Group (6808.HK)

Tingyi Holdings Corp. (0322.HK) Tsingtao Brewery Co., Ltd. (0168.HK) Uni-President Enterprises (1216.TW)

Want Want China Holdings Ltd. (0151.HK)

Asia ex-Japan Telecom Services

Advanced Info Service (ADVA.BK) Axiata Group (AXIA.KL) Bharti Airtel Ltd. (BRTI.NS)

Bharti Infratel Ltd. (BHRI.NS) China Mobile (0941.HK) China Telecom (0728.HK)

China Unicom (0762.HK) Chunghwa Telecom (2412.TW) DiGi.Com (DSOM.KL)

Far EasTone (4904.TW) HKT Trust and HKT Limited (6823.HK) Hutchison Telecom HK (0215.HK)

Idea Cellular Ltd. (IDEA.NS) KT Corp. (030200.KS) LG Uplus Corp. (032640.KS)

M1 (MONE.SI) Maxis (MXSC.KL) PCCW Limited (0008.HK)

PT Indosat (ISAT.JK) PT Telkom (TLKM.JK) PT XL Axiata (EXCL.JK)

Reliance Communications Ltd. (RLCM.NS) Singapore Telecom (STEL.SI) SK Telecom (017670.KS)

SmarTone Telecommunications Holdings Ltd. (0315.HK)

StarHub Limited (STAR.SI) Taiwan Mobile (3045.TW)

Telekom Malaysia (TLMM.KL) Total Access Communication (DTAC.BK)

Asia ex-Japan Wireless Equipment & Products

AAC Technologies Holdings (2018.HK) BYD Electronics (0285.HK) Career Technology (6153.TW)

Catcher Technology Co., Ltd. (2474.TW) Compal Communications Inc. (8078.TW) FIH Mobile Ltd. (2038.HK)

Flexium Interconnect (6269.TW) HTC Corp. (2498.TW) Largan Precision Co., Ltd. (3008.TW)

LG Electronics (066570.KS) Lite-On Technology Corp. (2301.TW) Sunny Optical Technology (2382.HK)

Tripod Technology Corp. (3044.TW) TXC Corp. (3042.TW) Unimicron Technology Corp. (3037.TW)

Wistron NeWeb Corp. (6285.TW) Zhen Ding Technology (4958.TW) ZTE Corporation (0763.HK)

Distribution of Ratings:

Barclays Equity Research has 2589 companies under coverage.

44% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 48% of companies with this rating are investment banking clients of the Firm.

39% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 43% ofcompanies with this rating are investment banking clients of the Firm.

15% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 39% of companies with this rating are investment banking clients of the Firm.

Guide to the Barclays Research Price Target:

Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock willtrade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period.

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Barclays Capital Inc. (BCI, New York)

Tokyo

Barclays Securities Japan Limited (BSJL, Tokyo)

São Paulo




Banco Barclays S.A. (BBSA, São Paulo)

Hong Kong

Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)

Toronto

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Johannesburg

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EQUITY RESEARCH Asia Ex-Japan Banks May Yan Sharnie Wong, CA Noel Chan +852 2903 4756 +852 2903 3457 +886 2 663 84693 [email protected] [email protected] [email protected] Barclays Bank, Hong Kong Barclays Bank, Hong Kong BCSTW, Taiwan

Asia ex-Japan Capital Goods Yang Song Sebastian Hou + 852 2903 2489 +886 2 663 84687 [email protected] [email protected] Barclays Bank, Hong Kong BCSTW, Taiwan

Asia Ex-Japan General Retail Candy Huang +852 2903 4883 [email protected] Barclays Bank, Hong Kong

Asia Ex-Japan Gaming & Leisure Phoebe Tse +852 2903 4285 [email protected] Barclays Bank, Hong Kong

Asia ex-Japan Infrastructure & Transport Jon Windham, CFA Patrick Xu, CFA +852 2903 4672 +852 2903 3458 [email protected] [email protected] Barclays Bank, Hong Kong Barclays Bank, Hong Kong

Asia ex-Japan Insurance Noel Chan +886 2 663 84693 [email protected] BCSTW, Taiwan

Asia ex-Japan Internet & Media Alicia Yap, CFA William Huang +852 2903 4593 +852 2903 4766 [email protected] [email protected] Barclays Bank, Hong Kong Barclays Bank, Hong Kong

Asia ex-Japan IT Hardware Kirk Yang Dale Gai +852 2903 4635 +886 2 663 84697 [email protected] [email protected] Barclays Bank, Hong Kong BCSTW, Taiwan

Asia ex-Japan LCD Displays Jamie Yeh +886 2 663 84689 [email protected] BCSTW, Taiwan

Asia ex-Japan Metals & Mining Ephrem Ravi Ada Dai +852 2903 4892 +852 2903 4052 [email protected] [email protected] Barclays Bank, Hong Kong Barclays Bank, Hong Kong

Asia ex-Japan Oil & Gas Somshankar Sinha Clement Chen Sidney Yeh +852 2903 2434 +852 2903 2498 +886 2 663 84677 [email protected] [email protected] [email protected] Barclays Bank, Hong Kong Barclays Bank, Hong Kong BCSTW, Taiwan

Asia ex-Japan Real Estate Paul Louie Alvin Wong Sidney Yeh +852 2903 4545 +852 2903 4535 +886 2 663 84677 [email protected] [email protected] [email protected] Barclays Bank, Hong Kong Barclays Bank, Hong Kong BCSTW, Taiwan

Asia ex-Japan Semiconductors Andrew Lu +886 2 663 84698 [email protected] BCSTW, Taiwan

Asia ex-Japan Staples Vineet Sharma, CFA Emily Huang Grace Li +852 2903 4609 +886 2 663 84692 +886 2 663 84684 [email protected] [email protected] [email protected] Barclays Bank, Hong Kong BCSTW, Taiwan BCSTW, Taiwan

Asia ex-Japan Telecom Services Anand Ramachandran, CFA +65 6308 3895 [email protected] Barclays Bank, Singapore

Asia ex-Japan Wireless Equipment & Products Dale Gai Kirk Yang +886 2 663 84697 +852 2903 4635 [email protected] [email protected] BCSTW, Taiwan Barclays Bank, Hong Kong

ECONOMICS RESEARCH Jian Chang * Wai Ho Leong * +852 2903 2654 +65 6308 3292 [email protected] [email protected] *These authors are members of the Fixed Income, Commodities and Currencies Research department and are not equity analysts.

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