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Review of 2011 Asia Quantitative Outlook and introduction of new ideasSandy Lee+852 2252 2101 / [email protected] Quantitative Strategies Asia ex-JapanEquity Quantitative Strategies, Asia ex-JapanMay 2011

YTD 2011 factor performance in Asia Quality (ROE, profit margin), mid-term price momentum, and earnings revision-related y ( , p g ), p , g

indicators fared well. Value factors saw declining performance, while larger cap outperformed.

2010 annualised return % YTD 2011 annualised return %Rank Top 10 factors 2010 annualised return (% ) Factor category1 Change in earnings yield 16.10 Revision & chg in EY2 Earnings yield 13.59 Valuation3 Earnings revision indicator (FY 12.67 Revision & chg in EY4 Normalised E/P 11.63 Revision & chg in EY5 StarMine predicted surprise 11 56 Revision & chg in EY

Rank Top 10 factors YTD annualised return (% ) Factor category1 Return on equity 15.47 Financial strength2 Change in earnings yield 13.15 Revision & chg in EY3 Price momentum (12M -1M) 13.09 Size, momentum & liquidity4 Price momentum (6M -1M) 12.41 Size, momentum & liquidity5 StarMine predicted surprise 12 18 Revision & chg in EY5 StarMine predicted surprise 11.56 Revision & chg in EY

6 Revision index 10.79 Revision & chg in EY7 Dividend yield 7.59 Valuation8 Price momentum (12M -1M) 5.89 Size, momentum & liquidity9 Sales/Price 4.95 Valuation10 Trade momentum (3M) 4.72 Size, momentum & liquidity

5 StarMine predicted surprise 12.18 Revision & chg in EY6 Long term price momentum 11.60 Size, momentum & liquidity7 Consensus rating * 11.09 Revision & chg in EY8 Earnings revision indicator (FY2) 11.01 Revision & chg in EY9 Change in ROE (FY2) 9.99 Growth10 Pretax profit margin 8.27 Financial strength

Rank Bottom 10 factors 2010 annualised return (% ) Factor category41 Default probability * (7.51) Financial strength40 Shareholders’ equity ratio (6.77) Financial strength39 Average daily traded value (4.31) Size, momentum & liquidity38 Return on assets (3.50) Financial strength37 Asset turnover (3 34) Financial strength

Rank Bottom 10 factors YTD annualised return (% ) Factor category41 Estimate dispersion (10.56) Revision & chg in EY40 Asset turnover (9.54) Financial strength39 B/P (7.33) Valuation38 Price momentum (1M) (6.34) Size, momentum & liquidity37 M k t * (6 16) Si t & li idit37 Asset turnover (3.34) Financial strength

36 Price momentum (1M) (3.09) Size, momentum & liquidity35 Trailing profit margin (2.28) Financial strength34 Change in ROE (FY2) (2.08) Growth33 Trailing EBITDA/EV (1.55) Valuation32 Long term price momentum (1.31) Size, momentum & liquidity

37 Market cap * (6.16) Size, momentum & liquidity36 Volatility (5.66) Size, momentum & liquidity35 Trailing EBITDA/EV (4.88) Valuation34 Shareholders’ equity ratio (3.93) Financial strength33 Sales/Price (3.41) Valuation32 Default probability * (2.97) Financial strength

3© Nomura International (Hong Kong) Limited

Notes: Factor returns are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest quintile and short the quintile with the lowest scores (rebalanced monthly), except for the factors marked *, which are computed reverse-based. Factor returns do not include transaction costs. Universe is based on the MSCI Standard Index in AC Asia Pacific ex-Japan. Factor definitions are shown in Appendix I. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Risk-adjusted factor performance in Asia Among value, E/P outperformed while B/P underperformed. Growth, capex/sales saw improved IRs.g , p p , p p

YTD 2011 IR

Average daily traded valueVolatility

Long term price momentum Price momentum (12M -1M)Price momentum (6M -1M)

Price momentum (3M)Price momentum (1M)

Market cap *

Trailing EBITDA/EVCashflow yield

Sales/PriceB/P

Earnings yieldDividend Payout

Dividend yield

Volume turnover ratioTrade momentum (3M)

Average daily traded value

Consensus rating *Estimate dispersion

StarMine predicted surpriseNormalised E/P

Change in earnings yieldEarnings revision indicator (FY2)

Revision index

EBITDA/EVTrailing EBITDA/EV

Return on assets

EPS growth (FY2)EPS growth (FY1)

Sales growth (FY2)Sales growth (FY1)

Sales growth (1Y)Change in ROE (FY2)Change in ROE (FY1)

(5) (4) (3) (2) (1) 0 1 2 3 4 5 Default probability *

Capex to salesCapex to assets

Asset turnoverPretax profit margin

Trailing profit marginShareholders’ equity ratio

Return on equity


Notes: Figures are annualised information ratio. Universe is based on the MSCI Standard Index in AC Asia Pacific ex-Japan. Factor definitions are shown in Appendix I.Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

( ) ( ) ( ) ( ) ( )

Average alpha for DM catching up with EM

In the past few months alongside net inflows and relative outperformance the average In the past few months, alongside net inflows and relative outperformance, the average factor alpha for developed Asia appears to have been catching up with its emerging peers.

Of late, the average correlation between factor returns has been rising, as investors become more risk-averse.

Average factor performance (long short spread return by quintile)

Average correlation of typical quant factors and cumulative returns for select factors

more risk averse.

2025303540

Emerging Asia

Asia Pacif ic ex Jp0.5

0.6

0.7

25303540

CorrelationCum. return (%)

E/P (LHS)

-505

1015

Developed Pacif ic ex Jp

0 1

0.2

0.3

0.4

05

101520

Correlation (RHS)

-105

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10 0

0.1

-10-5

Feb-

09

May

-09

Aug-

09

Nov-

09

Feb-

10

May

-10

Aug-

10

Nov-

10

Feb-

11

Revision (LHS)


Note: Universe is based on MSCI AC Asia Pacific ex-Japan. The charts show average factor performance for the 41 factors listed in Appendix I.Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Note: For correlation, the chart shows short-term (60-day) rolling average (absolute) correlation of return for 12 typical quant factors. Factor performance is calculated by cumulating the return spread between group #3 and #1. Factor portfolios are rebalanced monthly with country diversification. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

DM Asia saw improving IC since 2H 2010

Positive values of the information coefficient mean that our representative set of quant Positive values of the information coefficient mean that our representative set of quant factors are, on average, demonstrating the ability to forecast returns, and vice versa.

The utility of quant factors for investing has appeared more promising in emerging Asia since late 2009, while for developed Asia, it has been improving since 2H 2010.

Developed Pacific ex-Japan Emerging Asia

, p , p g

0.02

0.04

0.06

0.08

Factor ICs monthly

0.02

0.04

0.06Factor ICs monthly

-0.04

-0.02

0.00

0.02

0 04

-0.02

0.00

-0.08

-0.06

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

6-month moving average

-0.06

-0.04

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

6-month moving average


Notes: The information coefficient measures the correlation of the monthly ranking of stocks according to quant factors and the subsequent month’s ranking of the returns of these stocks.Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Notes: The information coefficient measures the correlation of the monthly ranking of stocks according to quant factors and the subsequent month’s ranking of the returns of these stocks.Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Review on Quants Outlook 2011 (published 9 Dec 2010)

We believe productivity and scale as well as the ability of companies to manageWe believe productivity and scale, as well as the ability of companies to manage costs, sustain capital spending and grow market share, will likely be key return drivers in 2011.

In terms of styles in Asia, we suggest adding exposure to a composite profitability and productivity factor (comprising ROE and capex/sales factors) and continue to stress earnings/price momentum and growth over value Among valuecontinue to stress earnings/price momentum and growth over value. Among value factors, we prefer E/P over B/P.

High-ROE stocks do not seem expensive by valuation viewpoints. In contrast, l ROE t k l bl t ti d dlow-ROE stocks are vulnerable to rating downgrades.

Net inflows from overseas to the Asian markets could continue in 2011. Factors that are typically preferred by foreign investors, such as capex, growth, price yp y p y g p g pmomentum and earning revisions, will see more upside potential.

We recommend a composite productivity measure that comprises ROE and capex/sales factors We think this helps to screen profitable stocks that offer


capex/sales factors. We think this helps to screen profitable stocks that offer capacity to invest for the future in order to remain competitive.

Overall profitability is still improving in Asia Asia earnings-revision trend has mean-reverted since the beginning of 2010 and margin g g g g

compression has been undermining earnings expectations of late. The regional median ROE has been improving since mid-2009.

Median ROE in Asia Pacific ex JapanEarnings momentum index

1.5

2.0

2.5

18

20

22(%)

0.5

1.0

12

14

16

0.0

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10 10

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11


Note: Earnings momentum index is defined as: % of companies with +ve Revi,t / % of companies with -ve Revi,t. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Note: Charts show median ROE in MSCI AC Asia-Pacific ex Japan universe.Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Is profitability factor becoming expensive? High-ROE stocks have consistently outperformed in 2011 YTD.g y p However, the recent relative P/E between high- and low-ROE groups remains quite stable

compared with the level seen in 2010.

Ratio of P/B and P/E between high- and low-ROE groupsDaily factor return of ROE since 2009

(%) 3 61 1

0

5

10(%)

2 8

3.0

3.2

3.4

3.6

0.9

1.0

1.1 PER (LHS)

PBR (RHS)

-10

-5

0

2 0

2.2

2.4

2.6

2.8

0.6

0.7

0.8

-15

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov-

09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov-

10

Jan-

11

Mar

-11

May

-11

1.8

2.0

0.5

Dec-

99

Dec-

00

Dec-

01

Dec-

02

Dec-

03

Dec-

04

Dec-

05

Dec-

06

Dec-

07

Dec-

08

Dec-

09

Dec-

10


Note: Performance is calculated by cumulating the return spread between high and low ROE groups (#1 and #3). Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

High-ROE stocks see faster rating upgrades The average analyst rating remains on a rising trend despite near the historical high

M di ti i A i P ifi S d i ti b t hi h d

The average analyst rating remains on a rising trend, despite near the historical high. The extremely narrow rating spread between high- and low-ROE groups has started to

turn around, suggesting the speed of rating upgrades is faster for high-ROE stocks.

Median consensus rating in Asia Pacific ex Japan seems to have peaked

Spread in consensus ratings between high and low ROE groups

1.8 0 9

1.0

2.0

2.2

2 4

Rating (market level)

0 5

0.6

0.7

0.8

0.9 Spread

2.4

2.6

2.8 0 1

0.2

0.3

0.4

0.5

3.0

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11

0.0

0.1

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11


Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Revisions for high-ROE stocks have slowed A glance at the recent revision trend for high-ROE stocks suggests a decline in the first A glance at the recent revision trend for high ROE stocks suggests a decline in the first

four months of 2011. Analysts’ revisions pose a key risk to the performance of high-ROE stocks, in our view.

Median revision index by ROE groups

5 (%)

1

2

3

4 High ROE

Low ROE

-3

-2

-1

0

-5

-4

Apr-0

0Oc

t-00

Apr-0

1Oc

t-01

Apr-0

2Oc

t-02

Apr-0

3Oc

t-03

Apr-0

4Oc

t-04

Apr-0

5Oc

t-05

Apr-0

6Oc

t-06

Apr-0

7Oc

t-07

Apr-0

8Oc

t-08

Apr-0

9Oc

t-09

Apr-1

0Oc

t-10

Apr-1

1


Note: Charts show median revision index (three-month average) for stock groups by ROE.Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

We continue to prefer high-ROE stocks We may see short-term pressure on high-ROE stocks following their outperformance. But we y p g g p

continue to prefer high-ROE stocks because: 1) their valuations are stable and the rating spread remains narrow against the low-ROE group; and 2) with inflationary pressures rising, growth and high-ROE stocks are more likely to benefit amid rising risk aversion and monetary tightening

diticonditions.Performance of composite productivity factor using ROE and capex/sales factor

(%) Composite productivity factor (capex/sales + ROE)ROE

10

20

30 O

Capex/sales

(20)

(10)

0

(30)

(20)

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10


Note: Composite productivity measure is sorting good ROE companies with high capex/sales. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Rising impact from foreigners Foreign investors have been buying Asian equities since 2009. Net inflows to Asian

markets could continue amid low interest rates in the US and with QE2.Our regression analysis suggests foreign investors prefer stocks with high exposure in

factors related to capex, mid-term momentum, growth and earnings revisions.

Asia performance and net foreigners’ buy t-stat of the coefficient for the quant factors

Capex to assetsC t l

300160 Net foreigners' buy (LHS)Capex to sales

EPS growth (FY1)Price momentum (12M -1M)

Market cap *Price momentum (6M -1M)

Default probability *

200

250

80

100

120

140 MSCI AC AP ex JP (RHS)

Default probability *Shareholders’ equity ratio

Sales growth (FY2)Earnings revision indicator (FY2)

Long term price momentum EBITDA/EV

100

150

20

40

60

80

0 0.5 1 1.5 2 2.5

EBITDA/EVEarnings yield

Change in earnings yield

500

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

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Dec

-08

Dec

-09

Dec

-10


Note: Net foreigner’s buy is defined as net foreigner’s buy volume divided by the total trading volume. Source: Bloomberg, Nomura Quantitative Strategies

Note: where y=factor return, x=net foreigners’ buy (adjusted by market return), r=market return. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

rxy

Reiterating Quants Outlook 2011 thematic screen We reiterate our Quants Outlook screen exhibiting stocks with good profitability/productivity e e e a e ou Qua s Ou oo sc ee e b g s oc s good p o ab y/p oduc y(ROE and capex/sales), positive earnings and price momentum (revision index, StarMine-predicted surprise, 12M-1M price return), and growth potential (sales growth and EPS growth). We consider the E/P factor in our screening process, to avoid picking stocks at expensive prices.

Quant screen individual factor performance Outlook quant screen outperformed YTD 2011

25 Composite profitability/productivity 40 Quant Screen

15

20

25

rman

ce (%

)

Composite momentumComposite growthForecast earnings yield

1520 25 30 35 40

rman

ce (%

)

APxJ Benchmark (Equal-weighted)

MSCI AC AP ex Japan Index (US$)

0

5

10

umul

ativ

e Pe

rfo

(10)(5)0 5

10 15

umul

ativ

e Pe

rfor

(5)

Dec

-09

Feb-

10

Apr-1

0

Jun-

10

Aug-

10

Oct

-10

Dec

-10

Feb-

11

Apr-1

1

C u (15)(10)

Dec

-09

Feb-

10

Apr-1

0

Jun-

10

Aug-

10

Oct

-10

Dec

-10

Feb-

11

Apr-1

1

C u


Note: The chart shows cumulative long-short performance of the four factor categories in our quant screen. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Note: The chart shows cumulative long-only performance of our quant screen since the launch of investment idea. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Latest Quants Outlook screen basketStocks with productivity/profitability, positive earnings and price momentum, and growth potential

Bloomberg Composite Composite earnings/ Composite Forecast Fundamental PriceBloomberg Composite Composite earnings/ Composite Forecast Fundamental PriceMarket code Name Sector productivity price momentum growth earnings yield (%) rating 29-Apr-11Australia WPL AU Woodside Petroleum Energy 3.0 1.1 4.0 4.9 BUY 46.80Australia GMG AU Goodman International Financials 2.4 0.9 -0.8 8.5 Not rated 0.71Australia NAB AU National Australia Bank Financials -0.6 0.3 -1.0 9.4 NEUTRAL 27.08Australia AIO AU Asciano Industrials -0.2 0.4 0.9 6.0 Not rated 1.65China 151 HK Want Want China Hldgs Consumer Staples 2.1 -0.6 0.9 4.2 BUY 6.97China 3968 HK China Merchants Bank H Financials 0.3 1.5 0.0 10.0 BUY 20.00China 200002 CS China Vanke Co B Financials -0.3 0.5 1.8 10.6 Not rated 11.00China 267 HK Citic Pacific Industrials 0.5 1.0 2.2 8.7 Not rated 23.20China 3800 HK Gcl Poly Energy Information Technology 5.4 4.4 1.1 9.0 BUY 5.55India BJAUT IN Bajaj Auto Consumer Discretionary 2.8 2.6 -0.5 6.9 BUY 1,474.00India ITC IN ITC Consumer Staples 0.5 2.8 -0.5 4.1 BUY 192.35India IIB IN Indusind Bank Financials 0.0 4.5 1.5 6.3 Not rated 259.80India LICHF IN Lic Housing Finance Financials -0.2 3.3 0.3 9.6 Not rated 219.25India DRRD IN Dr Reddy's Laboratories Health Care 0.4 0.0 0.3 5.2 BUY 1,663.90Korea 005270 KS Daegu Bank Financials -1.0 0.3 -0.5 13.8 BUY 17,900Korea 005830 KS Dongbu Insurance Co Financials 0.1 0.7 0.9 11.0 Not rated 51,000Korea 042670 KS Doosan Infracore Co Industrials 1.4 2.0 0.4 9.6 Not rated 29,600Korea 000660 KS Hynix Semiconductor Information Technology 2.4 1.6 0.6 10.4 NEUTRAL 33,800Korea 010130 KS Korea Zinc Materials 1.7 6.4 -0.2 10.1 Not rated 422,000Korea 017670 KS SK Telecom Co Telecom Services 0.6 -1.3 -0.4 13.3 BUY 162,500Malaysia IOI MK IOI Corp Consumer Staples 0 4 1 5 1 4 6 7 BUY 5 29Malaysia IOI MK IOI Corp Consumer Staples -0.4 -1.5 -1.4 6.7 BUY 5.29Malaysia PBKF MK Public Bank Fgn Financials -0.4 1.0 0.3 7.7 NEUTRAL 13.10Malaysia SPSB MK SP Setia Financials 0.3 0.5 3.5 4.1 NEUTRAL 4.18Philippines AP PM Aboitiz Power Utilities 2.0 4.6 -1.5 9.1 Not rated 31.55Singapore JCNC SP Jardine Cycle & Carriage Consumer Discretionary -0.2 3.8 1.0 9.2 Not rated 36.88Singapore OLAM SP Olam International Consumer Staples -0.5 0.4 1.4 6.2 BUY 2.87Taiwan 2891 TT Chinatrust Finl Hldgs Financials -0.8 1.7 -0.2 6.8 BUY 26.25Taiwan 2884 TT E.Sun Financial Holdings Financials -0.9 1.7 0.5 7.6 BUY 20.30gTaiwan 2881 TT Fubon Financial Holding Financials -1.0 1.5 -0.3 7.4 BUY 42.00Taiwan 2609 TT Yang Ming Marine Transp Industrials 0.1 -0.4 0.9 13.3 REDUCE 24.25Taiwan 8069 TT E Ink Holdings Information Technology 0.5 1.2 5.2 9.7 Not rated 58.30Taiwan 6121 TT Simplo Technology Co Information Technology 0.5 -0.2 1.0 8.2 BUY 194.00Taiwan 3044 TT Tripod Technology Corp Information Technology 1.0 0.8 0.5 9.2 NEUTRAL 135.50Taiwan 2344 TT Winbond Electronics Corp Information Technology 0.7 1.0 2.4 11.1 Not rated 9.03Taiwan 2103 TT TSRC Corp Materials 1.1 4.4 -0.1 9.7 Not rated 85.50

Note: Data as of 30 April 2011. Selection of stocks screened from the MSCI Asia-Pacific ex-Japan. Stocks that fall in the top two quintiles of each market and sector on composite productivity, and those that are in the first half by composite momentum and composite growth are highlighted. We also consider value factor E/P in our screening process to avoid picking stocks at expensive prices and hence excludes the bottom two quintiles stocks by forecast E/P. Source: Worldscope, StarMine, I/B/E/S, MSCI, Nomura Quantitative Strategies 15

Taiwan 3045 TT Taiwan Mobile Telecom Services 1.5 0.9 -1.6 6.5 BUY 73.90Thailand KBANK TB Kasikornbank Financials -0.4 -1.0 0.7 8.6 NEUTRAL 126.50

Introducing Style Selection Model Different style strategies tend to cycle in and out of favor depending on the investment y g y p g

environment and macro circumstances. We exploit a systematic approach to select investment styles, with the objective of securing consistent performance in the long run.

Changes in factor leadership over the cycle show the importance of style investing.

Investment styles matter: Factor returns by periodsPerformance of major factors (mid 2007 – Feb 2011)

20

30

40(%) Dividend yield

E/PB/PPrice momentum (12M-1M)Revision index

Average Std.dev. IR Average Std.dev. IR Average Std.dev. IRDividend yield 9.4 10.3 0.9 (1.4) 6.2 (0.2) 7.3 3.8 1.9

200708 ‐ 200902 200903 ‐ 200912 201001 ‐ 201102

(20)

(10)

0

10

Revision indexE/P (2.1) 8.1 (0.3) 22.2 5.6 4.0 13.7 4.4 3.1B/P (2.8) 9.1 (0.3) 31.2 12.2 2.5 2.0 6.1 0.3CF/P (2.7) 6.0 (0.4) 31.7 8.3 3.8 2.8 5.2 0.5Mid‐term price mtm 5.5 12.8 0.4 (35.0) 20.2 (1.7) 5.3 5.7 0.9Revision index 11.5 4.7 2.4 (3.5) 5.6 (0.6) 10.2 3.7 2.7

(30)

(20)

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Estimates dispersion (10.2) 7.0 (1.5) 27.2 7.8 3.5 (1.6) 4.8 (0.3)Default probability * 8.3 11.4 0.7 (40.5) 14.6 (2.8) (6.7) 6.6 (1.0)


Note: Universe is based on MSCI AC Asia-Pacific ex-Japan. Data run to 28 February. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Note: Factor returns are annualised figures and do not include transaction costs. The factors marked with * are reverse-based. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Defining eight style themes

Our style selection model starts from creating stock portfolios through screening on eight Our style selection model starts from creating stock portfolios through screening on eight style themes. Style indices are calculated by tracking performance of the long-short portfolios of a given investment style theme.

Definition of eight investment styles Illustration of screening methodology

Style Factors Definition

Sort by style factorAsia

Quintile 1

Quintile 2

Long portfolio

+Size * Market cap Log of US$ market cap

Momentum Price momentum (12M ‐1M)Last 12‐month return less the last 1 month return in local currency

Yield Dividend yield F12‐month DPS / stock priceValuation Earnings yield F12‐month EPS / stock price

B/P Actual BPS / stock priceSort by style factor

(for each country and sector)

Pacif ic ex-Japan

UniverseQuintile 3

Quintile 4

Quintile 5 Short portfolio

Style return

Revision Revision index

(Number of upward analyst revisions ‐ number ofdownward analyst revisions) / total number ofanalysts' estimate

Growth Sales growth (FY2) FY2 sales / FY1 salesEPS growth (FY2) FY2 EPS / FY1 EPS

Profitability Return on equity F12‐month net profit /actual shareholders' equityQuintile 5

‐Change in pretax profit margin FY2 pretax profit margin ‐ FY1 pretax profit margin

Risk * Volatility Past 36‐month price return volatility

Estimate dispersionI/B/E/S FY1 consensus EPS standard deviation /absolute value for FY1 consensus EPS

Default probability Default probability estimated using Merton model


Note: The factors marked with * are reverse-based. Reported data are sourced from Worldscope, consensus estimate data from I/B/E/S, and price data from Exshare.Source: Nomura Quantitative Strategies

Source: Nomura Quantitative Strategies

Return and correlation between style indicesWe use a relatively small number of styles as it is important that these style indices offerWe use a relatively small number of styles as it is important that these style indices offer

good diversification.

Long-term performance and correlation between style indicesLong term performance and correlation between style indices

Performance statisticsSize* Momentum Yield Valuation Revision Growth Profitability Risk*

Annualised return (%) 3.74 3.84 4.48 9.86 8.50 1.14 1.24 ‐0.69( )Standard derivations (%) 9.22 11.82 7.83 7.33 4.21 5.30 5.75 10.74IR 0.41 0.33 0.57 1.34 2.02 0.21 0.21 ‐0.06

Correlation coefficientsSize* Momentum Yield Valuation Revision Growth Profitability Risk*

Size* 1.00 ‐0.67 ‐0.21 0.54 ‐0.23 0.24 ‐0.35 ‐0.57Momentum ‐0.67 1.00 0.10 ‐0.56 0.41 ‐0.10 0.53 0.54Yield ‐0.21 0.10 1.00 0.13 ‐0.04 ‐0.47 ‐0.09 0.59Valuation 0 54 ‐0 56 0 13 1 00 ‐0 27 ‐0 03 ‐0 35 ‐0 40Valuation 0.54 ‐0.56 0.13 1.00 ‐0.27 ‐0.03 ‐0.35 ‐0.40Revision ‐0.23 0.41 ‐0.04 ‐0.27 1.00 0.00 0.14 0.20Growth 0.24 ‐0.10 ‐0.47 ‐0.03 0.00 1.00 0.26 ‐0.37Profitability ‐0.35 0.53 ‐0.09 ‐0.35 0.14 0.26 1.00 0.31Risk* ‐0.57 0.54 0.59 ‐0.40 0.20 ‐0.37 0.31 1.00


Note: Factor returns are annualised figures and do not include transaction costs. The factors marked with * are reverse-based. Correlation is calculated by using monthly style returns since Jan-1999. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Methodology to rank styles In line with behavioural finance literature we study key drivers of style rotation We compute In line with behavioural finance literature, we study key drivers of style rotation. We compute

the combined style ranking scores based on the respective long-term relative-value and short-term relative-strength rankings of styles. We also use market return as a risk aversion proxy to improve style timing. We select the two styles with the best ranking scores and go long top quintile and short bottom quintile of the selected style.

Illustration of the style selection model ranking process

Rank by value spread Z-score

8 StylesSize

Long-term relative-value of style

E/P & B/P spread k

1st Style

2nd Style

3rd Style

Combined style ranking

if previous month's market return Momentum

YieldValuationRevisionGrowth

Profitability

rank score

Short-term relative-

3rd Style

4th Style

5th Style

6th Style

is +ve,60%/40% on style

momentum/value spread

if previous month's market return is -ve

Rank by style 6-month return momentum

ProfitabilityRisk strength of style

Style momentum rank score

7th Style

8th Style

is ve,40%/60% on style

momentum/value spread



How we derive the latest Asia style rankingsWe illustrate how combined style ranking scores are derived using the latest style rankingsWe illustrate how combined style ranking scores are derived using the latest style rankings

in the Asia Pacific ex Japan region. Our model selects Momentum and Revision as the most attractive styles in May.

Current ranking of styles for Asia Pacific ex Japan (May 2011)

Values Ranks CombinedE/P spread B/P spread E/P spread B/P spread

z-score z-score z-score z-scoreSize* -0.07 -0.82 -3.24 2 7 8 6.6 8Momentum 0 35 0 28 7 70 1 4 1 1 6 1

Values Ranks CombinedStyle

momentumStyle

momentum Score Rank

Momentum 0.35 0.28 7.70 1 4 1 1.6 1Yield -0.68 -0.40 1.82 4 5 7 6 7Valuation -0.74 -0.70 1.91 5 6 6 5.8 6Revision -0.21 -1.50 6.80 3 8 2 3.4 2G th 1 09 0 87 2 31 8 1 4 4 2 4Growth -1.09 0.87 2.31 8 1 4 4.2 4Profitability -0.88 0.74 3.41 7 2 3 3.6 3Risk* -0.83 0.30 2.00 6 3 5 4.8 5


Note: Since MSCI AC APxJ March return is +4.15%, the equation: combined score = 20% x E/P spread rank + 20% x B/P spread rank + 60% x style momentum (6M) rank is applied. Source: Nomura Quantitative Strategies

Performance of Asia style selection model Our style rotation model has delivered fairly consistent performance over the cycle Our style rotation model has delivered fairly consistent performance over the cycle.

(%) (%)Long return (LHS)Sh (LHS)

Performance of style selection model for Asia Pacific ex Japan

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Long Short Long – short

Annualised return (%) 22.44 10.62 11.82

Standard deviation (%) 24.71 24.78 5.03

IR 0.91 0.43 2.35



Performance compared with other selectors Our Asia model delivers a consistent return and higher IR than other style selectors Our Asia model delivers a consistent return and higher IR than other style selectors.

Performance of Asia style selection model versus alternative style selectors

140

(%) Our style selection modelRelative-value only

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Long shortOur style model

(relative value + style Relative Short term style50‐50 between

relative value & Average of eightLong ‐ short performance

(relative‐value + style momentum + risk proxy)

Relative‐value only

Short‐term style momentum only

relative‐value & style momentum

Average of eight style indices

Annualised return (%) 11.82 7.78 9.96 10.56 3.94Standard deviation (%) 5.03 4.59 5.80 4.79 2.45IR 2.35 1.69 1.72 2.21 1.61Turnover (%) 34.43 40.92 21.72 32.38 ‐


Note: Turnover of the model is defined as the average number of one-way style switch each month over the total number of styles selected.Source: Nomura Quantitative Strategies

Turnover (%) 34.43 40.92 21.72 32.38

Compare those with different parameters Our Asia model yields a better IR than alternatives using different parameters Our Asia model yields a better IR than alternatives using different parameters.

Efficacy of other value and momentum parameters for Asia Pacific ex Japan model

Alternate value spread windows Expanding window 24-month rolling windowAnnualised return (%) 11.82 11.19Standard deviation (%) 5.03 5.43IR 2.35 2.06Turnover (%) 34.4 43.3

Alternate value factors E/P + B/P spread E/P spread only B/P spread onlyAnnualised return (%) 11.82 10.28 9.48Standard deviation (%) 5.03 5.16 4.99IR 2.35 1.99 1.90IR 2.35 1.99 1.90Turnover (%) 34.4 33.2 41.4

Alternate momentum measures 3-month 6-month 9-month 12-monthAnnualised return (%) 11.46 11.82 10.13 10.92Standard deviation (%) 5 51 5 03 4 63 5 53Standard deviation (%) 5.51 5.03 4.63 5.53IR 2.08 2.35 2.19 1.98Turnover (%) 38.1 34.4 36.1 36.2



Asia model works with quarterly rebalance Our Asia style selection model is effective using either monthly or quarterly rebalance Our Asia style selection model is effective using either monthly or quarterly rebalance

Efficacy of model with alternative 3-month rebalancing frequency

120(%) Our style selection model

R l ti l l

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Long shortOur style model

(relative value + style Relative Short term style50‐50 between

relative value & Average of eightLong ‐ short performance






Annualised return (%) 10.24 6.79 9.34 10.17 2.97Standard deviation (%) 4.74 4.29 6.04 4.92 2.46IR 2.16 1.58 1.55 2.06 1.21Turnover (%) 15.98 15.51 12.30 14.89 ‐



Turnover (%) 15.98 15.51 12.30 14.89

Stock screen results using model outputWe can present stock screen ideas based on styles that we selected from the modelWe can present stock screen ideas based on styles that we selected from the model.

Performance of stock screen based on the results of style selection model for Asia Pacific ex Japan

(%) (%)Long portfolio

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Long Short Benchmark Long – short Annualised return (%) 25.48 4.71 16.03 20.77Standard deviation (%) 24.99 24.64 24.59 9.37IR 1.02 0.19 0.65 2.22Turnover 69.2 69.0 4.8 138.2Number 46 40 605 85


Note: We take the long positions in the stocks that fall into top quintiles of the selected styles at the same time, and short positions in the stocks at the bottom quintiles of the selected styles. Asia Pacific ex-JP benchmark is the equal weighted return of the MSCI AC Asia Pacific ex-Japan universe, rebalanced monthly. Source: Nomura Quantitative Strategies

Does style selection model work in China? Applying the same style model to the CSI 300 universe also sees good performance Applying the same style model to the CSI 300 universe also sees good performance.

Performance of style selection model for China CSI 300

(%) (%)Long return (LHS)

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Long Short Long – short Annualised return (%) 34.33 21.33 13.00Standard deviation (%) 43.15 43.68 7.06IR 0.80 0.49 1.84



Style momentum fares best in China The correlation of monthly returns between relative-value and relative-strength strategies isThe correlation of monthly returns between relative value and relative strength strategies is

-0.37, implying better diversification opportunities in the long run.Performance of China style selection model versus alternative style selectors

(%) Our style selection model

2030405060

(%) yRelative-value onlyShort-term style mtm only50-50 value & style mtmAverage of 8 styles

(30)(20)(10)

010

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Our style model 50‐50 between Long ‐ short performance






Annualised return (%) 13.00 ‐6.10 12.65 10.43 4.23Standard deviation (%) 7.06 10.46 10.18 8.09 4.17IR 1.84 ‐0.58 1.24 1.29 1.02Turnover (%) 41 3 38 4 28 3 42 6


Note: The turnover of the model is defined as the average number of one-way style switch each month over the total number of styles selected.Source: Nomura Quantitative Strategies

Turnover (%) 41.3 38.4 28.3 42.6 ‐

Same parameters also work for China model As with the Asia style selection model our preferred China style selection model yields a As with the Asia style selection model, our preferred China style selection model yields a

higher information ratio than do other alternatives.

Efficacy of other value and momentum parameters for China CSI 300 model

Alternate value spread windows Expanding window 24-month rolling windowAnnualised return (%) 13.00 9.61Standard deviation (%) 7.06 7.38IR 1 84 1 30IR 1.84 1.30Turnover (%) 41.3 43.1

Alternate value factors E/P + B/P spread E/P spread only B/P spread onlyAnnualised return (%) 13.00 9.21 2.24Standard deviation (%) 7 06 7 55 8 57Standard deviation (%) 7.06 7.55 8.57IR 1.84 1.22 0.26Turnover (%) 41.3 36.2 42.8

Alternate momentum measures 3-month 6-month 9-month 12-monthAnnualised return (%) 6 11 13 00 0 95 10 79Annualised return (%) 6.11 13.00 0.95 10.79Standard deviation (%) 9.61 7.06 8.18 8.21IR 0.64 1.84 0.12 1.31Turnover (%) 48.9 41.3 41.7 38.4



Exhibit the latest style rankings in ChinaWe illustrate how combined style ranking scores are derived using the latest style rankingsWe illustrate how combined style ranking scores are derived using the latest style rankings

in the China CSI 300 universe. Our model selects Yield and Low risk as the most attractive styles in May.

Current ranking of styles for China CSI 300 (May 2011)

Values Ranks CombinedE/P spread B/P spread E/P spread B/P spread

z-score z-score z-score z-scoreSize* -1.19 -0.66 0.12 7 7 6 6.6 7M t 0 75 0 23 1 12 1 3 7 4 4

Values Ranks CombinedStyle

momentumStyle

momentum Score Rank

Momentum 0.75 0.23 -1.12 1 3 7 4 4Yield -0.10 1.32 9.45 4 1 3 2.7 1Valuation -0.32 -0.35 16.78 5 6 1 3.7 3Revision 0.36 -0.89 5.44 2 8 5 5 6Growth -0.99 0.52 6.59 6 2 4 4 4Profitability -1.63 0.05 -6.17 8 4 8 6.8 8Risk* 0.16 -0.05 10.85 3 5 2 3.2 2


Note: Since MSCI AC APxJ March return is -0.95%, the equation: combined score = 30% x E/P spread rank + 30% x B/P spread rank + 40% x style momentum (6M) rank is applied. Source: Nomura Quantitative Strategies

Introducing high dividend yield strategy Reference reports: Playing high yield: saving the score, 24 June, 2010.

f The dividend yield factor return in Asia is negatively correlated to the market return. The defensive nature of high-yield stocks is due to their perceived relatively lower risk. We

observe that analyst estimate dispersion and estimate revision risks in association with DPS are the lowest among the high dividend yield stocks Assuming investors prefer high-DPS are the lowest among the high dividend yield stocks. Assuming investors prefer high-yield stocks because of their lower uncertainty, we believe factors that reflect the reliability of dividends can be complementary to a high dividend yield strategy.

DPS estimate dispersion in dividend yield groups DPS revisions in following 3 months by DY groups

8(%)

Low High

35(%)

Low High

4

5

6

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25

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35 Low High

0

1

2

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#1 #2 #3 #4 #5 Universe0

5

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#1 #2 #3 #4 #5 Universe


Note: Chart shows the average of the monthly median DPS revision in the following three months from January 2000 to June 2010. Source: Nomura Quantitative Strategies

#1 #2 #3 #4 #5 Universe

Note: Chart shows the average of the monthly median DPS from January 2000 to June 2010. Source: Nomura Quantitative Strategies. Source: Nomura Quantitative Strategies

Comparing performance by reliability

List of factors Image of simulationCategory Factor Hypothesised effect

Capability Payout ratio Negative Comparing thep y y g

Earnings quality Accruals Negative

Growth EPS growth Positive

DPS th P itiDividend

yield

TopBottomComparing the performances

DPS growth Positive

Forecast change Forecast EPS change Positive

Forecast DPS change Positive

yield

Net upgrades Net analyst upgrades for EPS Positive

Net analyst upgrades for DPS Positive

Unincorporated revision EPS revision - DPS revision PositiveComplementary factor

Stability DPS dispersion Negative

Volatility of DPS Negative

Psychological resistance Yield change Positive

Universe MSCI AC Asia Pacific ex Japan

Period Jan. 2000 - May 2010

Country diversification Yes

Sector diversification Yes (GICS Level 1)

31


Psychological resistance Yield change Positive ( )

© Nomura International (Hong Kong) Limited

High reliability stocks outperformed for most factors

Factor return spread for high dividend yield stocksFactor return spread for high dividend yield stocks

Category Factor name Est. Sign Return over benchmark (annualized, %)

Top Bottom Spread

Capability Payout ratio negative 0.60 8.60 -8.01

Earnings quality Accruals negative 0.99 4.05 -3.07

Grow th EPS grow th positive 4.88 1.20 3.68

DPS grow th positive 2.23 3.16 -0.93

Momentum in revision EPS revision % positive 4.34 -0.92 5.26

EPS revision # positive 3.81 0.32 3.49

DPS i i % iti 3 97 0 80 4 77DPS revision % positive 3.97 -0.80 4.77

DPS revision # positive 4.29 0.53 3.76

Unincorporated Revision EPS revision - DPS revision positive 4.47 1.64 2.83

Stability of DPS DPS dispersion negative 3 37 2 09 1 28Stability of DPS DPS dispersion negative 3.37 2.09 1.28

Volatility of DPS negative 1.03 4.02 -2.99

Psychological resistance Yield change positive 4.33 -1.83 6.15

32

Note: Annualised returns vs the benchmark. The benchmark is an equally weighted portfolio of MSCI AC Asia Pacific ex Japan.Source: I/B/E/S, Worldscope, Nomura Quantitative Strategies

© Nomura International (Hong Kong) Limited

Our Asian high dividend yield strategy Concept: Since investors look at high dividend yield as a form of ‘safety net’, factors that Concept: Since investors look at high dividend yield as a form of safety net , factors that

indicate the reliability and sustainability of the dividend yield are important in the high-yield universe. We create a composite score based on factors that are considered good indicators of dividend reliability: earnings capability, earnings quality, growth, recent f t h t d DPS i i b k d b EPS i i t bl DPS dforecast change, net upgrades, DPS revision backed by EPS revision, stable DPS and psychological resistance.

Image of high dividend yield strategy Dividend reliability composite score

Score Category Factor name Est. Sign Top 1/3 Middle 1/3 Bottom 1/3 12

High yield stocks - distribution of reliability score%

L l hi h i ld t k Capability Payout ratio Negative -1 0 +1 Earnings quality Accruals Negative -1 0 +1 Growth EPS growth Positive +1 0 -1 Forecast change Forecast EPS change Positive +1 0 -1 Net upgrades Net analyst upgrades for DPS Positive +1 0 -1 Unincorporated Revision EPS revision – DPS revision Positive +1 0 -1 4

6

8

10Long only high yield stocks with reliability score >= 0

Stability of DPS Volatility of DPS Negative -1 0 +1 Psychological resistance Yield change Positive +1 0 -1 0

2

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8Reliability score


Note: Universe is based on MSCI All Country Asia-Pacific ex-Japan. Portfolios are rebalanced monthly and grouping simulation is conducted with country and sector diversification. Source: Nomura Quantitative Strategies

Performance summary (Asian DY models) The performance of high dividend yield strategy improves significantly, from 2pp to 7pp

annual excess return when the composite score is used for checking the reliability of theannual excess return, when the composite score is used for checking the reliability of the high-yield stocks. Even during times where dividend yield is not effective, consideration of the extra reliability check in a high dividend yield strategy delivers better performance.

Performance of high dividend yield strategy by setting a minimum criterion for the composite scorePerformance of high dividend yield strategy by setting a minimum criterion for the composite score.

70

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High yield with score >=160

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High yield Score >=0 Score >= 1 Score >=0 Score >= 1Annualized return over benchmark (%) 1.66 2.57 3.17 6.46 7.43Risk (%) 3 25 1 41 2 01 4 23 5 17

High yield with


Note: Chart shows excess return over benchmark. Benchmark is the equally weighted return of the constituents in MSCI AC Asia Pacific ex Japan. Source: Nomura Quantitative Strategies

Risk (%) 3.25 1.41 2.01 4.23 5.17IR 0.51 1.82 1.58 1.53 1.44

Appendix I: Definition of factors# Factor Description1 Market cap * Log of US$ market cap2 Price momentum (1M) Past 1-month local currency return3 Price momentum (3M) Past 3-month local currency return4 Price momentum (6M -1M) Last 6-month return less the last 1 month return in local currency5 Price momentum (12M -1M) Last 12-month return less the last 1 month return in local currency6 Long term price momentum Past 36-month local currency return7 Volatility Past 36-month price return volatility8 Average daily traded value Monthly traded value in USD / number of traded days9 Trade momentum (3M) Past 1-month trading volume - previous 3-month average trading volume10 Volume turnover ratio Past 1-month trading volume / shares outstanding at month-end0 o u e u o e a o as o ad g o u e / s a es ou s a d g a o e d11 Dividend yield F12-month DPS / stock price12 Dividend Payout Actual dividends / actual net profit before extraordinary items13 Earnings yield F12-month EPS / stock price14 B/P Actual BPS / stock price15 Sales/Price F12-month sales per share / stock price16 Cashflow yield F12-month cashflow per share / stock price17 Trailing EBITDA/EV Actual EBITDA / (market cap + interest-bearing debt - cash - short-tern marketable securities)

(F12 month net profit + actual interest expense + actual depreciation) / (market cap + interest bearing debt cash18 EBITDA/EV

(F12-month net profit + actual interest expense + actual depreciation) / (market cap + interest-bearing debt - cash -short-tern marketable securities)

19 Revision index (Number of upward analyst revisions - number of downward analyst revisions) / total number of analysts’ estimate20 Earnings revision indicator (FY2) FY2 EPS / previous 3-month average FY2 EPS21 Change in earnings yield F12-month earnings yield - past 3-month average earnings yield

22 Normalised E/P(F12-month earnings yield - average earnings yield in past 36 months) / standard deviation of the earnings yields inthe past 36 months

23 StarMine predicted surprise (SmartEstimate F12-month - consensus mean) / max(divisor, |mean|)24 Estimate dispersion I/B/ES FY1 consensus EPS standard deviation / absolute value for FY1 consensus EPS25 Consensus rating * I/B/E/S consensus analyst rating26 Change in ROE (FY1) FY1 ROE - actual ROE27 Change in ROE (FY2) FY2 ROE - FY1 ROE28 Sales growth (1Y) Actual sales / previous year actual sales29 Sales growth (FY1) FY1 sales / actual sales30 Sales growth (FY2) FY2 sales / FY1 sales31 EPS growth (FY1) FY1 EPS / actual EPSg ( )32 EPS growth (FY2) FY2 EPS / FY1 EPS33 Return on assets Actual net profit / actual total assets34 Return on equity F12-month net profit / actual shareholders’ equity35 Shareholders’ equity ratio Actual shareholders’ equity / actual total assets36 Trailing profit margin Actual net profit / actual sales37 Pretax profit margin F12-month pretax profit / F12-month sales38 Asset turnover Actual sales / actual total assets39 Capex to assets Actual capital expenditure / actual total assets


Note: The factors marked with * are reverse-based. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

39 Capex to assets Actual capital expenditure / actual total assets40 Capex to sales Actual capital expenditure / actual sales41 Default probability * Default probability estimated using Merton model

Appendix II: Publications and models Asian Equity Quantitative Research reportsy

Quantitative Outlook 2011 Asia Pacific Quantitative Insight Quants Factor Dynamics, Quants/Technicals Bulletin Asia Pacific Fundflow Insight / Asia Technical Analysis Focus Index reshuffle projection research [coverage: HSI/HSCEI, S&P/ASX 200, FTSE STI, KOSPI 200, FTSE Xinhua China

25/A50 Indices] Customised Asia Pair Trade Monitor (statistical) / Asia Trading Places (statistical + fundamental) Hong Kong Short-Selling Activity / Asia Earnings Results Monitor Asia Pacific Quantitative Landscape - The changing landscape of Asian markets – a quantitative view Asia Pacific Quantitative Landscape The changing landscape of Asian markets a quantitative view

Monthly update on Asia Equity/China A Quant models & daily factor performance (presentations) Asian Quant models reports

Style selection model – A systematic style-switching approach Playing high yield: saving the score Playing high yield: saving the score Short-selling activity – A new source of alpha? Consensus Rating Strategy – Cornering the market on ratings Mid-term Momentum Strategy – Boosting the power of the Big Mo Downside Beta Strategy – Fishing in the windgy g Value-based Accruals Strategy – The impact of accruals and the flight to quality Enhanced Earnings Revision Strategy – The long and the short of beating the herd Low Dispersion Return reversal: catching the swing China Quantitative Strategy – Towards the futures


Event-driven strategy – Buyback announcement signals value Asia Pacific Statistical Pair Trading – Managing the ups and downs

Appendix III: Asia enhanced earnings revision models Reference reports: 1) The long and the short of beating the herd: An enhanced earnings-revision

t t 25 S 2009 2) Chi Q tit ti St t T d th f t 5 M 2010strategy, 25 Sep 2009; 2) China Quantitative Strategy - Towards the futures, 5 Mar 2010. Concept: Investors can make better use of analysts’ earnings-revision information by quantifying

market signals and factors — such as valuations, predicted surprises and price/volume momentum — that reinforce the impact of earnings revisions in each marketmomentum — that reinforce the impact of earnings revisions in each market.

Long potential outperformers (high composite factor) in top earnings revision group; short potential underperformers (low composite factor) in bottom earnings revision group.

Results of Asia portfolio optimisation simulation Performance of enhanced earnings-revision strategy

300

350

io

Asia-Pacific Australia China

Hong Kong India Korea

Malaysia Singapore Thailand120

140 Enhanced earnings revision strategy (optimised long-short)

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Note: Back test with 20% turnover and 8% risk control. Source: Nomura Quantitative Strategies Note: Universe is based on the MSCI constituents. Source: Nomura Quantitative Strategies

Dec Jun

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Dec Jun

DecJa Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja

Appendix IV: Low-dispersion return-reversal strategy Reference reports: 1) Return reversal: catching the swing, 7 Dec 2009; 2) China Quantitative

St t T d th f t 5 M 2010 O l i i di t th t t k ith l l tStrategy - Towards the futures, 5 Mar 2010. Our analysis indicates that stocks with low analyst estimate dispersion have a tendency to revert faster from investor overreaction than the high dispersion group, especially for undervalued (loser group) stocks. Using residual return (the excess return that is not explained by typical fundamental factors) can further enhance the p y yp )return predictive power of a short-term return reversal strategy.

Performance of high- and low-dispersion reversal Performance of Low Dispersion Reversal Strategy

150

200

250

port

folio

Pacific HK / China

Singapore Australia

Korea Taiwan

6080

100120140160180

ive

retu

rn (%

)

Low dispersion

0

50

100

rfor

man

ce o

f L/S

p

-200

204060

ec-9

9n-

00ec

-00

n-01

ec-0

1n-

02ec

-02

n-03

ec-0

3n-

04ec

-04

n-05

ec-0

5n-

06ec

-06

n-07

ec-0

7n-

08ec

-08

n-09

ec-0

9n-

10ec

-10

Cum

ulat High dispersion

(50)

0

Dec

-99

Jun-

00D

ec-0

0Ju

n-01

Dec

-01

Jun-

02D

ec-0

2Ju

n-03

Dec

-03

Jun-

04D

ec-0

4Ju

n-05

Dec

-05

Jun-

06D

ec-0

6Ju

n-07

Dec

-07

Jun-

08D

ec-0

8Ju

n-09

Dec

-09

Jun-

10D

ec-1

0

Per

De Ju De Ju De Ju De Ju De Ju De Ju De Ju De Ju De Ju De Ju De Ju De

Low Earnings Dispersion High Earnings Dispersion SpreadAnnualized Return 14.15 6.74 7.41Risk 8.54 9.69 8.96IR 1.66 0.70


Note: Universe is based on the constituents of MSCI Hong Kong, China (HK listed), Korea, Taiwan, Singapore, and Australia. Source: Nomura Quantitative Strategies

Note: Universe is based on the constituents of MSCI Hong Kong, China (HK listed), Korea, Taiwan, Singapore, and Australia. Source: Nomura Quantitative Strategies

Appendix V: Enhancing value using HK short-sell factor Reference reports: Short-selling activity, 10 November, 2010. We define short-sell factor as the

amount of short-sell turnover divided by the total turnover of the stock. Despite both portfolios going ‘long’ value stocks, the group with heavier short-selling pressure continues to see weak price performance. In contrast, the group with low P/E stocks and least short-selling pressure outperforms leading to an annualised return spread of circa 24%outperforms, leading to an annualised return spread of circa 24%.

Low P/E stocks with recent underperformance but different level of short sell pressure150

0

50

100 Low P/E stocks with minimal short sell pressure

(100)

(50)

ec-0

3

n-04

ec-0

4

n-0 5

ec-0

5

n-06

ec-0

6

n-07

ec-0

7

n-08

ec-0

8

n-09

ec-0

9

n-10

Low P/E stocks heavily shorted by investors

De Ju De Ju De Ju De Ju De Ju De Ju De Ju

Low P/E w ith low short selling Low P/E w ith high short sellingAnnualized return (%) 18.2 -5.6Standard deviation (%) 15.8 11.4IR 1.1 -0.5Number of stocks 9 2 14 9


Note: Stocks in both portfolios are value stocks that underperformed the market in the previous month. The difference between the two portfolios is that one consists of stocks that have had considerably lower short selling activity. Annualized return by short-selling activity is relative to the market. Source: HKEx, I/B/E/S, Nomura Quantitative Strategies

Number of stocks 9.2 14.9

Appendix VI: Capital flow information matters in China A We analyze normalized 5-day capital flow ratio for each stock in the CSI 300 universe. We analyze normalized 5 day capital flow ratio for each stock in the CSI 300 universe.

Normalized 5-day capital flow ratio = cumulative 5-day capital flow / cumulative 5-day traded value Capital flow = net capital flow from super funds + large investors – medium investors – small investors Order size: super fund (RMB over 1M), large investor (RMB 200K-1M), medium investor (RMB 40K-200K),

small investor (RMB 0-40K)small investor (RMB 0 40K) Stocks with strong capital flow outperformed the market since 2010.

Performance of top 30 stocks by normalize 5-day capital flow ratio versus CSI 300 Index

140

160

180

Top 30‐stocks portfolio

CSI 300 Index

80

100

120

60

Jan‐10

Feb‐10

Mar‐10

Apr‐10

May‐10

Jun‐10

Jul‐1

0

Aug

‐10

Sep‐10

Oct‐10

Nov

‐10

Dec

‐10

Jan‐11

Feb‐11

Mar‐11

Apr‐11


Note: We screen top 30 stocks ranked by normalized 5-day capital flow ratio, and rebalance the portfolio daily.Source: Wind, Nomura Quantitative Strategies

Appendix VII: Organisation of Nomura Global Quant StrategyTokyo Hong Kong London New York

E it St t d Q tit ti

Quantitative Research Center

E it Q tit ti Asia Quantitative

Equity Quantitative

Equity Strategy and Quantitative Research Team

Quantitative Research Dept.

Equity Quantitative Research Dept.

Quant Solution

Sandy Lee (6)Kenneth ChanY hi Shi i

Ian Scott (9)Inigo Fraser-JenkinsSh thi N i

Joseph J Mezrich (5)Yasushi IshikawaG Ji

Asia Quantitative Research Dept.

Hiromichi Tamura (34)

Strategy Group

IB Solution

Research Group

Hiromichi Tamura (6)Tomonori UchiyamaYoko Ishige

Yasuhiro ShimizuRico KwanTacky ChengDesmond Chan

Shanthi NairJane PearceMark DiverRishav DevSaurabh Katiyar

Gang JiangJunbo FengAki Matsui

Index Products

IB Solution Research Group

Yoko IshigeAkihiro MurakamiMami OdeNaoko Kato

Saurabh KatiyarArjun BhattacharyaMaureen Hughes

Index Products Group


Any Authors named on this report are Research Analysts unless otherwise indicatedAnalyst CertificationI, Sandy Lee, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

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

Online availability of research and additional conflict-of-interest disclosuresNomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and p q y y , , p , pelsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG.Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance.

The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities.

Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear.Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector.

Distribution of ratings (Global)The distribution of all ratings published by Nomura Global Equity Research is as follows:The distribution of all ratings published by Nomura Global Equity Research is as follows:49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*.40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with this rating are investment banking clients of the Nomura Group*.As at 31 March 2011As at 31 March 2011.*The Nomura Group as defined in the Disclaimer section at the end of this report..


Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc.

STOCKSA rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months.A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company.Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.

SECTORSfA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months.

A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months.A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months.Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target - Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.A 'Buy' recommendation indicates that potential upside is 15% or more.A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%.A 'Reduce' recommendation indicates that potential downside is 5% or more.A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including whenA rating of Suspended indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company.Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies.

SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation.A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation.A Neutral rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation.A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.


Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008)STOCKSA rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months.A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months.A rating of '3' or 'Neutral' indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six monthsA rating of 3 or Neutral , indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months.A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months.A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein.

SECTORSA 'Bullish' stance indicates that the analyst expects the sector to outperform the Benchmark during the next six monthsA Bullish stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months.A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months.A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months.Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008Explanation of Nomura s equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied p g y, , p y y p p g p p pby the recommendation.A 'Strong buy' recommendation indicates that upside is more than 20%.A 'Buy' recommendation indicates that upside is between 10% and 20%.A 'Neutral' recommendation indicates that upside or downside is less than 10%.A 'Reduce' recommendation indicates that downside is between 10% and 20%.A 'Sell' recommendation indicates that downside is more than 20%.

SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation.A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation.A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

Price targetsA Target Price if discussed reflect in part the analyst's estimates for the company's earnings The achievement of any target price may be impeded by general market and macroeconomic trends andA Target Price, if discussed, reflect in part the analyst s estimates for the company s earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.


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