the asia investigator equity korea: congratulati ons on ... · should remain relatively unscathed....

Citi Investment Research & Analysis is a division of Citigroup Global Markets Inc. (the "Firm"), which 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.

Citigroup Global Markets

Asia Pacific Equity Strategy (Citi)

Corporate Securities Strategy

28 September 2009 40 pages

The Asia Investigator Korea: Congratulations on the Graduation

Asia ex: Korea has exited the FTSE EM universe and joins the FTSE Developed

Markets — From a biggish fish in a small pond to a small fish in a largish pond. While this move to the FTSE Developed Markets will have repercussions for liquidity among some of the smaller-caps in the Korean market, the large-caps should remain relatively unscathed. Korean large-caps tend to be well known, including companies such as Samsung Electronics, LG Electronics, POSCO or even Hyundai Motors. Page 3

Australia: Trend Earnings: Profitability & Valuations for the Next Cycle — Citi economists have upgraded the outlook for 2010 Australian GDP to 2.75% from 2.25%. Drivers are increasing signs that the GFC is largely behind us, a rapid recovery in China, and unprecedented stimulus. 5

China: A-share Market: Waiting for the Second Shoe to Drop — We believe apart from the reasons highlighted in our 9 Sep 09 note, such as 1) a slowdown in new bank lending, 2) a crackdown on misuse of bank funds and 3) release of previously locked-up shares hitting a peak, at 3x the previous peak month, other factors are hindering the performance of the A-share market. Page 28

Fun With Flows: At 2.1x PBV, Asia Does Not Look Attractive To Global Funds — Although Global/International equity funds took in US$4.3b of new money in August, with the exception of Hong Kong, other Asian markets did not benefit much. Rather, global funds were net sellers in most Emerging Markets (EM) worldwide and proceeds were invested in US, Canada and Japan equities. Page 34

Markus Rosgen +852-2501-2752 [email protected]

Australia Strategist Graham Harman

China Strategist Lan Xue

Hong Kong Strategist Anil Daswani

India Strategist Aditya Narain, CFA

Indonesia/Pakistan Strategist Salman Ali, CFA

Japan Strategist Tsutomu Fujita, CFA

Korea Strategist Michael S Chung

Malaysia Strategist Yong Yin Ng, CFA

Pakistan Strategist Asif Ali

Singapore Strategist Hak Bin Chua

Taiwan Strategist Peter Kurz

Thailand Strategist Suchart Techaposai

Quant Strategist, Asia Pacific Paul Chanin

Chief Economist, Asia Pacific Johanna Chua

See Appendix A-1 for Analyst Certification and important disclosures.

Equity

The Asia Investigator 28 September 2009

Citigroup Global Markets 2

Model Portfolio (Asia/Pacific ex Japan) Percentage Weighting Over / Under MSCI Benchmark*

-8 -6 -4 -2 0 2 4 6

Hong Kong (8.6)

Korea (13.3)

Taiwan (12.6)

Aust/NZ (25.7)

Thailand (1.4)

Philippines (0.5)

Singapore (4.8)

Indonesia (1.8)

Malaysia (3.0)

India (8.1)

China (20.3)

Underweight Overweight

Model Portfolio (Asia/Pacific ex Japan) Percentage Weighting Over / Under MSCI Benchmark*

Model Portfolio (Asia ex Japan) Percentage Weighting Over / Under MSCI Benchmark**

-10 -5 0 5 10 15

Telecom (6.9)

Banks (20.1)

Info. Tech. (12.9)

Energy (8.3)

Utilities (3.6)

Industrials (9.1)

Consumer Discretionary (5.2)

Real Estate (7.7)

Other Financials (7.1)

Consumer Staples (7.1)

Materials (12.0)

Underweight Overweight-6 -3 0 3 6 9 12 15

Banks (18.0)

Telecom (8.4)

Info. Tech. (17.2)

Utilities (4.4)

Consumer Discretionary (6.1)

Energy (8.6)

Materials (7.1)

Consumer Staples (4.5)

Other Financials (6.5)

Industrials (10.8)

Real Estate (8.2)

Underweight Overweight

* Numbers in brackets show neutral weights within MSCI AC Asia Pacific ex Japan US$ Index as at 3 July 2009 ** Numbers in brackets show neutral weights within MSCI AC Asia ex Japan US$ Index as at 3 July 2009 Consumer Staples includes food & staples retailing, food beverage & tobacco, household products, health care equipment & services, and pharmaceutical & biotechnology Industrials include capital goods, commercial services & supplies and transportation Information Technology includes technology hardware & equipment, semiconductors and semiconductor equipment, software & services Other Financials include diversified financials and insurance Source: MSCI, Citi Investment Research and Analysis

Asia Pacific Strategy Overview



Korea: Congratulations On The Graduation

Korea has exited the FTSE EM universe and joins the FTSE Developed

Markets — From biggish fish in small pond to small fish in a largish pond. While this move to the FTSE Developed Markets will have repercussion for liquidity among some of the smaller caps in the Korean market, the large caps should remain relatively unscathed. Korean large caps tend to be well known, including companies such as Samsung Electronics, LG Electronics, POSCO or even Hyundai Motors.

The key to making money in Korea is to understand the cyclical nature — The closest proxy in the Developed Market (DM) universe to Korea is Germany. Both equity markets have a focus on manufacturing/heavy industrials. Investors generally buy them when the P/E is infinite and the P/BV low, and sell them when the P/E is low and the P/BV high. Thus far in this cycle it has not been different and unless either market finds the source of longevity it won’t be, in our view.

Korea responds well to value investing with a twist of momentum — Given the cyclical nature of the market, a disciplined value strategy has shown good results over time. Matrixes such as P/Sales, P/E, P/BV or P/CE all appear to work well. In terms of momentum, shorter term indicators have worked well.

Korea vs. Germany P/BV discount which has existed for such a long time has begun to close

-100

-80

-60

-40

-20

0

20

40

60

80

86 88 90 92 94 96 98 00 02 04 06 08

Relative PBV Korea vs. Germany

% premium

% discount

Source: MSCI, Citi Investment Research and Analysis

Asia-ex Equity Strategy


Elaine Chu +852-2501-2768 [email protected]



This report’s main aim is to put Korea into some kind of context for developed market investors who up until now are unlikely to have spent a lot of time looking at Korea. For in-depth research and insights on Korea we recommend following the CIRA Head of Korean Research, Michael Chung’s, Kimchi Discovery publication1. At the end of this report we highlight some of the top Korean market cap research which may be of interest to investors.

Korea seems keen to throw off its Emerging Market jersey and grab hold of the Developed Market one. It is only with the benefit of hindsight that we look so fondly on the period prior to ‘graduation’. While certainly the fact that one graduated was great, gone where the long holidays, the lie ins, and evenings spent at the union bar. We believe there may come a time where Korea too may look at its time spent in the Emerging Market club with great fondness. Being all grown up and part of the Developed Markets may not be all that it is cracked up to be in our view.

There is something to be said for being a large fish in a small pond vs. being a small fish in a large pond. One of the changes which will be felt is in the liquidity of the small and mid caps. While there is an investable universe for the Asian dedicated investor it is highly unlikely that the global investor will venture to them. As the stocks become less liquid, and as interest in them wanes, so their cost of capital is likely to rise. For Korea’s large caps, such as Samsung Electronics, POSCO, Hana Financial, Hyundai Motor or LG Electronics, the change will likely be negligible. The biggest change may just the changing of names and addresses on their shareholders business cards.

Investments wise, value based strategies appear to have worked well for the Korean market. Ratios such as P/Sales, P/BV and P/CE have all added significantly to returns over both the short-term and longer-term. The added twist is to add a tinge of momentum to the portfolio.

Korea vs. the other great cyclical, Germany

The single biggest catalyst for change to have occurred in Korea over the last decade was the so-called IMF crisis. This forced leverage to come down substantially, from in excess of 300% in many cases, to a mere 55% today. Corporates become more open to change and transparency was increased with the dismantlement of some of the chaebol structures. As can be seen from Figure 1, the post-IMF crisis ROE has been significantly higher than the pre-IMF crisis ROE, and that with substantially less debt. The keys behind this improvement have been better asset turn and also higher margins for some.

Looking at Korea relative to Germany, its closest proxy in the developed markets, shows that during the late 1980s its ROE lagged that of Germany and again for the vast majority of the 1990s. It has only been post the IMF crisis that the ROE discount has closed (Figure 1). Korean ROEs have recovered and now match those of Germany. At the same time, the P/BV discount, which has existed for such a long time, has begun to close and the markets now trade in-line with each other (Figure 2).

1 For latest version please see ‘Korea Kimchi Discovery #39 – Market Concern over the Korean Liquidity Situation are Overdone’, CIRA report, 21st August 2009 (https://www.citigroupgeo.com/pdf/SAP30194.pdf).

Korea: Congratulations On The Graduation

Korea in the context of developed

markets, closest proxy is fellow cyclical

Germany.

Being a big fish in a small pond is at

times preferable to a new smaller fish in a

bigger pond.

Value factors such as P/Sales, P/CE or

P/BV add substantially to outperformance.

The IMF crisis proved to be the catalyst

for rising ROE and less debt.

ROE gap with Germany has closed, as has

the P/BV gap. Cyclicals trade together.



Figure 1. Korea ROEs have recovered and now match those of Germany

-150-100

-500

50100150200250300350400

86 88 90 92 94 96 98 00 02 04 06 08

Relative ROE Korea vs. Germany

% premium

% discount


Figure 2. The P/BV discount which has existed for such a long time has also begun to close

-100

-80

-60

-40

-20

0

20

40

60

80

86 88 90 92 94 96 98 00 02 04 06 08

Relative PBV Korea vs. Germany

% premium

% discount


In terms of the Korean corporates relative earnings, cashflow, book value and dividend growth, these are all highlighted in Figure 3.

In terms of currencies, the tendency of the Korean Won has been to depreciate vs. the US$, while the Deutsche Mark (and subsequently the Euro) have generally appreciated vs. the US$.

In terms of local currency performance, Korea has had the upper hand when it comes to earnings growth since 1988, and also over the course of the last ten years and three years (Figure 3).

Historically, Korea has shown stronger

EPS and book value growth than Germany.



Figure 3. Growth rates of German and Korean Corporates – Historically, Korea has shown stronger EPS and book value growth

Germany KoreaEarnings growth (% p.a.) Last 10yrs -1.8% 9.7%Last 5yrs 1.1% -4.4%Last 3yrs -20.8% -17.9%Since 1988 2.4% 5.9% Cash earnings growth (% p.a.) Last 10yrs 0.9% 4.2%Last 5yrs 1.7% -0.1%Last 3yrs -5.7% -5.8%Since 1996 3.1% 2.4% Book value growth (% p.a.) Last 10yrs 6.0% 7.5%Last 5yrs 3.6% 11.8%Last 3yrs -0.7% 11.3%Since 1988 6.3% 8.6% Dividend growth (% p.a.) Last 10yrs 2.8% 8.0%Last 5yrs 16.0% -8.8%Last 3yrs 7.2% -16.2%Since 1988 5.1% 2.9% Market performance (% p.a.) Last 10yrs -2.3% 6.9%Last 5yrs 3.6% 13.6%Last 3yrs -6.7% 5.9%Since 1988 6.0% 7.2% Change in FX (% p.a.) Euro WonLast 10yrs 3.0% -0.3%Last 5yrs 3.2% -1.3%Last 3yrs 3.7% -8.1%

Note: Growth rates and market performance in local currency terms

Source: MSCI, CEIC, Citi Investment Research and Analysis

On the cash earnings front (net income plus depreciation), the results are similar, over the last ten years Korea has gown cash earnings faster than Germany but since 1996, the growth rates have been roughly similar.

Turning to book value growth, Korea is ahead over both the short-term and also the long-term. The story is a little more mixed when it comes to dividend growth, with Korea having done better in the last ten years but over both five years, three years, and since 1988, German corporates have been able to grow dividends faster.

For those who are newcomers to the Korean market one way to look at the market is that it has all the cyclical aspects of the German equity market but during flash points displays greater volatility. For instance, when the US$ strengthens abruptly (as it did in mid-2008) it has historically led to short-term funding issues and Won weakness.

So, the way to think about these markets is that both are cyclical in nature. While the bad times never last, nor do the good times last forever. Korea has had a slightly stronger growth angle to it as it has come from a lower base.

Same cyclicality but higher volatility,

especially if the US$ begins to

strengthen.



Korea vs. Asia ex is a different story

Aside from recessionary periods, Korea has maintained a P/E discount vs. the Asia Pac region. The same also applies to P/BV (Figures 5 and 7). While in absolute terms, the Korean equity market is now trading towards being 1 standard deviation above the mean, and at the upper end of the historic trading range but on a relative basis, the discount remains. The discount has narrowed since 2000 but it remains a discount nonetheless. Noteworthy is that the ROE gap has narrowed substantially again, especially post 2000, but investors have been unwilling to narrow the P/BV gap.

Figure 4. MSCI Korea Trailing P/E Figure 5. Relative to Asia Pac ex Japan

7121722273237424752

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

2009E = 15.1

-100

-50

0

50

100

150

200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

2009E = 16.8% discount% Premium

% Discount

Source: MSCI, Citi Investment Research and Analysis Source: MSCI, Citi Investment Research and Analysis

Figure 6. MSCI Korea Trailing P/BV Figure 7. Relative to Asia Pac ex Japan

0.4

0.9

1.4

1.9

2.4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

2009E = 1.5

-70

-60

-50

-40

-30

-20

-10

0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

2009E = 20.7% discount% Discount


Figure 8. MSCI Korea Trailing P/CE Figure 9. Relative to Asia Pac ex Japan

2

4

6

8

10

12

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

2009E = 8.3

-80-70-60-50-40-30-20-10

0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

2009E = 23.8% discount% Discount


Korean discount remains on a P/E, P/BV,

P/CE, EV/EBITDA and EV/Sales basis.



On the basis of P/CE (net income plus depreciation) Korea again looks expensive having only been at these levels twice before, once in 1999/2000 and then again in 2003/4. Part of the issue is to do with the depressed levels of earnings and part has had to do with the level of the market. In the four months post the 1999/2000 peak the market lost 29%, post 2003/4 the market fell by 17%. Over time, the market has closed the relative gap with the region. Currently valuations stand close to parity but are expected to widen again in the future as earnings come thorough in Korea.

Figure 10. MSCI Korea Trailing Dividend Yield Figure 11. Relative to Asia Pac ex Japan

0.4

0.9

1.4

1.9

2.4

2.9

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

2009E = 1.2

-90-80-70-60-50-40-30-20-10

0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

2009E = 54.2% discount

% Discount


Figure 12. Korea EV-to-EBITDA Figure 13. Relative to Asia Pac ex Japan

3

5

7

9

11

13

15

90 92 94 96 98 00 02 04 06 08

2009E = 8.3

-50-40-30-20-10

010203040

90 92 94 96 98 00 02 04 06 08


% Discount

Source: FactSet, Citi Investment Research and Analysis Source: FactSet, Citi Investment Research and Analysis

Figure 14. Korea EV-to-Sales Figure 15. Relative to Asia Pac ex Japan

0.4

0.6

0.8

1.0

1.2

1.4

1.6

90 92 94 96 98 00 02 04 06 08

2009E = 1.1

-70

-60

-50

-40

-30

-20

-10

90 92 94 96 98 00 02 04 06 08

2009E = 35.0% discount

% Discount

Source: FactSet, Citi Investment Research and Analysis Source: FactSet, Citi Investment Research and Analysis

On a P/BV and P/CE basis the market is

beginning to look expensive.



Those looking for yield in Korea may be disappointed. Dividend yields are low as the pay-out ratios remain low. Korean corporates have plenty of reasons as to why they need to hoard cash. We remain unconvinced as other cyclical markets, such as Taiwan for instance, have much higher pay-out ratios and a high percentage of cyclical exposure. Thus, those looking for yield are likely to be sorely disappointed in Korea.

The steep deleveraging which took place in the late 1990’s has led to a significant decline in the EV ratios i.e. both EV/EBITDA and EV/sales. Both these ratios continue to show Korea trading at a substantial discount to the region and to its own pre-2000 average.

Figures 4 to 15 provide investors with a snapshot of the Korean equity market. The sky high P/E’s are more of a function of “no earnings” than a significant re-rating and is indicative of Korea being a cyclical market (see also the direction of ROE over time).

Figure 16. MSCI Korea ROE Figure 17. Relative to Asia Pac ex Japan

-4

0

4

8

12

16

20

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

2009E = 10.2

-200

-150

-100

-50

0

50

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008


% Discount


What factors drive returns in Korea

Figure 18 comes from the CIRA Quant Team in Singapore, headed by Paul Chanin. It shows the performance of 24 different individual factors and then three factors which are proprietary to Paul Chanin and his team, the Radar factors. In each case they look at the performance spread between the high (top 20%) and the low (bottom 20%) factors on a pan-regional basis.

Leaving aside the proprietary model, Radar, the rankings over time have been highest in the combination of value factors and a tinge of momentum. Over the last five years price to sales has worked best, next comes Radar and then P/CE. Over the last two years, a combination of 1-month price momentum, low P/E, and earnings revisions have proven to be very useful. Over the last 12-months, 1- and 3-month price change and trailing P/E have worked well. Over a shorter time period, it has again been a value tilt which has driven outperformance.

So, yes Korea is a growth market but within the growth a combination of value P/S, P/E or P/CE with a momentum overlay has proven to be conducive to performance.

Dividend yield remains low in both

absolute and relative terms. Korea is not a

yield play type of market.

EV/EBITDA and EV/Sales continue to

show Korea trading at a significant

discount.

Combine value and momentum factors

and they should be conducive to excess

returns.



Figure 18. Performance Spread between High (Top 20%) and Low (Bottom 20%) Factor Portfolios Regionally (Rank in Brackets)

Unrestricted Returns IRs

1m 3m 6m 1y 2y 5y 1y 2y 5y Valuations

Dividend Yield -0.1 (13) -12.5 (21) -15.8 (22) -2.4 (15) 3.5 (12) 5.6 (17) -0.2 (13) 0.3 (12) 0.4 (16)Price/Cash Flow 0.9 (8) 0.4 (8) 4.3 (9) 2.5 (8) 8.4 (5) 21.2 (4) 0.1 (8) 0.5 (5) 1.4 (4)Trailing PE 0.5 (10) -1.4 (12) 6.9 (7) 16.8 (3) 16.2 (2) 18.7 (8) 1.4 (1) 1.6 (1) 1.3 (5)F'Cast PE (12m F'rwd) 2.1 (3) 7.1 (4) 15.9 (2) -6.1 (19) -10.3 (26) 4.3 (19) -0.3 (17) -0.6 (26) 0.2 (18)Price/Sales 1.7 (5) 7.9 (2) 8.7 (5) -12.1 (21) 6.5 (9) 26.3 (1) -0.5 (19) 0.3 (11) 1.5 (3)Price/Book 2.8 (1) 7.2 (3) 7.8 (6) 6.1 (6) -1.5 (19) 20.1 (6) 0.3 (6) -0.1 (19) 1.1 (6)

Profitability Reported ROE -0.7 (15) -6.3 (16) -5.1 (16) -2.4 (13) 3.9 (11) -7.2 (24) -0.3 (16) 0.4 (9) -0.5 (23)Forecast ROE -1.3 (17) -1.9 (14) 12.5 (3) 0.4 (11) 2.0 (14) -4.0 (21) 0.0 (11) 0.1 (14) -0.2 (21)Net Margin (Trailing) -0.7 (16) -7.7 (18) -8.1 (19) 7.8 (4) 4.2 (10) -10.9 (25) 0.7 (4) 0.4 (8) -0.9 (25)Net Margin (F'Cast) -2.3 (22) -10.2 (19) -4.4 (14) 3.9 (7) -13.5 (27) -20.3 (27) 0.2 (7) -0.8 (27) -1.3 (27)

Earnings Certainty & Quality Cash flow to Earnings -1.4 (18) -12.9 (23) -11.7 (20) -2.4 (14) 7.6 (6) 11.7 (11) -0.2 (14) 0.6 (4) 1.0 (8)Earnings Estimate Variability (Hist) -2.3 (21) -6.8 (17) -2.5 (13) -5.7 (18) -7.0 (24) -11.8 (26) -0.5 (21) -0.6 (25) -1.0 (26)Earnings Estimate Dispersion FY1 1.1 (7) -5.7 (15) -12.2 (21) -5.5 (17) -2.7 (22) -6.2 (23) -0.5 (20) -0.2 (23) -0.5 (24)

Earnings Growth Historical EPS Growth -1.8 (20) -11.1 (20) -6.4 (17) -0.7 (12) 6.5 (8) -0.1 (20) -0.1 (12) 0.5 (7) 0.0 (20)1Y EPS Growth 1.3 (6) 1.2 (7) 3.1 (11) 6.5 (5) 13.5 (4) 6.9 (14) 0.7 (3) 1.0 (3) 0.5 (14)Earnings Revisions Ratio -2.9 (23) -1.0 (11) -7.3 (18) 0.7 (10) 13.5 (3) 20.1 (5) 0.1 (10) 1.3 (2) 1.6 (1)PEG Ratio 2.0 (4) -1.4 (13) 2.3 (12) -12.7 (22) -2.4 (21) 5.8 (16) -1.1 (23) -0.2 (22) 0.5 (13)Long Term PEG Ratio 2.8 (2) 1.5 (6) 3.8 (10) -19.3 (23) 6.8 (7) 6.7 (15) -1.1 (24) 0.4 (10) 0.5 (15)

Price Momentum % Price Change (1M) -3.3 (24) 5.9 (5) 10.8 (4) 55.0 (1) 20.6 (1) 9.0 (13) 1.2 (2) 0.5 (6) 0.3 (17)% Price Change (3M) -0.6 (14) -0.4 (10) -5.0 (15) 17.9 (2) 1.3 (15) 4.4 (18) 0.6 (5) 0.0 (15) 0.2 (19)% Price Change (6M) 0.3 (11) -15.2 (24) -27.8 (24) -10.2 (20) -1.8 (20) 18.7 (9) -0.4 (18) -0.1 (20) 0.8 (10)% Price Change (12M) -4.5 (27) -19.1 (25) -31.8 (25) -20.6 (24) 0.3 (17) 19.7 (7) -0.8 (22) 0.0 (17) 0.8 (9)First 11 of Last 12M -3.4 (25) -21.7 (27) -37.3 (27) -36.5 (27) -9.0 (25) 16.6 (10) -1.6 (25) -0.3 (24) 0.7 (11)260D Trading Value 0.8 (9) -0.3 (9) 5.7 (8) -3.0 (16) 0.3 (16) -5.9 (22) -0.2 (15) 0.0 (16) -0.4 (22)

Radar Composite Score -4.3 (26) -12.5 (22) -22.6 (23) -25.1 (25) -0.3 (18) 23.7 (2) -1.9 (27) 0.0 (18) 1.5 (2)Relative Valuation Score 0.1 (12) 12.8 (1) 16.2 (1) 1.6 (9) 2.5 (13) 10.1 (12) 0.1 (9) 0.1 (13) 0.6 (12)Composite Momentum Score -1.6 (19) -19.2 (26) -32.7 (26) -29.3 (26) -4.3 (23) 21.4 (3) -1.6 (26) -0.2 (21) 1.1 (7)

Source: FactSet, I/B/E/S, WorldScope, Citi Investment Research and Analysis

Korea’s top market caps

Below we highlight some of the top Korea stocks by market cap. Many of these are world class companies which have been successful at establishing themselves on the world stage, gaining not only market share but also increased recognition for their products.

Figure 19. Global Comparisons

2009E Global Peers 2009E1 Percent Premium/Discount Relative to Global Peers

RIC Name PE (x) P/BV (x) Div yield (%)

EPS growth

PE (x) P/BV (x) Div Yield (%)

EPS Growth

PE P/BV Div Yield EPS Growth

086790.KS Hana Financial Group 47.2 0.9 0.4 -63.4% 25.9 1.4 2.6 6.5% 82% -36% -84% -1080%005380.KS Hyundai Motor 15.5 1.5 1.0 42.7% -39.8 1.2 0.9 -201.8% 139% 26% 10% 121%066570.KS LG Electronics 8.6 2.0 0.8 400.3% 458.1 2.6 2.1 -77.2% -98% -22% -63% 619%005490.KS POSCO 18.0 1.6 2.4 -44.1% 26.8 1.9 1.7 -57.3% -33% -16% 39% 23%005930.KS Samsung Electronics 14.4 1.9 0.7 53.0% 458.1 2.6 2.1 -77.2% -97% -28% -68% 169%

1 Hyundai Motor vs. global peers in Automobiles & Components covered by CIRA; Hana Financial vs. Global Banks; LG Electronics and Samsung Electronics vs.

Semiconductors and POSCO vs. peers in Materials globally.

Source: Citi Investment Research and Analysis Estimates



Figure 20. Summary of Korean Recommendations and Recent Research

Price (Won) RIC Name Current1 Target Rating ETR (%) Recent Research Date GEO Link Primary Analyst 086790.KS Hana Financial Group 39,800 40,000 1L 0.9% Buy: Deep Value, More

Catalysts 19-Aug-09 https://www.citigroupgeo

.com/pdf/SAP30138.pdf Jinsang Kim +82-2-3705-0769 [email protected]

005380.KS Hyundai Motor 114,500 120,000 1M 5.8% Buy: Poised For Another Leg Up With YF Sonata Launch

17-Sep-09 https://www.citigroupgeo.com/pdf/SAP30855.pdf

Ethan Kim +82-2-3705-0747 [email protected]

066570.KS LG Electronics 129,500 154,000 1L 19.7% Buy: Mid-Q Checks; So Far, So Good

18-Aug-09 https://www.citigroupgeo.com/pdf/SAP30094.pdf

Henry H Kim, CFA +82-2-3705-0720 [email protected]

005490.KS POSCO 511,000 550,000 2M 10.1% Downgrade to Hold: Take a Breather

04-Aug-09 https://www.citigroupgeo.com/pdf/SAP29707.pdf

Brian Cho +82-2-3705-0767 [email protected]

005930.KS Samsung Electronics 820,000 1,030,000 1L 26.3% Buy: All About Earnings Power, Raising Target Price to W1,030,000

21-Sep-09 https://www.citigroupgeo.com/pdf/SAP30918.pdf

Henry H Kim, CFA +82-2-3705-0720 [email protected]

1Priced as of 23 September 2009

Source: Citi Investment Research and Analysis Estimates



Country

Mkt Cap P/E (x) EPS Growth (%) Yield (%) PBV ROE (%) US$ Performance 09/24/2009 USD bil 2008 2009 2010 2008 2009 2010 2009 (x) 2008 2009 2010 1W 1M YTDMSCI Asia Pacific 5003.2 26.9 25.4 16.8 -54.3 6.1 50.8 2.2 1.6 6.0 6.2 8.9 -0.2 4.6 32.4MSCI Asia Pacific ex Japan 2821.9 18.2 17.9 14.6 -25.1 2.1 22.2 2.6 2.0 11.4 11.0 12.5 -1.2 6.6 57.5MSCI Asia 4198.2 32.0 27.8 17.1 -61.8 15.0 63.0 2.0 1.5 4.8 5.4 8.4 -0.1 3.7 28.5MSCI Asia ex Japan 2016.9 20.0 17.9 14.2 -30.1 11.6 26.7 2.3 1.9 10.4 10.8 12.6 -1.4 5.5 57.4Australia 794.2 15.0 17.7 15.9 -13.7 -15.0 11.6 3.9 2.1 14.0 11.7 12.4 -0.8 9.8 57.7China 521.0 18.0 16.0 13.4 -10.9 12.3 19.8 2.4 2.3 14.2 14.3 15.4 -3.9 1.2 47.3Hong Kong 226.8 18.8 18.9 17.0 -33.1 -0.6 11.5 3.0 1.5 8.0 7.8 8.3 -2.3 0.8 49.0India 218.6 21.8 20.8 16.9 -7.6 4.3 19.4 1.1 3.2 15.6 15.0 15.9 0.9 8.9 83.0Indonesia 55.1 17.1 16.6 14.4 -1.6 3.4 15.0 2.6 3.8 26.0 22.9 22.6 1.3 10.1 112.1Japan 2181.3 69.8 55.4 21.0 -84.3 25.9 164.2 1.8 1.3 1.8 2.3 5.7 1.1 2.1 10.5Korea 402.0 21.2 15.0 11.1 -38.0 40.9 34.7 1.2 1.6 8.2 10.5 12.7 0.8 9.7 65.3Malaysia 78.9 15.8 17.5 15.3 -21.8 -9.6 14.7 2.7 1.9 12.8 11.1 11.8 0.3 4.8 41.5New Zealand 10.8 11.3 14.4 14.2 -17.6 -21.4 1.6 NA 1.6 15.0 11.4 11.4 -0.9 5.5 42.3Philippines 12.6 19.2 16.3 14.1 -13.2 17.8 15.5 3.2 2.3 13.4 14.0 15.0 4.3 0.3 49.7Singapore 132.9 14.1 17.6 15.1 -13.2 -20.1 16.8 3.3 1.7 12.3 9.7 10.7 -0.7 3.3 51.8Taiwan 329.2 35.7 30.0 17.4 -67.3 19.0 72.4 3.0 1.9 5.7 6.4 10.4 -2.3 8.6 56.4Thailand 39.8 15.7 13.4 11.5 13.9 16.9 16.1 3.2 1.8 12.6 13.6 14.4 2.2 11.6 70.2

* MSCI Asia excludes Australia and New Zealand.

Source: IBES Consensus, MSCI, FactSet and Citi Investment Research and Analysis estimates

Sector

Mkt Cap P/E (x) EPS Growth (%) Yield (%) PBV ROE (%) US$ Performance03/06/2009 USD bil 2008 2009 2010 2008 2009 2010 2009 (x) 2008 2009 2010 1W 1M YTDMSCI Asia Pac ex Japan 2821.9 18.2 17.9 14.6 -25.1 2.1 22.2 2.6 2.0 11.4 11.0 12.5 -1.2 6.6 57.5Energy 224.2 15.4 15.7 13.3 -7.3 -1.8 18.5 2.6 2.1 15.6 13.4 14.6 -1.2 4.9 59.9Materials 354.1 14.8 18.4 14.9 -19.1 -19.6 23.4 2.1 2.3 16.4 12.3 13.9 -3.3 5.8 69.2Capital Goods 169.9 19.3 15.0 13.0 -30.7 28.6 15.6 2.0 1.7 10.4 11.8 12.3 -1.0 4.3 53.6Commercial & Professional Services 10.8 16.6 17.7 16.8 1.6 -6.1 5.2 2.3 5.6 36.7 31.5 27.9 -1.7 9.6 29.2Transportation 68.5 53.6 NM 24.0 -85.1 -98.7 NM 2.3 1.3 2.4 0.2 5.5 -2.1 3.8 35.8Automobiles & Components 54.8 18.6 14.4 12.7 7.2 28.8 13.3 1.2 2.0 11.1 14.1 14.1 3.4 10.0 168.3Consumer Durables & Apparel 23.6 23.8 11.5 10.3 -25.1 107.4 12.0 1.8 2.3 10.9 20.2 19.1 0.1 -3.0 67.3Consumer Services 30.3 15.2 18.6 15.3 -7.3 -18.5 21.8 1.7 1.9 12.6 10.1 11.6 2.4 11.5 50.3Media 10.5 13.8 16.4 15.5 -18.0 -16.3 6.3 4.9 1.7 11.1 10.4 10.6 0.7 9.1 36.0Retailing 37.4 19.3 19.1 16.5 -18.6 1.0 16.0 1.8 2.7 16.5 14.0 15.0 0.2 3.1 68.2Food & Staples Retailing 72.2 18.1 18.0 17.0 7.1 0.2 6.2 2.2 2.3 12.9 12.9 13.1 0.1 7.0 53.4Food Beverage & Tobacco 76.7 17.2 16.0 14.3 -9.4 7.0 12.2 2.3 2.6 16.9 16.5 16.6 0.8 7.8 40.7Household & Personal Products 14.1 34.1 25.9 21.7 18.8 31.8 19.0 1.8 8.6 21.8 25.2 33.9 1.2 5.7 32.6Health Care Equipment & Services 8.9 22.8 20.5 18.3 15.5 11.4 11.8 0.7 3.4 17.0 16.6 17.2 -0.1 17.6 35.3Pharmaceuticals Biotechnology & Life Sciences

26.7 27.7 19.7 16.4 -3.8 40.5 20.2 0.7 3.7 15.9 18.8 20.7 -0.2 7.9 24.8

Banks 589.3 15.6 16.2 13.5 -11.5 -3.5 19.8 3.2 1.9 13.1 11.5 12.9 -0.7 10.7 72.3Diversified Financials 83.6 22.9 19.8 17.3 -34.8 15.5 14.1 2.7 2.4 11.3 12.2 13.1 -1.4 5.4 75.2Insurance 118.8 29.9 19.7 17.2 -52.1 52.0 14.2 2.3 2.4 8.5 12.1 12.8 -2.7 5.9 37.3Real Estate 213.0 13.9 16.9 15.8 -19.6 -17.3 6.7 2.9 1.2 8.0 7.1 7.2 -2.8 3.9 51.4Software & Services 64.0 26.6 24.3 21.2 16.9 9.4 14.9 0.8 7.1 32.1 29.0 26.5 -0.5 9.1 101.8Technology Hardware & Equipment 133.3 20.9 29.1 14.8 -48.0 -28.1 97.6 2.1 1.9 9.4 6.4 11.7 -1.0 11.3 90.7Semiconductors & Semiconductor Equipment

182.1 NM 26.6 15.6 -95.0 NM 70.1 2.3 2.4 0.7 8.8 13.6 -1.0 6.9 77.7

Telecommunication Services 165.8 12.7 12.8 12.1 4.3 -0.3 5.2 4.4 2.1 18.1 16.7 16.3 -0.5 1.7 9.6Utilities 88.9 26.6 17.9 15.0 -45.2 49.0 19.5 2.8 1.6 6.3 8.8 9.9 -0.2 3.1 22.8

Note: The above valuation data are compiled based on the MSCI Asia Pacific universe of stocks with which IBES forecasts are available. Fiscal year of each company is

calendarized to December as the year-end. The market capitalization for countries, sectors and the region are free-float adjusted.

NM = Not Meaningful; NA = Not Available.

Source: IBES Aggregate, MSCI, FactSet and Citi Investment Research and Analysis estimates

Asia Pacific Market Intelligence



Price YTD Analyst's MSCI Portfolio FY09E FY09E EPS FY09E Div FY09E FY09EName 25 Sep 09 Perf (%) Ticker Rating Wght (%) Wght (%) PE (x) Gwth (%) Yield (%) P/BV (x) ROE (%)Australia/New Zealand (+135 bps Overweight) 25.7 27.0 Aust & NZ Banking 23.8 55.6 ANZ.AX 1M 7.0 17.2 -6.8 3.9 1.8 10.5Brambles 8.0 7.7 BXB.AX 2M 5.0 22.3 -29.5 3.2 6.8 30.6Tabcorp Hld 7.1 1.9 TAH.AX 2M 1.0 8.0 -4.9 9.1 1.3 16.4Telecom NZ 2.6 14.4 TEL.NZ 2M 4.0 10.0 -30.2 9.2 1.8 18.1Telstra 3.3 -15.1 TLS.AX 2H 6.0 9.9 10.3 8.6 3.3 32.9Woodside Pet 52.4 42.8 WPL.AX 1M 4.0 23.1 -23.8 1.7 4.6 20.0China (-628 bps Underweight) 20.3 14.0 China Construction Bank 6.2 46.8 0939.HK 1M 3.0 11.7 18.1 4.3 2.4 20.6China Mobile 78.3 0.6 0941.HK 1L 3.0 12.1 2.8 3.7 2.8 22.8CNOOC 10.4 43.4 0883.HK 3L 5.0 16.2 -43.1 2.2 2.4 14.6Industrial & Commercial Bank of China 5.9 45.1 1398.HK 1M 3.0 13.4 17.5 3.7 2.6 19.2Hong Kong (+637 bps Overweight) 8.6 15.0 BOC Hong Kong 17.1 94.8 2388.HK 1L 4.0 15.9 239.4 3.8 1.9 11.8Guoco 80.6 77.3 0053.HK 2L 1.0 25.0 42.5 2.5 0.7 2.7HSBC 7.0 6.4 HSBA.L 1M 2.0 27.0 17.0 3.0 1.6 5.9Hong Kong & China Gas 19.0 62.2 0003.HK 3L 2.0 25.0 12.1 1.9 3.7 14.9Henderson Land 49.8 73.3 0012.HK 1L 2.0 17.6 1.5 3.0 0.9 4.9Hutchison Whampoa 55.3 42.2 0013.HK 1L 4.0 13.2 1.1 3.1 0.7 5.7India (-309 bps Underweight) 8.1 5.0 Bharti Airtel 414.4 15.9 BRTI.BO 1L 1.0 16.6 17.9 - 4.0 23.8State Bank of India 2,139.2 66.1 SBI.BO 1L 1.5 13.0 14.1 1.4 2.1 15.8Wipro 567.2 142.8 WIPR.BO 1L 2.5 20.6 16.8 1.2 4.5 22.0Indonesia (-78 bps Underweight) 1.8 1.0 PT Telkom 8,650.0 25.4 TLKM.JK 1L 1.0 15.2 -2.1 4.5 4.4 29.3Korea (+375 bps Overweight) 13.3 17.0 KEPCO 35,400.0 19.6 015760.KS 2L 0.5 -17.1 56.8 - 0.6 -3.4KB Financial 59,500.0 80.5 105560.KS 1L 4.0 29.8 -62.3 0.6 1.2 3.9Samsung Elec 795,000.0 76.3 005930.KS 1L 6.5 13.8 53.0 0.7 1.8 12.9Shinhan Financial 47,650.0 68.7 055550.KS NR 3.0 19.1 -42.2 0.7 1.1 5.9Shinsegae 570,000.0 18.3 004170.KS 3L 3.0 18.5 1.2 0.2 2.4 13.2Malaysia (-205 bps Underweight) 3.0 1.0 Tanjong 15.0 12.6 TJPL.KL 1L 1.0 9.7 34.8 6.7 1.7 17.2Philippines (-47 bps Underweight) 0.5 0.0 Singapore (-77 bps Underweight) 4.8 4.0 DBS 13.1 55.3 DBSM.SI 1L 2.0 15.2 -22.2 4.3 1.2 8.1StarHub 2.2 11.3 STAR.SI 2L 1.0 11.8 4.0 8.3 32.6 276.2SPH 3.7 20.3 SPRM.SI 1L 1.0 15.4 -11.6 5.8 2.9 18.5Taiwan (+237 bps Overweight) 12.6 15.0 Acer 79.4 88.2 2353.TW 1M 2.0 18.2 -2.0 2.5 2.4 12.9Far Eastone 37.3 0.0 4904.TW 2L 2.0 13.1 -7.6 7.0 1.7 13.0Formosa Plastics 64.0 57.1 1301.TW 2L 2.0 16.8 18.1 4.7 2.0 12.0Taiwan Mobile 59.3 21.8 3045.TW 1L 3.0 14.7 -7.2 5.6 4.4 29.9TSMC 61.1 38.3 2330.TW 1L 6.0 19.9 -21.0 4.1 3.4 17.1Thailand (-40 bps Underweight) 1.4 1.0 Kasikornbank 86.0 91.1 KBANf.BK 3L 1.0 14.2 -5.2 2.3 1.7 11.9Total 100.0 100.0 16.1 -3.3 3.6 2.0 12.4

Neutral weight as of 3 July 2009

Source: Citi Investment Research and Analysis estimates

Asia Pacific Model Portfolio by Country



Price YTD MSCI Portfolio FY09E FY09E EPS FY09E Div FY09E FY09EName 25 Sep 09 Perf (%) Country Wght (%) Wght (%) PE (x) Gwth (%) Yield (%) P/BV (x) ROE (%)Banks (+1042 bps Overweight) 20.1 30.5 Aust & NZ Banking 23.8 55.6 AU 7.0 17.2 -6.8 3.9 1.8 10.5BOC Hong Kong 17.1 94.8 HK 4.0 15.9 239.4 3.8 1.9 11.8China Construction Bank 6.2 46.8 CN 3.0 11.7 18.1 4.3 2.4 20.6DBS 13.1 55.3 SG 2.0 15.2 -22.2 4.3 1.2 8.1HSBC 7.0 6.4 GB 2.0 27.0 17.0 3.0 1.6 5.9Industrial & Commercial Bank of China 5.9 45.1 0.0 3.0 13.4 17.5 3.7 2.6 19.2Kasikornbank 86.0 91.1 TH 1.0 14.2 -5.2 2.3 1.7 11.9KB Financial 59,500.0 80.5 KR 4.0 29.8 -62.3 0.6 1.2 3.9Shinhan Financial 47,650.0 68.7 KR 3.0 19.1 -42.2 0.7 1.1 5.9State Bank of India 2,139.2 66.1 IN 1.5 13.0 14.1 1.4 2.1 15.8Consumer Discre. (-22 bps Underweight) 5.2 5.0 Shinsegae 570,000.0 18.3 KR 3.0 18.5 1.2 0.2 2.4 13.2SPH 3.7 20.3 SG 1.0 15.4 -11.6 5.8 2.9 18.5Tabcorp Hld 7.1 1.9 AU 1.0 8.0 -4.9 9.1 1.3 16.4Consumer Staples (-710 bps Underweight) 7.1 0.0 Energy (+69 bps Overweight) 8.3 9.0 CNOOC 10.4 43.4 HK 5.0 16.2 -43.1 2.2 2.4 14.6Woodside Pet 52.4 42.8 AU 4.0 23.1 -23.8 1.7 4.6 20.0Financials , Others (-615 bps Underweight) 7.1 1.0 Guoco 80.6 77.3 HK 1.0 25.0 42.5 2.5 0.7 2.7Industrials (-7 bps Underweight) 9.1 9.0 Brambles 8.0 7.7 AU 5.0 22.3 -29.5 3.2 6.8 30.6Hutchison Whampoa 55.3 42.2 HK 4.0 13.2 1.1 3.1 0.7 5.7Information Technology (+405 bps Overweight) 12.9 17.0 Acer 79.4 88.2 TW 2.0 18.2 -2.0 2.5 2.4 12.9Samsung Elec 795,000.0 76.3 KR 6.5 13.8 53.0 0.7 1.8 12.9Wipro 567.2 142.8 IN 2.5 20.6 16.8 1.2 4.5 22.0TSMC 61.1 38.3 TW 6.0 19.9 -21.0 4.1 3.4 17.1Materials (-999 bps Underweight) 12.0 2.0 Formosa Plastics 64.0 57.1 TW 2.0 16.8 18.1 4.7 2.0 12.0Real Estate (-572 bps Underweight) 7.7 2.0 Henderson Land 49.8 73.3 HK 2.0 17.6 1.5 3.0 0.9 4.9Telecommunications (+1414 bps Overweight) 6.9 21.0 Bharti Airtel 414.4 15.9 IN 1.0 16.6 17.9 0.0 4.0 23.8China Mobile 78.3 0.6 HK 3.0 12.1 2.8 3.7 2.8 22.8Far Eastone 37.3 0.0 TW 2.0 13.1 -7.6 7.0 1.7 13.0PT Telkom 8,650.0 25.4 ID 1.0 15.2 -2.1 4.5 4.4 29.3StarHub 2.2 11.3 SG 1.0 11.8 4.0 8.3 32.6 276.2Taiwan Mobile 59.3 21.8 TW 3.0 14.7 -7.2 5.6 4.4 29.9Telecom NZ 2.6 14.4 NZ 4.0 10.0 -30.2 9.2 1.8 18.1Telstra 3.3 -15.1 AU 6.0 9.9 10.3 8.6 3.3 32.9Utilities (-5 bps Underweight) 3.6 3.5 Hong Kong & China Gas 19.0 62.2 HK 2.0 25.0 12.1 1.9 3.7 14.9KEPCO 35,400.0 19.6 KR 0.5 -17.1 56.8 0.0 0.6 -3.4Tanjong 15.0 12.6 MY 1.0 9.7 34.8 6.7 1.7 17.2Total 100.0 100.0 16.1 -3.3 3.6 2.0 12.4

Neutral weight as of 3 July 2009

Source: Citi Investment Research and Analysis estimates

Asia Pacific Model Portfolio by Sector



Trend Earnings: Profitability & Valuations for the Next Cycle

Economy Continues to Firm — Citi economists have upgraded the outlook for 2010 Australian GDP to 2.75% from 2.25%. Drivers are increasing signs that the GFC is largely behind us, a rapid recovery in China, and unprecedented stimulus.

Sweet Spot for Equities — This sub-trend economic recovery, with its relatively benign yield implications, presents a favourable environment for equity prices.

Equity Dilution — $110bn of equity has been raised on the ASX since Jan 2008; however, we find the overall dilution relatively mild. Discounts have not seemed excessive and accretive investment opportunities have been widespread.

PE re-rating — Largely over with the PE peak of 17.5 expected by mid next year. Multiples are likely to remain elevated for the next 2 years and look well justified to settle back at higher than normal levels given our dovish view on inflation.

Profitability — Trailing index ROE is still a relatively high 13.1%. However, we look for upside in 2010 and beyond, initially driven by margin expansion, and with subsequent potential for re-leveraging and increased asset turn. Resources and Bank sectors have fundament drivers supportive of higher than usual ROE’s being restored and maintained over the medium term.

Stock Opportunities — We identify the following stocks as low PE using mid-cycle earnings: Aristocrat, Bluescope, Fairfax, Goodman Fielder, Qantas, Stockland, Suncorp, and Telstra, (see see Figure 25 for full table).

Figure 1. Sector Performance Relative to S&P/ASX 200

0.6

0.8

1.0

1.2

1.4

1.6

Oct 07 Dec 07 Feb 08 Apr 08 Jun 08 Aug 08 Oct 08 Dec 08 Feb 09 Apr 09 Jun 09 Aug 09

Industrial Cyclicals Defensives

Financials Resources

Source: Citi Investment Research and Analysis

Australia Equity Strategy

Graham Harman +61-2-8225-4890 [email protected]

Richard Schellbach +61-2-8225-4838 [email protected]



The global financial crisis carved a chasm in S&P/ASX 200 Index earnings in FY2009, with EPS dropping 21%. With a corresponding drop in index ROE over the same period; $110 bn of equity issuance since early 2008; and with index PE expansion of 6 multiple points, the arithmetic for 2010 and 2011 has been gyrating wildly. On Citi numbers, the S&P/ASX 200 is now on 15.7x FY2009 earnings; 16.3x FY2010 earnings; and 13.5x 2011 earnings.

In this note, we pull together key components of a "before and after" analysis of the GFC, including:

1. Dilution (Market cap = Shares x Price)

2. Multiple expansion (Price = PE x Earnings per Share)

3. Earnings base (Earnings = Equity per share x ROE)

4. Profit Margin (Income / Sales)

5. Asset Turn (Sales / Assets)

6. Financial leverage (ROE = Income/Sales x Sales/Assets x Assets/Equity)

We find that:

Dilution, whilst dramatic for many individual stocks, does not derail the value of the market overall. Although the market cap of the index has outpaced the price index by 8.7% over the past 12 months, the average issuance discount has been only 13% and there have been plenty of profitable uses for cash.

Multiple Expansion is nearly over. Over the last 8 months the PE on the Australian equity market has expanded by almost 6 multiple points. Compared to history, this multiple expansion period is normal in terms of magnitude (6 vs 8.5) but much shorter than average in duration (8 months vs 25).

Profitability remains at high levels. The trailing ROE of the Australian market post-reporting season stands at 13.1%, notwithstanding the 2009 earnings collapse. This is well up on the long-term average of 10.9%. We see the Australian market is now trading on 19x mid-cycle earnings, versus a long-term average of 16x.

Du Pont Analysis points up. Melding a top-down and bottom-up analysis, incorporating Citi analyst estimates, we see ROE lifting in 2010. That is, we believe the ROE low in this cycle will be higher than the highs of most previous cycles. Margin expansion is overwhelmingly the driver, with asset

turn stabilizing and financial de-gearing slowing but not yet reversing.

Bull Market remains intact, with earnings growth increasingly taking over from multiple expansion as a support. Stocks still trading on under 11x trailing average 6-year EPS (i.e. cycle-average) include: Aristocrat, Bluescope, Fairfax, Goodman Fielder, Qantas, Stockland, Suncorp, and Telstra (see Figure 25 for full table).

Looking Over the Valley

We take account of structural changes in

multiples, margins and equity supply

We find the amount of equity issuance

does not derail earnings recovery



Over the past 12 months, the market cap of the Australian equity market has risen by 5%. The price index has fallen by 4% over the same period (Figure 2).

Since the beginning of 2008, $110bn of equity has been raised on domestic equities at an average discount of 13%. Given that market capitalisation over this period has averaged around $1000bn, the influence of equity issuance on key profitability variables such as ROE is relatively mild. This is all the more so given the prevalence of potentially profitable and accretive opportunities through the heart of the crisis.

Figure 2. Market Cap Index (LHS) versus (diluted) Shareprice Index (RHS), Australia

Figure 3. Price Dilution by Stock Type (Shareprice Increase less Market cap Increase, Jan 1 2008 through Sept 20 2009)

800

1000

1200

1400

1600

1800

2000

Jan-07Mar-0

7Jun-07

Sep-07Dec-

07Mar-0

8Jun-08

Sep-08Dec-

08Mar-0

9Jun-09

Aug-09Oct-

09

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

M Cap Price Index

$ A Bn All Ords Index

-25%

-20%

-15%

-10%

-5%

0%

Resources Industrial Cyclicals Defensives Financials REITs

Source: Citi Investment Research and Analysis Source: Citi Investment Research and Analysis

Figure 3 shows the shortfall of shareprice appreciation versus market cap growth by sector. REITS and financials were clearly the most affected; resources were a very mixed bag but in general were cashed up in the wake of the boom; and there was little to choose between defensives and industrial cyclicals.

Stocks which have recorded little or no dilution on this definition since the beginning of 2008 include:

Coca-Cola Amatil, Ansell, Origin Energy, Computershare, BHP-Billton, Caltex, ERA, Spark, Harvey Norman, ASX, Metcash and Tatts Group.

Stocks where market cap growth has run significantly ahead of shareprice growth include Primary Healthcare, Asciano; resources, including Iluka, Aquarius Platinum, OZ Minerals and Sino Gold; Wesfarmers; steels, particularly Sims and Bluescope; banks, particularly Westpac and ANZ; and a range of REITs.

Dilution

All Ords market cap has risen faster than

price due to a spate of issuance

Not surprisingly, the REIT and Financial

sectors have seen the heaviest dilution



Over the last 8 months the PE multiple on the Australian equity market has expanded by almost 6 points. We extrapolate how the market PE will track going forward by combining Citi bottom-up analyst estimates with our top-down index targets of 5000 by mid 2010 and 5500 by year end 2010. The resulting forecast profile (Figure 4) would indicate that we are now in the latter stages of multiple expansion with the market PE to peak at about 17.5 around the middle of next calendar year.

Figure 4. PE of Australian Equities + f’casts (shaded grey areas represent trough to peak re-ratings)

5

10

15

20

25

60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11

Sep 61 - Aug 64Duration 36 months

PE re-rating of +6.3

Aug 71 - Feb 73Duration 19 months


Apr 82 - Dec 83Duration 21 months


Nov 90 - Sep 93Duration 35 months


Sep 98 - Dec 99Duration 16 months


Feb 09 - NowDuration 8 months


Earnings Growth Kicks in

Source: Citi Investment Research and Analysis, Datastream, IRESS

Compared to history, this multiple expansion period would be a pretty standard experience in terms of magnitude but much shorter than average in duration. We calculate, since 1960, the average PE re-rating cycle for Australian equities to be 8.5 points over 25 months. Conclusions we make from the PE cycle are that:-

On average, Australian equities trough 16 month prior to earnings bottoming. It is therefore standard that the index will trade in “expensive” territory as the lagged effect of earnings downgrades fully wash through. For this reason we are still bullish on equities and do not consider them overvalued.

Multiples will likely start to contract from mid next year onwards however we don’t see the PE returning down to long run averages for another 2 years.

We believe that inflation will remain contained over the medium term and as such equities can justify PE multiples stabilising at levels slightly above their historical averages.

PE re-Ratings- How Far to Go ?

S&P/ASX 200 market PE estimated to

peak at around 17.5 by mid next year

The PE multiple on Australian equities

could eventually settle at above average

levels



Figure 5. Australian Equity market - PE on mid-cycle earnings Figure 6. S&P/ASX 200 - % of Stocks trading above 18x Reported earnings

0x

5x

10x

15x

20x

25x

30x

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

25%

30%

35%

40%

45%

50%

55%

60%

65%

Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10


Better than normal profitability levels going forward (further explored in the following section) leave us comfortable with the PE of mid-cycle earnings - currently 19x and going higher in 2010 if our bull-market prognosis is correct (Figure 5).

PE re-Ratings - At the Sector Level

As illustrated in Figure 1, the relative price performance of ASX sectors over the last 2 years has been almost "textbook" in terms of how you would expect sectors to behave around a key market bottom. Defensives which had been strongly outperforming up until March have since reversed whilst the poorly performing industrial cyclicals have now outperformed the market by almost 20% over the last 6 months. (This "textbook" outcome has from an empirical perspective been the exception rather than the rule however - we note that, in Australia, "cyclicals" have not had a consistent track record of outperformance post market lows).

Figure 7. Sector and Sub Sector Breakdown of Australian Stocks.

Industrial Cyclicals Defensives

* Developers * Engineering * Healthcare * Telco's

* Building Materials * Retail * Food & H'hld * Infrastructure

* Paper & Pack * Transport * Alcohol & Tobac * Utilities

Financials Resources

* Banks * Gold * Energy

* Investment & Fin * Div Resources * Other Metals

* Insurance


Breaking down ASX sectors into 4 distinct groups, we are able to gauge expected PE profiles and relative sector valuations:-

Sectors have performed “predictably”

leading into, and after, the market low of

March 2009



Banks look to be about 2/3rds of the way through their re-rating with the peak (in both absolute and relative terms) likely to be lowish compared to previous experiences in inflation controlled environments (i.e post early 1990’s). Excluding the early 1990’s, Australian banks tend to trade at a PE relative of around 0.8 versus the overall market. Given our view of bank ROE’s returning to 2007 peaks, we see upside room to bank valuations.

Figure 8. ASX Banks PE Ratio + forecast Figure 9. ASX Resources PE Ratio + forecast

0

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25

71 75 79 83 87 91 95 99 03 07 11

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1.8

2.0

Banks PE + f'cast Banks PE relative to ASX Market PE, (RHS)

5

10

15

20

25

30

35

71 75 79 83 87 91 95 99 03 07 11

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Resources PE + f'cast Resources PE relative to ASX Market PE, (RHS)


Resources are less easy to value on a PE basis given the instability of

earnings. Even the level of PE varies widely by data set; by trailing versus prospective numbers; and by spot versus analyst estimate numbers. Using the long resource PE history available in the Datastream series, resources would still appear to offer further PE rerating, (as shown in Figure 9). This is a trailing series. Using Citi analyst estimates, resources are trading on 21.3x FY2010E numbers and 14.9x FY2011E.

Industrial Cyclicals still have significant scope for PE re-rating in absolute terms (Figure 10), however in relative terms their valuations are largely in-line with normal ranges given the rerating in the market thus far this year.

Defensives are likely to see further PE de-rating. As the earnings recovery unfolds over the next 6 months, the sector could see a slide into discount territory (which for defensives is a standard outcome once market wide PE’s have peaked, as shown in 1993 and 2000, Figure 11).

Banks valuations contain potential upside

room

Defensive sectors will likely continue to

be largely left behind.



Figure 10. ASX Industrial Cyclicals PE Ratio + forecast Figure 11. ASX Defensives PE Ratio + forecast

0

5

10

15

20

25

71 75 79 83 87 91 95 99 03 07 11

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Industrial Cyclicals PE + f'cast Industrial Cyclicals relative to ASX Market PE, (RHS)

0

5

10

15

20

25

30

71 75 79 83 87 91 95 99 03 07 11

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Defensives PE + f'cast Defensives relative to ASX Market PE , (RHS)


ROE and the earnings retention rate are the critical factors in determining the trend growth in both earnings and dividends. Over the last 20 years the payout ratio on the Australian equity market has shown itself to be relatively stable between the 65% and 70% level. Given the stability of retained earnings, assumptions on earnings growth are disproportionately driven by what the “normalised” level of ROE should be.

Figure 12. Return on Equity, Australia v World

6

8

10

12

14

16

18

20

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Australia World

Source: Citi Investment Research and Analysis, Datastream

Profitability unwind remains a key concern for domestic equities. During the height of the previous sharemarket boom, the ROE of Australian stocks peaked at 20% compared to only 15% for international stocks as a whole. The fact that Australian corporates were overearning is hardly surprising given the source of the most recent bull market was a commodity super-cycle of which Australia would be a disproportionate beneficiary. We believe Resource booms are few and far between and, as such, the subsequent unwind may well have further to fall. As a reminder, our preference for international equities over domestic is largely driven by this ROE unwind.

ROE and Profitability Cycles

EPS growth = ROE * (1 -payout ratio)

Australian equities were significantly

“overearning” through 2005 - 2008



Where do we see ROE troughing?

Earnings on the Australian equity market are now 30% off their peak level from February 2008. We see the index of trailing 12-month earnings bottoming around the end of this calendar year a further 5% below where we are now (although on a half-by-half basis we are already on the lows).

An extrapolation of the earnings profile would indicate a trough ROE on Australian equities of around 11% around the end of calendar 2009. This would be a level in-line with long-run average profitability and certainly a remarkably high trough given the sub 8% levels we breached in the early 1990’s and early 1980’s.

Where do we see ROE’s returning to?

Theory and practice would show that profitability measures tend to mean revert over the medium term. We largely agree with this theory; however, a post credit crunch world could herald a genuine structural break to the relationship. Both capacity utilisation and business confidence point towards a recovery in ROE’s through 2010; however, both these variables are essentially coincident indicators which reflect an improvement in the general operating environment.

A Dupont formula shows ROE to be a function of profit margins, asset turnover and financial leverage:

ROE = (net income/sales) * (sales/assets) * (assets/equity)

From the above formula, it follows that an increase in any of the numerator components (income, sales or equity) will yield a higher overall level of “profitability” (i.e. a higher ROE). Using Citi analyst estimates we calculate a 2 percentage point ROE recovery over the current forecast year (Figure 13).

Figure 13. ROE bottom-up calc for Australian Equities (industrial companies median, Citi coverage)

ROE Margins X Asset Turnover X Leverage (Income / Sales) (Sales / Assets) (Assets / Equity)2008 17% = 9.4% X 79.8% X 221%2009E 11% = 8.5% X 67.0% X 198%2010E 13% = 10.5% X 67.5% X 190%


A drill down into the components of ROE would show the profitability improvement through 2010E to be largely driven by margin expansion. This would agree with views we formed through the recently completed company reporting season where we saw significant scope for positive operating leverage into 2010E. Over the coming year, Citi bottom-up analysts have factored in a rise in operating profits of 3% as the sales growth of -1% outpaces cost growth of minus 2%.

Market wide ROE to trough at 11%

around end of this year

Market-wide ROE estimated to be back up

to 13% by end of next year & 15% by

2011



Figure 14. Profit Margin, S&P/ASX 200 Figure 15. Corp Gearing (debt/debt+equity), private non-financial corporations

4%

6%

8%

10%

12%

14%

16%

97 98 99 00 01 02 03 04 05 06 07 08 09 10

Average = 10.6%

66%

68%

70%

72%

74%

76%

78%

1988 1991 1994 1997 2000 2003 2006 2009

Source: Citi Investment Research and Analysis Source: Citi Investment Research and Analysis, RBA

After 2010, we believe the lagged effects of cost cutting will start to subside and with it so should the ROE kicker from operating leverage/margin rebound. ROE’s will likely however then find support as top-line economic growth generates higher asset turnover. At the same time, ROE should be boosted as companies look to partially reverse some of the sharp deleveraging that occurred over the last 2 years (Figure 15).

Given moderate re-leveraging, increased turnover and stabilizing margins we see

the market wide ROE returning to around the 15% level by 2011E. Over the medium term, profitability remaining at these levels is likely given the marked structural themes underpinning the Australian banking sector and global resources.

Resource Sector - ROE & Profitability Cycles

Appropriately weighting resource commodities in proportion to Australia’s exposure yields a healthy rebound in the commodity price index over the coming 3 years. For Australian resource stocks, the elevated levels of commodity prices (even given the -2 standard deviation move over the last 12 months) can more than justify sector ROE’s getting back above 15% ( as illustrated below in Figure 16).

Figure 16. Return on Equity of ASX Resources vs Commodity Prices

5

10

15

20

25

83 87 91 95 99 03 07 1150

150

250

350

450

ASX Resources ROE RBA Commodity Price Index + forecast (RHS)

Source: Citi Investment Research and Analysis, Datastream

The Commodity price profile would

indicate the ROE on resource stocks

returning back to the high teens



Iron-ore and coal (which together make up 50% of Australia’s resource commodity exports) underpin our constructive commodity price outlook.

Figure 17. Citi Commodity Forecasts, (Mar 2003 = 100) Figure 18. Citi Commodity Forecasts, Base Metals (Mar 2003 = 100)

100

200

300

400

500

600

700

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Coking Coal Steaming Coal Gold Iron Ore Alumina LNG

F'cast

100

200

300

400

500

600

700

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Aluminium Copper Nickel Zinc Lead

F'cast


Bank Sector - ROE & Profitability Cycles

On September 15, our banks team published a detailed report on Australian Banks, Return to Excellence – the Recovery of 20% ROE’s. Using DuPont analysis they conclude that the “normalized” ROE for Australian banks will return to pre-crisis levels of around 20%. Key drivers of the rebound in ROE include:

Higher interest margins – Even though funding costs are likely to remain high, the weakened competitive landscape will allow banks to re-price loans.

Easing credit costs – The extreme lows seen in FY2007 are unlikely to be seen again; however, we see cycle average levels returning by FY2012, with loan losses at 25-30bps reflecting the shift of lending towards mortgages (Figure 20).

Cost efficiencies – A lower inflationary environment will contain employment cost pressures whilst the replacement of core systems adds material savings.

Increased leverage capacity – Basel II applies a lower risk weighting to house lending and as such we believe the leverage capacity of Australian banks will lift from 19x pre-crisis, and 17x currently, to 21x.

The first 3 bullet points (i.e. interest margins, credit costs and costs efficiencies) drive the recovery of the industry ROA back to levels from a decade ago (Figure 21). Given that ROE is essentially a function of ROA and leverage, it follows that re-leveraging additionally boosts industry wide ROE.

Figure 19. Australian system loans outstanding Jan 2009 ($bn)

Housing, $999

Other Personal, $145

Business, $620

Total: $1,764

Source: CIRA, RBA



Figure 20. Australian Bank Impairment charges as % of total credit Figure 21. Australian Bank Sector ROA – history and estimate

0.18%

0.42%

0.77%

0.91%

0.50%

0.27%

FY07 FY08 FY09F FY10F FY11F FY12F0.60%

0.65%

0.70%

0.75%

0.80%

0.85%

0.90%

0.95%

1.00%

1.05%

1.10%

FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09F FY10F FY11F FY12F

Source: Citi Investment Research and Analysis Source: Company Reports and CIRA Estimates

The recovery in profitability of Australian banks is in stark contrast to their offshore counterparts. As shown in Figure 22, Australian banks have a long history of “over-earning” despite two decades of attempts by regulators and governments to bring about a more competitive domestic landscape. The profitability rebound that Australian banks will likely experience may not be matched by their offshore counterparts. Given the structural headwinds apparent, we think the ROE’s of international banks will be doing well to get back to their average of the last decade (i.e. 13%). In relative terms, the extent to which Australian banks overearn versus non-Australian banks is likely to hit all time highs.

Secular trends also provide an additional reason as to why they can maintain earnings superiority. Over the last two decades, financial services growth within the Australian economy has been relatively mild compared to other developed markets. It follows that Australian Banks would have relatively less to lose in the event of any reversal of the “financial miracle” (Figure 23).

Figure 22. Return on Equity - Australian Banks vs World Banks Figure 23. Value Add in Financials & Bus Services (as % of total value added)

5

10

15

20

25

79 83 87 91 95 99 03 07 11

Australian Banks World Banks

0

10

20

30

40

50

New Zea l

Aus tralia Spain

JapanF rance

Germ anyBe lg ium

Austr ia Sw itz Ita ly

Neth lds USA U.KIre land

Luxem b

1990 2007

Source: Citi Investment Research and Analysis, Datastream Source: Citi Investment Research and Analysis, OECD Factbook 2009

High yields on banks shares remain

compelling relative to record low interest

rates



At the stock level, as we move through a market trough, questions to ask are: Has the global recession been fully reflected in company earnings (i.e.

where are we relative to trough cycle earnings); and

Is the market pricing the stock as if it will under-earn indefinitely? Or paying a PE premium to "look across the valley" to earnings recovery?

Figure 24. The Earnings Cycle of Equities

+ Recommendation Upgrades from analyst

+ Operatio

nal Leve

rage

+ Cautiously Optimistic Commentary from companies

+ Small earnings upgrades from analysts (largely ignored by market)

+ Bull market company commentary

+ Capacity constraints & inflation pressures

- Analyst capitulate on earnings

- Companies go negative on outlook commentary

- Analyst earnings downgrades begin

-Reverse Operational Leverage

- Companies deny the obvious realities

- Recommendation downgrades from analysts


The market has now rallied 50% since early March 2009 yet the benefits of operational leverage are yet to come through. Given that equities are now in the “sweet spot” of the investment clock, we believe there to be no shortage of stock opportunities that have considerable re-rating potential.

Figure 25. Stocks looking attractive on mid-cycle earnings ASX Code Name Price PE on 6-year average

EPS Recomm Top 100

BSL Bluescope Steel Ltd $ 3.12 4.3x 2H YGNS Gunns Ltd $ 1.15 6.6x 2S NPBG Pacific Brands Ltd $ 1.23 6.7x 2H NSUN Suncorp-Metway Ltd $ 8.18 6.8x 2H YTAH TABCORP Holdings Ltd $ 7.02 7.3x 2M YALS Alesco Corporation Ltd $ 4.81 7.4x 2H NAPN APN News & Media Ltd $ 2.04 7.5x 2M NMGR Mirvac Group $ 1.74 7.6x 3M YFXJ Fairfax Media Ltd $ 1.72 8.2x 1M YDXS Dexus Property Group $ 0.82 8.4x 2M YCSR CSR Ltd $ 1.94 8.5x 3H YAWB AWB Ltd $ 1.50 8.9x 2S NAWC Alumina Ltd $ 1.79 8.9x 3S YQAN Qantas Airways Ltd $ 2.78 9.1x 1H YCPA Comm Prop Office Fund $ 0.85 9.3x 2M YSIP Sigma Pharmaceuticals Ltd $ 1.08 9.4x 2H NWHG WHK Group Ltd $ 0.98 10.0x 1H NTEN Ten Network Holdings Ltd $ 1.41 10.1x 3M NSGP Stockland $ 4.07 10.3x 2M YPPX PaperlinX Ltd $ 0.64 10.3x 2S NGFF Goodman Fielder Ltd $ 1.63 10.6x 1H YSGH Slater & Gordon Ltd $ 1.65 10.6x 2H NSPT Spotless Group Ltd $ 2.73 10.7x 2H NHST Hastie Group Ltd $ 2.13 10.8x 2H NALL Aristocrat Leisure Ltd $ 4.61 10.8x 2H YTLS Telstra Corp Ltd $ 3.25 10.9x 2H Y


Stock Selection Timing

We are now towards the end of the

earnings downgrade cycle for equities



The below table provides company information on other Citi covered companies mentioned through this report.

Figure 26. Company information of stocks mentioned

ASX Code Name Price Recomm ASX Code Name Price Recomm

ANN Ansell Ltd 9.74 2M ILU Iluka Resources Ltd 3.98 1H

ANZ Australia NZ Banking Group Ltd 23.18 1M MTS Metcash Ltd 4.60 1M

AQP Aquarius Platinum Ltd 5.95 1H ORG Origin Energy Ltd 15.69 1M

ASX ASX Ltd 35.28 2M OZL OZ Minerals Ltd 1.16 3H

BHP BHP Billiton Ltd 38.70 1M SGM Sims Metal 23.68 2H

CCL Coca-Cola Amatil Ltd 10.05 2M TTS Tatts Group Ltd 2.53 1M

CPU Computershare Ltd 10.49 2M WBC Westpac Banking 24.91 1M

ERA Energy Resources Of Australia 25.75 2H WES Wesfarmers Ltd 26.28 2M

HVN Harvey Norman Holdings Ltd 4.31 2M


Australia Market Intelligence

Mkt Cap P/E (x) EPS Growth (%) Yield (%) PBV ROE (%) US$ Performance 09/24/2009 USD bil 2008 2009 2010 2008 2009 2010 2009 (x) 2008 2009 2010 1W 1M YTDAustralia 794.2 15.0 17.7 15.9 -13.7 -15.0 11.6 3.9 2.1 14.0 11.7 12.4 -0.8 9.8 57.7Energy 56.9 22.5 27.2 24.2 27.8 -17.0 12.1 2.2 2.4 13.3 8.7 9.1 -0.3 6.2 53.7Materials 195.5 14.2 19.9 17.1 -8.5 -28.5 16.0 2.4 2.8 21.2 14.1 15.0 -3.9 4.1 63.3Capital Goods 6.8 17.6 19.5 15.5 -19.5 -9.8 25.5 3.4 2.9 18.1 15.1 17.6 -4.3 -1.1 55.2Commercial & Professional Services

9.7 16.7 17.8 17.1 1.0 -6.3 4.7 NA 6.0 38.7 33.5 29.3 -1.6 10.9 33.5

Transportation 20.4 94.2 -92.9 22.6 -90.9 -266.9 NM 8.2 1.2 1.2 -1.3 5.5 0.0 13.6 22.3Consumer Durables & Apparel

1.9 14.4 16.2 15.5 -3.2 -11.0 4.0 3.9 2.3 18.4 14.2 14.0 1.1 9.4 83.2

Consumer Services 11.7 11.7 12.9 12.2 -11.0 -9.4 5.5 2.4 1.6 13.6 12.4 12.7 1.2 11.4 40.5Media 3.1 9.7 16.1 15.7 -23.0 -39.5 2.4 NA 0.8 7.1 5.1 5.0 -1.8 20.4 39.7Retailing 1.9 16.3 16.5 14.3 -1.7 -1.4 15.2 NA 2.1 13.9 12.9 13.7 -5.2 33.1 96.1Food & Staples Retailing 60.8 17.6 17.8 17.0 5.3 -1.3 4.7 5.4 2.2 12.4 12.5 12.7 0.0 6.3 56.9Food Beverage & Tobacco 19.4 16.3 15.6 14.5 3.4 4.7 7.9 4.1 3.2 19.9 20.3 20.7 -0.8 9.3 40.2Health Care Equipment & Services

7.7 21.1 19.1 17.4 13.5 10.3 10.1 NA 3.1 16.7 16.3 16.8 -0.1 16.7 31.5

Pharmaceuticals Biotechnology & Life Sciences

17.9 22.9 18.2 15.8 32.4 25.5 15.0 NA 3.9 20.9 21.4 23.6 -1.6 9.2 25.9

Banks 230.7 14.8 16.4 14.9 -12.9 -9.4 9.7 4.4 2.0 14.5 12.0 12.8 1.4 15.8 91.9Diversified Financials 21.5 15.1 18.2 15.5 -31.9 -16.9 17.6 3.6 1.9 12.9 10.5 11.8 3.3 19.6 92.9Insurance 51.5 16.5 14.6 13.2 -36.9 13.1 10.4 5.0 1.8 10.4 12.2 12.9 -0.8 6.8 24.3Real Estate 53.6 9.0 12.9 14.4 -19.0 -30.3 -10.8 7.0 1.1 9.5 8.7 7.2 -1.5 15.5 28.6Software & Services 4.3 18.7 18.4 17.2 17.0 1.6 6.9 NA 5.4 34.5 29.4 25.9 2.4 13.2 77.3Telecommunication Services

12.3 10.3 9.7 9.4 12.0 5.7 3.8 8.9 3.1 31.9 32.1 31.6 -1.5 -0.6 5.1

Utilities 6.4 15.3 14.5 13.6 4.8 5.4 6.7 10.2 1.0 8.0 7.2 7.2 0.9 6.3 10.7

Note: The above valuation data are compiled based on the MSCI Australia universe of stocks with which IBES forecasts are available. Fiscal year of each company is



Source: IBES Aggregate, MSCI, FactSet, CIRA estimates.



A-share Market: Waiting for the Second Shoe to Drop What's new — Since end-July, the domestic A-share market has sharply

underperformed the H-share market. The premium that A shares command over their respective H shares is at 18% – very close to historical lows (see Figs 1 & 2).

What do we think — We believe apart from the reasons highlighted in our 9 Sep 09 note, such as 1) a slowdown in new bank lending, 2) a crackdown on misuse of bank funds and 3) release of previously locked-up shares hitting a peak, at 3x the previous peak month (see Fig 3), other factors are hindering the performance of the A-share market.

Launch of Emerging Board looks imminent — Ten companies have got approval for imminent listing after the long Oct weekend. Though the total amount to be raised is not so significant, it is nevertheless a liquidity diversion from the main board.

Disappointing new IPO performances — The latest A-share IPOs have failed to match expectations, clearly hindering retail investors’ enthusiasm (see Fig. 4).

No more Golden September for property sales — Our China property team believes Sep sales have so far not picked up meaningfully from the seasonally weak summer time (see Fig. 5). In particular, in first-tier cities sales continue to deteriorate due to tightening second mortgages and rapid price increases. This is making investors nervous about the possibility of 2H09 property sales seeing a sharp decline vs. 1H09. Slower sales could also delay kick off in new construction.

Liquidity: Double-edged sword for A shares on funding pressure from smaller

banks — Aggressive lending over the past 8 months has left small/mid-sized size banks’ balance sheets stretched. According to our banks analyst, Simon Ho, some smaller A-share banks (esp. Minsheng, SZDB, Shanghai Pudong Dev. Bank) barely meet the minimum legal requirement of 8% total CAR, let alone the CBRC's guidance for 10% (potentially rising to 12% next year for smaller banks). Their T1 ratios are also low, even by global standards. To carry on increasing loans rapidly in 2010, these banks will likely need more capital. H-share banks are in far better shape with total CARs of 11-12% and much higher T1 ratios, generally 9-10%. Other than the CMB rights issue, equity raising by H-share banks looks unlikely. A number of banks have already announced plans to raise capital: Minsheng Bank has said it will have an H-share listing; SPDB is targeting a domestic placement; lately after the 2Q result, BOC has said that it may raise more capital, although more likely sub-debt as opposed to equity (see Figs. 6 & 7).

China Equity Strategy

Lan Xue +852-2501-2783 [email protected]



Long Oct 1st weekend is discouraging investors from taking major positions — China is heading toward its longest holiday (Oct 1-8) to celebrate its 60th Anniversary. This means stock markets will be closed for 6 trading days during this period. Such a long holiday is likely to discourage investors from taking any major positions over the next week or so.

What’s next — The H-share market is not suffering as much from the above factors. In particular, the H share market’s liquidity mainly comes from global funds, which remain abundant. Nevertheless, such huge divergence in performances looks unsustainable. We believe there is a good chance of the A- share market playing some catch-up in the last 2 months of the year in anticipation of 1Q10 loan growth pick-up.

Figure 1. Shanghai Comp. Index and H Share Index Rel. Performance Figure 2. A-Share Premium to Dual-Listed H Shares at Month End

75

100

125

150

175

200

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09

Shanghai Composite Index H Share Index

1 Jan 09 = 100

0%3%

24%30%

33%

40%

53%

41%47%

79%

61%

46%52%

64%

83%

90%

66%

53%

44%38%

29%23%

19%

38%

31%

49%

59%

49%

39%

28%

40%46%

21%18%

10%

48%

43%

58%57%

43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

29-Se

p-06

31-O

ct-06

30-N

ov-06

29-D

ec-06

31-Ja

n-07

28-Fe

b-07

30-M

ar-07

30-Ap

r-07

11-M

ay-07

31-M

ay-07

29-Ju

n-07

31-Ju

l-07

20-Au

g-07

27-Au

g-07

28-Se

p-07

26-O

ct-07

31-O

ct-07

30-N

ov-07

31-D

ec-07

31-Ja

n-08

29-Fe

b-08

31-M

ar-08

30-Ap

r-08

30-M

ay-08

30-Ju

n-08

31-Ju

l-08

29-Au

g-08

30-Se

p-08

31-O

ct-08

28-N

ov-08

26-D

ec-08

30-Ja

n-09

27-Fe

b-09

31-M

ar-09

30-Ap

r-09

29-M

ay-09

30-Ju

n-09

31-Ju

l-09

31-Au

g-09

22-Se

p-09

AIH Premium

Source: Bloomberg and Citi Investment Research and Analysis Source: Powered by DataCentral



Figure 3. A-share Market — Release of Previously Locked-up Shares

Current Month Release in Volume Current Monthly Release in Value (m shares) (RMB m) Jan-07 2,252 22,881 Feb-07 2,180 20,152 Mar-07 3,562 37,842 Apr-07 8,575 94,405 May-07 5,689 127,091 Jun-07 3,044 50,600 Jul-07 3,639 40,113 Aug-07 5,033 108,743 Sep-07 2,214 40,064 Oct-07 12,497 240,617 Nov-07 2,897 42,577 Dec-07 2,102 37,413 Jan-08 2,475 47,759 Feb-08 4,405 111,781 Mar-08 2,618 42,010 Apr-08 3,252 34,829 May-08 3,268 56,931 Jun-08 3,201 44,789 Jul-08 2,165 18,209 Aug-08 21,166 155,819 Sep-08 1,684 9,608 Oct-08 8,373 61,291 Nov-08 7,392 42,250 Dec-08 12,799 91,089 Jan-09 7,661 63,776 Feb-09 9,045 82,028 Mar-09 20,516 201,813 Apr-09 19,992 185,249 May-09 24,745 281,123 Jun-09 13,941 142,416 Jul-09 11,555 119,143 Aug-09 12,727 115,437 Sep-09 11,772 94,458 Oct-09 60,590 679,991 Nov-09 6,035 59,209 Dec-09 3,735 42,037 Jan-10 3,034 31,813 Feb-10 3,298 30,252 Mar-10 4,825 49,995 Apr-10 7,226 95,128 May-10 2,354 27,621 Jun-10 5,950 74,246 Jul-10 1,425 13,758 Aug-10 3,724 56,590 Sep-10 1,181 14,436 Oct-10 1,648 16,800 Nov-10 1,312 14,997 Dec-10 10,726 127,503




Figure 4. A Share IPO Performance Summary

RIC Name First Trading Date

IPO Price (Rmb)

Closing @1st Trading day

Performance

002276.SZ Wanma Cable 2009/7/10 11.50 25.93 125%002275.SZ Guilin Sanjin 2009/7/10 19.80 36.01 82%002277.SZ Joindoor 2009/7/17 19.58 37.90 94%601107.SS Sichuan Express 2009/7/27 3.60 10.90 203%601668.SS China State Con 2009/7/29 4.18 6.53 56%002279.SZ Join-Cheer Soft 2009/8/11 27.00 56.29 108%002278.SZ SHSKP & CE 2009/8/11 15.96 31.20 95%601788.SS Everbright 2009/8/18 21.08 27.40 30%002283.SZ Tianrun Crank 2009/8/21 14.00 19.90 42%002282.SZ Bosun Tools 2009/8/21 11.50 16.33 42%002281.SZ Accelink Tech 2009/8/21 16.00 29.79 86%002280.SZ New Century 2009/8/21 22.80 36.80 61%002286.SZ Baolingbao Bio 2009/8/28 20.56 30.11 46%002287.SZ Tibet Cheezheng 2009/8/28 11.81 24.21 105%002285.SZ World Union Prop 2009/8/28 19.68 26.83 36%002284.SZ Asia Pacific 2009/8/28 18.80 25.90 38%002291.SZ Foshan Sat. Shoes 2009/9/3 18.00 22.18 23%002290.SZ Suzhou Heseng 2009/9/3 27.80 34.80 25%002289.SZ Shenzhen Success 2009/9/3 15.88 22.22 40%002288.SZ GD Chaohua 2009/9/3 12.10 18.68 54%002293.SZ Luolai Textile 2009/9/10 27.16 34.81 28%002294.SZ Salubris Pharm 2009/9/10 41.98 66.35 58%002292.SZ Alpha Animation 2009/9/10 22.92 40.95 79%


Figure 5. Weekly Transaction Volume in September 2009

September 2009 1st week (31 Aug - 6 Sep) 2nd week (7 Sep - 13 Sep) 3rd week (14 Sep – 20 Sep) sqm WoW Change

(%)YoY Change

(%)sqm WoW Change

(%)YoY Change

(%) sqm WoW Change

(%)YoY Change

(%)Beijing 383,300 3% 395% 380,900 -1% 225% 355,400 -7% 100%Tianjin 241,100 -29% 270% 333,600 38% 532% 268,100 -20% 223%Shanghai 527,000 0% 126% 454,900 -14% 144% 418,900 -8% 94%Hangzhou 132,300 51% 113% 135,400 2% 41% 123,000 -9% 158%Suzhou 162,200 -2% 304% 162,400 0% 185% 218,300 34% 317%Nanjing 200,700 -2% 315% 149,000 -26% 161% 174,400 17% 274%Ningbo 104,400 -8% 89% 117,300 12% 129% 140,200 20% 191%Shenzhen 67,600 4% -9% 72,900 8% -16% 66,900 -8% 7%Guangzhou 188,600 0% 329% 163,400 -13% 200% 169,300 4% 181%Dongguan 44,400 -37% -7% 61,100 38% 65% 97,900 60% 87%Chongqing 515,600 39% 118% 471,200 -9% 136% 480,500 2% 147%Chengdu 181,300 -17% 68% 283,000 56% 229% 328,900 16% 107%Xiamen 25,000 -52% 111% 39,700 59% 160% 35,600 -10% 78%Fuzhou 95,800 12% 475% 88,400 -8% 55% 51,300 -42% 43%Wuhan 273,400 -11% 163% 332,900 22% 263% 315,400 -5% 258%Changsha 234,200 -12% 119% 246,500 5% 75% 282,300 15% 98%Average 211,056 -4% 186% 218,288 3% 161% 220,400 1% 148%

Source: Soufun; Citi Investment Research and Analysis



Figure 6. Chinese Banks — CAR Comparison (H-share banks)

1H09 - H share banks T1 ratio T2 ratio of which: sub-debt Total CAR * Sub-debt as % T1 ICBC 10.0% 2.1% 0.6% 12.1% 6.4%CCB 9.3% 2.7% 1.6% 12.0% 17.7%BOC 9.4% 2.1% 1.2% 11.5% 12.8%BoCom 8.9% 3.8% 1.7% 12.7% 19.3%CMB 6.5% 4.1% 2.7% 10.6% 42.2% CMB post rights issue 8.3% 4.1% 2.7% 12.5% 33.0%CNCB 10.5% 1.6% 1.3% 12.0% 12.1% CNCB post CIFH acqn 9.7% 1.5% 1.2% 11.2% 12.1%

Source: Company Reports * Total CAR = T1 + T2

Figure 7. Chinese banks — CAR Comparison (A-share banks)

1H09 - A share banks (ex H listed) T1 ratio T2 ratio of which: sub-debt

Total CAR * Sub-debt as % T1

Bank of Beijing 13.5% 2.6% 1.4% 16.1% 10.7%Bank of Nanjing 13.3% 1.9% 1.1% 15.2% 8.0%Bank of Ningbo 11.6% 1.3% 0.0% 12.8% 0.0%Huaxia 6.8% 3.5% 1.7% 10.4% 24.3%Industrial Bank (Note 1) 7.4% 1.8% 0.4% 9.2% 5.7%Shanghai Pudong Dev Bank ** (Note 2) 4.8% 3.9% 2.6% 8.7% 52.8%Shenzhen Dev Bank 5.1% 3.5% 2.3% 8.6% 45.4%Minsheng 5.9% 2.6% 1.7% 8.5% 29.0%

Source: Company Report, Citi Investment Research and Analysis * Total CAR = T1 + T2 ** SPDB: T1 and T2

are 1Q09 figures, while sub-debt as % of total T2 capital is 2008 figures

Note 1: Industrial Bank received approval from CBRC and PBOC to issue no more than Rmb10bn

subordinated bonds on 7 August 09.

Note 2: SPDB received approval from CSRC to raise capital through private placement. SPDB expect to raise

no more than Rmb15bn, and T1 and CAR to be lifted to above 6% and 10%.



China Market Intelligence

Mkt Cap P/E (x) EPS Growth (%) Yield (%) PBV ROE (%) US$ Performance 09/24/2009 USD bil 2008 2009 2010 2008 2009 2010 2009 (x) 2008 2009 2010 1W 1M YTDChina 521.0 18.0 16.0 13.4 -10.9 12.3 19.8 2.4 2.3 14.2 14.3 15.4 -3.9 1.2 47.3Energy 89.1 12.4 13.4 11.0 0.5 -8.0 21.9 2.7 2.0 17.5 14.8 16.1 -4.3 0.1 52.3Materials 30.4 39.0 25.3 15.6 -60.3 53.9 62.6 1.1 2.3 6.5 9.0 13.0 -6.0 -2.5 79.8Capital Goods 28.2 78.7 16.8 14.4 -82.4 NM 16.1 1.5 1.9 2.7 11.3 11.8 -4.7 -4.0 34.0Transportation 16.8 16.9 48.1 24.8 -51.3 -64.8 94.0 1.7 1.6 9.4 3.3 6.3 -5.0 -5.5 58.3Automobiles & Components 6.1 13.2 11.8 10.6 19.6 11.5 11.5 1.4 2.1 18.4 17.4 16.8 2.7 -7.8 117.5Consumer Durables & Apparel 3.7 25.4 21.2 17.5 43.2 19.9 21.1 2.3 5.3 24.8 24.9 25.2 -5.2 3.0 118.2Consumer Services 0.6 17.2 20.5 14.2 -5.1 -16.1 44.9 2.4 0.8 4.6 3.8 5.3 0.6 -2.4 6.0Retailing 11.0 26.2 24.3 20.2 -50.9 8.1 19.8 1.4 2.9 12.3 12.1 13.4 -2.4 0.4 73.2Food Beverage & Tobacco 15.2 20.5 14.7 12.3 3.0 39.6 19.7 1.5 2.8 17.0 19.3 19.5 0.9 10.6 49.7Household & Personal Products

3.8 38.7 27.1 22.7 27.1 42.8 19.4 2.3 6.5 20.8 23.9 25.6 0.0 7.0 82.1

Banks 119.2 14.5 12.9 10.7 29.3 12.3 20.1 3.6 2.3 17.5 17.7 18.8 -5.2 5.8 55.0Diversified Financials 1.7 28.7 6.8 15.0 -75.3 NM -54.4 1.9 1.5 7.7 22.6 9.5 -8.8 -12.2 92.6Insurance 47.1 53.6 29.1 24.7 -59.9 83.8 17.9 0.9 3.8 8.7 13.2 13.8 -4.8 3.1 51.3Real Estate 32.8 17.2 16.2 12.3 -9.7 6.6 31.4 1.7 1.9 12.9 12.0 13.7 -6.8 -3.9 75.7Software & Services 17.8 71.6 44.8 33.1 62.3 59.7 35.3 0.3 17.0 35.7 37.9 35.6 -2.3 3.0 161.7Technology Hardware & Equipment

10.2 42.8 34.5 21.1 -56.5 24.1 63.8 0.8 3.0 7.4 8.6 12.7 3.8 22.2 194.9

Telecommunication Services 77.3 12.8 13.2 13.0 22.3 -3.3 1.5 3.3 2.1 18.4 16.0 14.9 -1.0 -0.7 4.8Utilities 8.7 138.8 15.4 12.7 -89.9 NM 21.4 2.5 1.7 1.4 10.8 12.2 -5.5 -9.5 9.3

Note: The above valuation data are compiled based on the MSCI China universe of stocks with which IBES forecasts are available. Fiscal year of each company is



Source: IBES Aggregate, MSCI, FactSet, CIRA estimates.



At 2.1x PBV, Asia Does Not Look Attractive To Global Funds

Global funds focus on relative valuations not growth; Developed markets win

— Although Global/International equity funds took in US$4.3b of new money in August, with the exception of Hong Kong, other Asian markets did not benefit much. Rather, Global funds were net sellers in most Emerging Markets (EM) worldwide and proceeds were invested in US, Canada and Japan equities. As per Figure 11, Global funds have gone less overweight Asia ex and more underweight other EMs.

Foreign funds were net sellers of China names for the first time in 14 months

— Apart from Pacific funds, other foreign equity funds all turned net sellers in the China market last month. Net net, foreign sell totaled US$2.3b in August as per EPFR Global. This contrasts total purchases of US$10.7b between July 2008 and July 2009. Foreign funds all held barbell positions and underweight China but overweight HK in August, yet these two were the worst performing markets in Asia.

Asian equity funds still the laggard in terms of receipts of fresh money — Despite inflows to all Asian dedicated equity funds resuming to a 7-week high of US$427m this week, the amount was minimal compared to US$4.1b of inflows to Global/International funds and GEM funds combined. Consensus cash levels at Asian funds remain the smallest of all, only 1.9% vs. 2.6% on average for Global and GEM funds. The direction of global money flows is getting more important to Asian market movements in the near-term.

Figure 1. Weekly Flows to Individual Country Funds, AxJ Regional Funds and Greater China Funds

-150-100

-500

50100150

AxJ re

gional

funds

China

Korea

Greater

China f

unds

Thail

and

Indon

esia

Philip

pines

Malaysi

a

Singa

pore

Hong Ko

ngInd

iaTa

iwan

US$m

n

Net flows in the week ended 9/23/09Prior 4-wk average

Source: EPFR Global Citi Investment Research and Analysis and Analysis

Fun With Flows

Elaine Chu +852-2501-2768 [email protected]




Appendix A-1 Analyst Certification

Each research analyst(s) principally responsible for the preparation and content of all or any identified portion of this research report hereby certifies that, with respect to each issuer or security or any identified portion of the report with respect to an issuer or security that the research analyst covers in this research report, all of the views expressed in this research report accurately reflect their personal views about those issuer(s) or securities. Each research analyst(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this research report.

IMPORTANT DISCLOSURES

Citigroup Global Markets Korea Securities Limited (CGMK) performs the role of liquidity provider on the warrants of which the underlying asset is Hyundai Motor. As at 25 Sep 09, CGMK holds 3,385,270 Citi ELW 9200, 3,397,370 Citi ELW 9252, 3,399,980 Citi ELW 9302, 2,999,500 Citi ELW 9329, 3,400,000 Citi ELW 9419 Call warrants & 970 shares of Hyundai Motor. Citigroup Global Markets Korea Securities Limited (CGMK) performs the role of liquidity provider on the warrants of which the underlying asset is POSCO. As at 25 Sep 09, CGMK holds 3,399,000 Citi ELW 9206, 3,400,000 Citi ELW 9253, 3,397,340 Citi ELW 9276, 3,367,350 Citi ELW 9325, 3,368,750 Citi ELW 9347 Call warrants & 135 shares of POSCO. Citigroup Global Markets Korea Securities Limited (CGMK) performs the role of liquidity provider on the warrants of which the underlying asset is Samsung Elec. As at 25 Sep 09, CGMK holds 3,400,000 Citi ELW 9227, 3,399,990 Citi ELW 9232, 3,400,000 Citi ELW 9262, 3,328,320 Citi ELW 9273, 3,400,000 Citi ELW 9300, 2,487,640 Citi ELW 9306, 3,400,000 Citi ELW 9348, 3,396,900 Citi ELW 9361, 3,400,000 Citi ELW 9420 Call warrants & 4,990 shares of Samsung Elec. Citigroup Global Markets Korea Securities Limited (CGMK) performs the role of liquidity provider on the warrants of which the underlying asset is Korea Electric Power. As at 25 Sep 09, CGMK holds 3,400,000 Citi ELW 9254, 3,299,290 Citi ELW 9326, 3,399,990 Citi ELW 9336, 3,397,800 Citi ELW 9362 Call warrants & 6,809 shares of KEPCO. Citigroup Global Markets Korea Securities Limited (CGMK) performs the role of liquidity provider on the warrants of which the underlying asset is Shinhan Finance. As at 25 Sep 09, CGMK holds 3,390,000 Citi ELW 9235, 3,398,500 Citi ELW 9256, 3,366,050 Citi ELW 9277, 3,336,600 Citi ELW 9304 Call warrants, 3,399,900 Citi ELW 9305 Put warrants & 6,566 shares of Shinhan Finance. Citigroup Global Markets Korea Securities Limited (CGMK) performs the role of liquidity provider on the warrants of which the underlying asset is LG Elec. As at 25 Sep 09, CGMK holds Citi 2,267,120 Citi ELW 9274, 2,784,640 Citi ELW 9354, 3,400,000 Citi ELW 9401, 3,400,000 Citi ELW 9424, 3,400,000 Citi ELW 9425 Call warrants & 34,101 shares of LG Elec. Citigroup Global Markets Korea Securities Limited (CGMK) performs the role of liquidity provider on the warrants of which the underlying asset is KB Financial Group. As at 25 Sep 09, CGMK holds 3,399,990 Citi ELW 9193, 3,399,990 Citi ELW 9204, 3,400,000 Citi ELW 9330 Call warrants & 11 shares of KB Financial Group. Citi is one of five broker-dealer firms each holding a 10% shareholding and economic interest in the Electronic Communications Network (AXE ECN Pty Limited). Accordingly, Citi has a direct financial interest in the success of the Electronic Communications Network. Angela Tan, Research Assistant, holds a long position in the securities of DBS Group. Citigroup Global Markets is acting as financial advisor to Goodman Fielder Ltd in relation to the potential divestment of its commercial edible fats and oils business. A consultant to Citigroup Global Markets or its affiliates is a Deputy Chairman and non-executive Director of Stockland.Also member of the Remuneration Committee of Stockland. Citigroup Global Markets Inc. is acting as an advisor to Citigroup Inc. on the proposed disposal of Citi Technology Services Limited to Wipro Technologies, the global IT service business of Wipro Limited.

Citigroup Global Markets Inc. or its affiliates beneficially owns 1% or more of any class of common equity securities of Henderson Land, Hutchison Whampoa, POSCO, Acer Inc, BOC Hong Kong, Aristocrat Leisure Ltd, Ansell Ltd, Australia and New Zealand Banking Group Ltd, ASX Ltd, Alumina Ltd, BHP Billiton Ltd, Bluescope Steel Ltd, Brambles Ltd, Computershare Ltd, CSR Ltd, Dexus Property Group, Fairfax Media Ltd, Gunns Ltd, HSBC Holdings PLC, Mirvac Group, Metcash Ltd, Origin Energy Ltd, Stockland, Suncorp-Metway Ltd, TABCORP Holdings Ltd, Tatts Group Ltd, Wesfarmers Ltd, Woodside Petroleum Ltd. This position reflects information available as of the prior business day.

Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of an offering of securities of POSCO, KEPCO, CNOOC, China Mobile, KB Financial Group, BOC Hong Kong, Australia and New Zealand Banking Group Ltd, Commonwealth Property Office Fund, DBS Group, Energy Resources Of Australia Ltd, HSBC Holdings PLC, State Bank of India, Suncorp-Metway Ltd, TABCORP Holdings Ltd, PT Telkom, Westpac Banking Corp, Western Gas Partners, L.P..

Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from Henderson Land, Hutchison Whampoa, Guoco, Hyundai Motor, POSCO, Samsung Electronics, KEPCO, Hana Financial Group, CNOOC, China Construction Bank, China Mobile, KB Financial Group, Formosa Plastics, Industrial & Commercial Bank of China, Acer Inc, BOC Hong Kong, Far Eastone, Australia and New Zealand Banking Group Ltd, BHP Billiton Ltd, Bharti Airtel, Brambles Ltd, Commonwealth Property Office Fund, DBS Group, Energy Resources Of Australia Ltd, HSBC Holdings PLC, Iluka Resources Ltd, Mirvac Group, Metcash Ltd, State Bank of India, Sims Metal Management Ltd, StarHub, Suncorp-Metway Ltd, Telecom Corporation of New Zealand Ltd, PT Telkom, Telstra Corp Ltd, Westpac Banking Corp, Western Gas Partners, L.P., Woodside Petroleum Ltd.

Citigroup Global Markets Inc. or its affiliates expects to receive or intends to seek, within the next three months, compensation for investment banking services from Hyundai Motor, CNOOC, China Mobile, State Bank of India, StarHub.

Citigroup Global Markets Inc. or an affiliate received compensation for products and services other than investment banking services from Australia and New Zealand Banking Group Ltd, Suncorp-Metway Ltd, Westpac Banking Corp, Hong Kong & China Gas, Henderson Land, Hutchison Whampoa, Shinsegae, Guoco, Hyundai Motor, POSCO, Samsung Electronics, KEPCO, Shinhan Financial Group, LG Electronics, Hana Financial Group, CNOOC, China Construction Bank, China Mobile, KB Financial Group, Formosa Plastics, Industrial & Commercial Bank of China, TSMC, Acer Inc, BOC Hong Kong, Taiwan Mobile, Far Eastone, Aristocrat Leisure Ltd, Ansell Ltd, ASX Ltd, AWB Ltd, BHP Billiton Ltd, Bharti Airtel, Bluescope Steel Ltd, Brambles Ltd, Coca-Cola Amatil Ltd, Computershare Ltd, CSR Ltd, DBS Group, Energy Resources Of Australia Ltd, Fairfax Media Ltd, Goodman Fielder Ltd, HSBC Holdings PLC, Kasikornbank, Mirvac Group, Origin Energy Ltd, OZ Minerals Ltd, Qantas Airways Ltd, State Bank of India, Singapore



Press, StarHub, Telecom Corporation of New Zealand Ltd, Ten Network Holdings Ltd, Tanjong, PT Telkom, Telstra Corp Ltd, WABCO Holdings Inc, Western Gas Partners, L.P., Wesfarmers Ltd, Wipro, Woodside Petroleum Ltd in the past 12 months.

Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as investment banking client(s): BHP Billiton Ltd, Henderson Land, Hutchison Whampoa, Guoco, Hyundai Motor, POSCO, Samsung Electronics, KEPCO, Hana Financial Group, CNOOC, China Construction Bank, China Mobile, KB Financial Group, Formosa Plastics, Industrial & Commercial Bank of China, Acer Inc, BOC Hong Kong, Far Eastone, Australia and New Zealand Banking Group Ltd, Bharti Airtel, Brambles Ltd, Commonwealth Property Office Fund, DBS Group, Energy Resources Of Australia Ltd, HSBC Holdings PLC, Iluka Resources Ltd, Mirvac Group, Metcash Ltd, State Bank of India, Sims Metal Management Ltd, StarHub, Suncorp-Metway Ltd, Telecom Corporation of New Zealand Ltd, PT Telkom, Telstra Corp Ltd, Westpac Banking Corp, Western Gas Partners, L.P., Woodside Petroleum Ltd.

Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, securities-related: Australia and New Zealand Banking Group Ltd, Suncorp-Metway Ltd, Westpac Banking Corp, Hong Kong & China Gas, Henderson Land, Hutchison Whampoa, Shinsegae, Guoco, Hyundai Motor, POSCO, Samsung Electronics, KEPCO, Shinhan Financial Group, LG Electronics, Hana Financial Group, CNOOC, China Construction Bank, China Mobile, KB Financial Group, Formosa Plastics, Industrial & Commercial Bank of China, TSMC, Acer Inc, BOC Hong Kong, Taiwan Mobile, Far Eastone, Aristocrat Leisure Ltd, Ansell Ltd, AWB Ltd, BHP Billiton Ltd, Bharti Airtel, Bluescope Steel Ltd, Brambles Ltd, Coca-Cola Amatil Ltd, Commonwealth Property Office Fund, Computershare Ltd, DBS Group, Energy Resources Of Australia Ltd, Goodman Fielder Ltd, HSBC Holdings PLC, Iluka Resources Ltd, Kasikornbank, Mirvac Group, Origin Energy Ltd, OZ Minerals Ltd, Qantas Airways Ltd, State Bank of India, Singapore Press, StarHub, Telecom Corporation of New Zealand Ltd, Ten Network Holdings Ltd, Tanjong, PT Telkom, Telstra Corp Ltd, WABCO Holdings Inc, Western Gas Partners, L.P., Wesfarmers Ltd, Wipro, Woodside Petroleum Ltd.

Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, non-securities-related: Hong Kong & China Gas, Henderson Land, Hutchison Whampoa, Shinsegae, Guoco, Hyundai Motor, POSCO, Samsung Electronics, KEPCO, Shinhan Financial Group, LG Electronics, Hana Financial Group, CNOOC, China Construction Bank, China Mobile, KB Financial Group, Formosa Plastics, Industrial & Commercial Bank of China, TSMC, Acer Inc, BOC Hong Kong, Taiwan Mobile, Far Eastone, Aristocrat Leisure Ltd, Ansell Ltd, Australia and New Zealand Banking Group Ltd, ASX Ltd, BHP Billiton Ltd, Bharti Airtel, Bluescope Steel Ltd, Brambles Ltd, Coca-Cola Amatil Ltd, Computershare Ltd, CSR Ltd, DBS Group, Energy Resources Of Australia Ltd, Fairfax Media Ltd, Goodman Fielder Ltd, HSBC Holdings PLC, Kasikornbank, Mirvac Group, Origin Energy Ltd, OZ Minerals Ltd, Qantas Airways Ltd, State Bank of India, Singapore Press, StarHub, Suncorp-Metway Ltd, Telecom Corporation of New Zealand Ltd, Ten Network Holdings Ltd, Tanjong, PT Telkom, Telstra Corp Ltd, WABCO Holdings Inc, Westpac Banking Corp, Western Gas Partners, L.P., Wesfarmers Ltd, Wipro, Woodside Petroleum Ltd.

Citigroup Global Markets Inc. or an affiliate received compensation in the past 12 months from Australia and New Zealand Banking Group Ltd, Suncorp-Metway Ltd, Westpac Banking Corp.

Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues.

The Firm is a market maker in the publicly traded equity securities of Hong Kong & China Gas, Henderson Land, Hutchison Whampoa, CNOOC, China Construction Bank, China Mobile, Industrial & Commercial Bank of China, BOC Hong Kong, Australia and New Zealand Banking Group Ltd, BHP Billiton Ltd, Coca-Cola Amatil Ltd, DBS Group, OZ Minerals Ltd, State Bank of India, Telstra Corp Ltd, Woodside Petroleum Ltd.

For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research & Analysis product ("the Product"), please contact Citi Investment Research & Analysis, 388 Greenwich Street, 29th Floor, New York, NY, 10013, Attention: Legal/Compliance. In addition, the same important disclosures, with the exception of the Valuation and Risk assessments and historical disclosures, are contained on the Firm's disclosure website at www.citigroupgeo.com. Valuation and Risk assessments can be found in the text of the most recent research note/report regarding the subject company. Historical disclosures (for up to the past three years) will be provided upon request.

Citi Investment Research & Analysis Ratings Distribution Data current as of 30 Jun 2009 Buy Hold SellCiti Investment Research & Analysis Global Fundamental Coverage 41% 38% 21%

% of companies in each rating category that are investment banking clients 46% 45% 39%Guide to Citi Investment Research & Analysis (CIRA) Fundamental Research Investment Ratings: CIRA's stock recommendations include a risk rating and an investment rating. Risk ratings, which take into account both price volatility and fundamental criteria, are: Low (L), Medium (M), High (H), and Speculative (S). Investment ratings are a function of CIRA's expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating.

For securities in developed markets (US, UK, Europe, Japan, and Australia/New Zealand), investment ratings are:Buy (1) (expected total return of 10% or more for Low-Risk stocks, 15% or more for Medium-Risk stocks, 20% or more for High-Risk stocks, and 35% or more for Speculative stocks); Hold (2) (0%-10% for Low-Risk stocks, 0%-15% for Medium-Risk stocks, 0%-20% for High-Risk stocks, and 0%-35% for Speculative stocks); and Sell (3) (negative total return).

For securities in emerging markets (Asia Pacific, Emerging Europe/Middle East/Africa, and Latin America), investment ratings are:Buy (1) (expected total return of 15% or more for Low-Risk stocks, 20% or more for Medium-Risk stocks, 30% or more for High-Risk stocks, and 40% or more for Speculative stocks); Hold (2) (5%-15% for Low-Risk stocks, 10%-20% for Medium-Risk stocks, 15%-30% for High-Risk stocks, and 20%-40% for Speculative stocks); and Sell (3) (5% or less for Low-Risk stocks, 10% or less for Medium-Risk stocks, 15% or less for High-Risk stocks, and 20% or less for Speculative stocks).

Investment ratings are determined by the ranges described above at the time of initiation of coverage, a change in investment and/or risk rating, or a change in target price (subject to limited management discretion). At other times, the expected total returns may fall outside of these ranges because of market price movements and/or other short-term volatility or trading patterns. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock's expected performance and risk. Guide to Citi Investment Research & Analysis (CIRA) Corporate Bond Research Credit Opinions and Investment Ratings: CIRA's corporate bond research issuer publications include a fundamental credit opinion of Improving, Stable or Deteriorating and a complementary risk rating of Low (L), Medium (M), High (H) or Speculative (S) regarding the credit risk of the company featured in the report. The fundamental credit opinion reflects the CIRA analyst's opinion of the direction of credit fundamentals of the issuer without respect to securities market vagaries. The fundamental credit opinion is not geared to, but should be viewed in the context of debt ratings issued by major public debt ratings companies such as Moody's Investors Service, Standard and Poor's, and Fitch Ratings. CBR risk ratings are approximately equivalent to the following matrix: Low Risk Triple A to Low Double A; Low to Medium Risk High Single A through High Triple B; Medium to High Risk Mid Triple B through High Double B; High to Speculative



Risk Mid Double B and Below. The risk rating element illustrates the analyst's opinion of the relative likelihood of loss of principal when a fixed income security issued by a company is held to maturity, based upon both fundamental and market risk factors. Certain reports published by CIRA will also include investment ratings on specific issues of companies under coverage which have been assigned fundamental credit opinions and risk ratings. Investment ratings are a function of CIRA's expectations for total return, relative return (to publicly available Citigroup bond indices performance), and risk rating. These investment ratings are: Buy/Overweight the bond is expected to outperform the relevant Citigroup bond market sector index (Broad Investment Grade, High Yield Market or Emerging Market), performances of which are updated monthly and can be viewed at http://sd.ny.ssmb.com/ using the "Indexes" tab; Hold/Neutral Weight the bond is expected to perform in line with the relevant Citigroup bond market sector index; or Sell/Underweight the bond is expected to underperform the relevant sector of the Citigroup indexes.

Non-US research analysts who have prepared this report are not registered/qualified as research analysts with the NYSE and/or NASD. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. The legal entities employing the authors of this report are listed below:

Citigroup Global Markets Asia Markus Rosgen,Lan Xue,Anil Daswani,Johanna Chua Citigroup Pty Limited Graham Harman Citigroup Global Markets India Private Limited Aditya Narain, CFA PT Citigroup Securities Indonesia Salman Ali, CFA Nikko Citigroup Limited Tsutomu Fujita, CFA Citigroup Global Markets Korea Securities Ltd Michael S Chung Citigroup Global Markets Malaysia SDN BHD Yong Yin Ng, CFA Citibank NA Asif Ali Citigroup Global Markets Singapore PTE LIMITED Hak Bin Chua,Paul R Chanin Citigroup Global Markets Taiwan Securities Co. Limited Peter Kurz Citicorp Securities (Thailand) Ltd. Suchart Techaposai

OTHER DISCLOSURES

Citigroup Global Markets Inc. and/or its affiliates has a significant financial interest in relation to Shinsegae, Hyundai Motor, POSCO, Samsung Electronics, KEPCO, China Mobile, KB Financial Group, Aristocrat Leisure Ltd, Australia and New Zealand Banking Group Ltd, BHP Billiton Ltd, Computershare Ltd, DBS Group, HSBC Holdings PLC, Mirvac Group, Origin Energy Ltd, Qantas Airways Ltd, State Bank of India, Telecom Corporation of New Zealand Ltd, Telstra Corp Ltd, WABCO Holdings Inc, Westpac Banking Corp, Wesfarmers Ltd, Wipro, Woodside Petroleum Ltd. (For an explanation of the determination of significant financial interest, please refer to the policy for managing conflicts of interest which can be found at www.citigroupgeo.com.)

Citigroup Global Markets Inc. or its affiliates beneficially owns 10% or more of any class of common equity securities of ASX Ltd, Wesfarmers Ltd. Citigroup Global Markets Inc. or its affiliates beneficially owns 5% or more of any class of common equity securities of POSCO, Woodside Petroleum Ltd. Citigroup Global Markets Inc. or its affiliates beneficially owns 2% or more of any class of common equity securities of Henderson Land, Aristocrat Leisure Ltd, BHP Billiton Ltd, Bluescope Steel Ltd, Brambles Ltd, HSBC Holdings PLC, Metcash Ltd, Origin Energy Ltd, Stockland, Suncorp-Metway Ltd, TABCORP Holdings Ltd.

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