China strategy report Q2 outlook - Nomura Holdings...China Strategy — Making it happen, Henry Wu, 9 March 2011 China Strategy – Wage hikes, tax reform and investment opportunities,

12 April 2011 Nomura 1

Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 38 to 44.

Strategy | C H I N A

Henry Wu, CFA +852 2252 2122 [email protected]

Action The Chinese equity market performed strongly in March, led by banking, coal,

utilities and property stocks. We highlight three focal points for investors in 2Q11: 1) further NIM expansion at Chinese banks following rate hikes; 2) high inflation and price controls; and 3) the impact of policy tightening on the real economy, including a possible growth slowdown. We expect banking stocks to continue to outperform, defensive stocks such as telecoms to do well but cyclicals to reverse their performance. Consumer staples look set to remain under pressure given the government’s price control efforts.

Anchor themes We think the market will continue to trend up in 2Q11 and we reiterate our year-end HSCEI index target of 16,000 and MSCI China index target of 83 given unstretched valuations (12.2x and 10.6x forward PE for 2011F and 2012F). Such valuations already factor in a slowing earnings growth scenario in 2011, in our view.

Trend is up for 2Q but so is the risk Banks: NIMs set to expand further in 2Q11

We think the market will continue to trend up in 2Q11 amid sector rotation. We believe Chinese banks will see significant margin expansion, driven by the past rounds of rate hikes as well as improving pricing power. In addition, Nomura’s economics team has brought forward its expectations for the next rate hike — it now expects a 25bp hike in each of 2Q and 3Q, rather than in 3Q and 4Q.

Price controls

We see the recent suspension of planned price increases by some Chinese enterprises as underlining growing efforts in China to rein in prices. For this reason we think consumer staples will likely remain under pressure. The near-term outlook for retail sales is, by Chinese standards, not encouraging (15.8% y-y in January-February, vs 19% y-y in 4Q10). Also, we note that in the past several inflation cycles, staples have generally underperformed.

Growth slowdown – the main near-term risk

We highlight possible economic growth slowdown as a major risk for the equity market in 2Q11, as previous tightening policies, including interest rate and RRR hikes, could drag down corporate earnings. Supply chain disruption caused by the earthquake in Japan will also likely affect 1Q/2Q results, especially in the manufacturing sectors.

Nomura stock selection

Our top picks: China Life Insurance (2628 HK), China Unicom (762 HK), China Yurun Food (1068 HK), Gome Electrical Appliances (493 HK), and ICBC (1398 HK).

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

Stocks for action Our top picks: potential front-line beneficiaries of investment opportunities in China in 2Q11 and those that: 1) benefit from interest rate hikes and meat scandals; 2) will likely see the least impact from high inflation and price controls; and 3) are defensive.

TOPDOWN

Analysts Henry Wu, CFA

+852 2252 2122

[email protected]

Yang Luo (Researcher)

+852 2252 2141

[email protected]

Michael Shen (Researcher)

+852 2252 2140

[email protected]

Stock Rating Price Price

target

China Life Insurance (2628 HK) BUY 30.3 40.0

China Unicom (762 HK) BUY 13.6 15.8

China Yurun Food (1068 HK) BUY 27.6 39.0

Gome Electrical Appliances (493 HK) BUY 2.9 4.3

ICBC (1398 HK) BUY 6.7 7.6

Priced as at 6 April 2011 close; local currency

Strategy | China Henry Wu, CFA


Contents

Overview 3

Market index performance in 1Q11 6

Sector rotation to continue 11

Tainted meat scandal 25 What is going on? 25 How serious is it? 25 Who benefits? 26

How we value the shares 30 Gome 30 China Life 30 Tingyi 30 Yurun 30 ICBC 31 China Unicom 31

Appendix 32

Also see the following reports: China Strategy — Making it happen, Henry Wu, 9 March 2011

China Strategy – Wage hikes, tax reform and investment opportunities, 18 February 2011

2011 outlook strategy report – 2011 Outlook – Higher ground, 7 December 2010

http://www.nomura.com/research/GetPub.aspx?pid=423491

http://www.nomura.com/research/GetPub.aspx?pid=420133

http://www.nomura.com/research/GetPub.aspx?spid=7235



Summary

Overview After a weak January-February, the Chinese equity market posted a good performance in March, with the HSCEI up 6.5% and MSCI China up 5.2%. Banking and property stocks started to catch up in performance terms towards the end of 1Q11, backed by strong 2010 results, margin expansion (banks) and appealing valuations.

Exhibit 1. Overview of MSCI China sector performance and indicators

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

MSCI China Index 22.8 16.8 14.1 25.5 25.3 29.3 52.3 85.5 40.9 64.9 66.6 70.8

MSCI China Return (%) (32) (26) (16) 80 (1) 16 79 64 (52) 59 3 6

- Consumer-Discretionary (%) (33) 28 2 104 (20) (10) 37 73 (64) 146 (7) (2)

- Energy (%) n.a. 4 19 137 2 32 67 61 (57) 74 19 12

- Consumer-Staple (%) (41) 10 (20) 224 (24) 0 89 48 (41) 113 1 (2)

- Healthcare (%) n.a. (9) 100 77 (17) (41) (28) n.a. n.a. 39 16 (3)

- Material (%) (29) (10) 28 225 (2) 13 89 99 (69) 82 0 10

- Industrial (%) (25) (23) (1) 70 14 (7) 48 104 (62) 46 4 (2)

- Telecom services (%) n.a. (36) (32) 40 7 30 77 96 (45) (4) 8 1

- IT (%) (3) (13) (36) 25 (34) 5 (7) 20 (57) 231 1 17

- Utilities (%) 79 34 4 96 (18) (7) 49 59 (40) (2) (11) 7

- Financial (%) 2 37 (44) 89 (5) 20 138 34 (46) 68 (3) 7

Macro 2011

Inflation (CPI) – Actual (%) 0.4 0.7 (0.8) 1.2 3.9 1.8 1.5 4.8 5.9 (0.7) 3.3 4.9*

Inflation (CPI) – Target (%) n.a. n.a. n.a. n.a. n.a. 4.0 3.0 3.0 4.8 4.0 3.0 4***

Inflation (PPI) – Actual (%) 2.8 (1.3) (2.2) 2.3 6.1 4.9 3.0 3.1 6.9 (5.4) 5.5 6.0*

China GDP growth (%) 8 8 9 10 10 11.3 12.7 14.2 9.6 9.2 10.3 9.8*

US GDP growth (%) 4 1 2 2 4 3.1 2.7 2.0 0.0 (2.6) 2.9 2.9*

Lending Rate (1Y) (%) - - -54bp - +27bp - +54bp +135bp -216bp - +50bp +100bp*

FX-RMB change (%) 0.0 0.0 0.0 0.0 0.0 2.6 3.3 6.9 6.9 0.1 3.1 6.5*

M2 growth, y-y (%) 14.0 14.4 16.8 19.6 14.6 17.6 16.9 16.7 17.8 27.7 19.7 16***

Crude Oil (OPEC) (%) (3) (27) 62 5 21 47 1 62 (61) 117 16 34.4*

Raw Coal (Aus BJ) (%) 28 (3) (8) 45 44 (23) 27 75 (10) 3 50 n.a.

Company Fundamental 2011

EPS 0.66 1.11 1.34 1.68 2.16 2.41 2.57 3.81 3.16 3.83 4.88** 5.82**

EPS Growth (%) (78) 68 21 25 29 12 7 48 (17) 21 27 20

ROE (%) 10 20 16 16 19 21 20 23 18 19 20** 20**

Company Valuation 2011

Forward P/B (x) 2.4 1.4 1.1 1.9 1.7 1.8 2.4 3.7 1.6 2.2 2.0** 2.0**

Forward P/E (x) 20.5 12.6 8.4 11.8 10.5 11.4 13.7 27.1 10.7 13.4 11.9** 12.2** Note: Pricing as of 6 March, 2011; * Nomura estimates; ** consensus estimates; *** government target

Source: WIND, CEIC, Bloomberg, Nomura research

We think the market will continue to trend upward in 2Q11, and we reiterate our year-end HSCEI index target of 16,000 and MSCI China index target of 83.

On the valuation front, MSCI China is trading at 12.2x 2011F and 10.6x 2012F consensus earnings. These valuations are based on a scenario that already takes in a slowdown in earnings growth in 2011, in our view.

On the earnings front, the market is looking for growth of 20% in 2011F, a slowdown from 27% y-y in 2010. Historically (in 2004, 2006 and 2007), following interest rate hikes, growth in MSCI China earnings has tended to slow in subsequent years (Exhibit 1). For example, MSCI China EPS growth slowed to 12% and 7% in 2005 and 2006, from 29% in 2004, following a series of 27bps interest rate hikes. The exception is 2007, when a cumulative 189bps rate hike failed to bring down earnings growth. Instead, the financials sector fully benefited from the hikes, posting strong earnings that more than offset slowdowns in other sectors.

Banking and property sectors outperformed in March 2011 backed by strong fundamentals

We are still bullish on the market and favour the banking sector, but consumer staples seems under short-term pressure



We think banking stocks will continue to outperform, with further NIM expansion in 2Q11 expected following recent interest rate hikes. Meanwhile, we think consumer staples will likely remain under pressure, given the government’s increasing efforts to rein in prices and the slightly disappointing retail sales outlook in the near term (15.8% y-y in Jan-Feb, vs 19% y-y in 4Q10).

On the downside, we think a possible economic growth slowdown would be a major near-term risk to the equity market in 2Q11. Apart from the tightening policies since 2H10 that we believe are starting to impact the economy, supply chain disruption caused by the earthquake in Japan will likely result in relatively weak 1Q/2Q11 results — especially for the manufacturing sector.

We think certain specific events will create some investment opportunities, such as the meat scandal (as reported by China Central Television, 15 March, 2011). We think the market is concerned that the scandal may take in other meat producers (during the milk industry scandal of 2008-09 concern spread to other milk producers). In our opinion, the clenbuterol-tainted pig feed scandal may have only a limited negative impact on the meat industry (for reasons see later in this report).

Exhibit 2. Index performance under IR hike cycles

Last IR hike cycle since Apr. 2006 to

Dec. 2007

IR hike cycle since October

2010

+27bp +27bp

+27bp

+18bp

+27bp

+18bp

+27bp+18bp

+25bp+25bp

+25bp +25bp

11 %

12 %

13 %

14 %

15 %

16 %

(50)

% 0

% 50

100

150

200

1 31 61 91 121

151

181

211

241

271

301

331

361

391

421

451

481

511

541

571

601

MSCI China Index relative performance

days

Qly GDP (06-07 cycle,RHS)

(%) (%)


Exhibit 3. One year performance comparison during IR hike

1y performance since Oct. 2004 IR

hike

IR hike cycle since October

2010

+27bp

+25bp

+25bp+25bp

+25bp

9.0 %

9.5 %

10.0 %

10.5 %

11.0 %

11.5 %

% (20)

% (10)

% 0

% 10

% 20

% 30

1 31 61 91 121

151

181

211

241

271

301

331

361

MSCI China Index relative performance

days

Qly GDP (04 cycle, RHS)

(%) (%)


Our top picks: China Life Insurance (2628 HK), China Unicom (762 HK), China Yurun Food (1068 HK), Gome Electrical Appliances (493 HK), and ICBC (1398 HK). Our top picks are potential front-line beneficiaries of investment opportunities in China in 2Q11,

We highlight the near-term risk of economic slowdown

Meat scandal — potential winners/losers

Repeat of market index in 2006-07 interest rate hike cycle?

Stock picks

Repeat of market index in 2004 interest rate hike cycle?



and those which: 1) should benefit from interest rate hikes and the meat scandal; 2) see the least impact from high inflation and price controls; and 3) are defensive stocks.

Exhibit 4. Valuation snapshot

EPS - Nomura EPS Growth (%) EPS - Consensus PE (x) - Nomura PE (x) - Consensus RoE - Nomura (%) Net debt/equity - Nomura (%)

Ticker 2009 2010F 2011F 2012F 2010 2011F 2012F 2010F 2011F 2010 2011F 2012F 2011F 2012F 2010 2011F 2012F 2009 2010 2011F

China Life Insurance 2628 HK 1.16 1.19 1.55 1.88 2.6 30.3 21.3 1.39 1.69 21.4 16.5 13.6 18.4 15.1 16.0 19.1 19.4 (1.2) (11.8) na

China Unicom 762 HK 0.40 0.16 0.38 0.53 (60.0) 137.5 39.5 0.28 0.49 71.6 30.1 21.6 40.5 23.2 2.7 4.2 5.7 30.5 38.6 46.1

China Yurun Food 1068 HK 1.00 1.45 1.95 2.57 45.0 34.5 31.8 1.69 2.07 18.9 14.0 10.7 18.9 14.0 23.9 22.7 24.8 Net cash Net cash Net cash

Gome Elec Appliances 493 HK 0.09 0.13 0.16 0.18 41.1 26.0 12.5 0.15 0.19 18.9 15.0 13.3 15.8 12.8 14.8 16.5 17.1 Net cash Net cash Net cash

ICBC 1398 HK 0.39 0.48 0.57 0.70 23.1 18.8 22.8 0.57 0.66 11.7 9.8 8.0 9.9 8.4 22.1 22.5 23.6 (178.0) na na

Note: Pricing as of 6 April 2011

Source: Bloomberg, Nomura research estimates

Exhibit 5. Stock performance

Mkt cap Nomura Consensus Nomura Consensus Share performance (%)

Ticker Price (US$bn) rating Buys Holds Sells Buy % TP Upside to TP (%) TP 1mth 3mth YTD 2-yr beta

China Life Insurance 2628 HK 30.30 98.3 BUY 14 20 3 37.8 40.00 32.0 33.7 0.5 (5.5) (4.6) 0.90

China Unicom 762 HK 13.60 41.2 BUY 19 8 8 54.3 15.80 16.2 13.5 2.7 22.3 22.3 0.62

China Yurun Food 1068 HK 27.60 6.4 BUY 32 1 1 94.1 39.00 41.3 32.9 6.0 2.8 8.0 0.58

Gome Electrical Appliances 493 HK 2.85 6.2 BUY 16 3 - 84.2 4.30 50.9 3.4 (0.3) (3.7) 1.8 0.97

ICBC 1398 HK 6.65 257.8 BUY 38 4 - 90.5 7.60 14.3 7.5 7.8 12.5 14.9 0.97 Note: Pricing as of 6 April 2011

Source: Bloomberg, Nomura research estimates



Market review

Market index performance in 1Q11

Exhibit 6. Monthly price performance for index (2011)

(3)

0

3

6

9

MSCI China HSCEI SHCOMP HSI

January performance February performance March performance(%)

Source: Bloomberg, Nomura research

Exhibit 7. Monthly price performance for MSCI China sectors (2011)

(10)

(5)

0

5

10

15

Dis

cret

iona

ry

Sta

ples

Ene

rgy

Fin

anci

al

Hea

lthca

re

Indu

stria

l

IT

Mat

eria

l

Tel

ecom

Util

ities

January performance February performance March performance(%)


Exhibit 8. January 2011 price performance

-1.0%-0.6%-0.2%

1.8%

(8)

0

8

16

IT

Tel

ecom HS

I

Dis

cret

iona

ry

Indu

stria

l

Mat

eria

l

MS

CI

Chi

na

Ene

rgy

Util

ities

SH

CO

MP

HS

CE

I

Fin

anci

al

Hea

lthca

re

Sta

ples

(%)


1Q11: best performance in March for China indices

1Q11: best performance in March for most sectors

IT was the best performer in January 2011…



Exhibit 9. February 2011 price performance

4.1%

-0.4% -0.5%-1.9%

(8)

(4)

0

4

8

SH

CO

MP IT

Hea

lthca

re

Ene

rgy

HS

CE

I

HS

I

Fin

anci

al

MS

CI

Chi

na

Util

ities

Mat

eria

l

Tel

ecom

Dis

cret

iona

ry

Sta

ples

Indu

stria

l

(%)


Exhibit 10. March 2011 price performance

6.5%5.2%

0.8% 0.8%

(4)

0

4

8

12

16

Mat

eria

l

Util

ities

Ene

rgy

Fin

anci

al

HS

CE

I

MS

CI

Chi

na

Sta

ples

Indu

stria

l

Hea

lthca

re

SH

CO

MP

HS

I

Dis

cret

iona

ry

Tel

ecom IT

(%)


Exhibit 11. 1Q11 price performance

4.9% 4.3%2.9% 2.1%

(10)

(5)

0

5

10

15

IT

Ene

rgy

Mat

eria

l

Util

ities

HS

CE

I

SH

CO

MP

Fin

anci

al

MS

CI

Chi

na

HS

I

Tel

ecom

Hea

lthca

re

Dis

cret

iona

ry

Indu

stria

l

Sta

ples

(%)


… and in February 2011

Material was the best performer in March 2011

IT was the best performer in 1Q11



Exhibit 12. Index performance breakdown by countries for 1Q11

4.9% 4.3%2.1%

(8)

(4)

0

4

8

12

Rus

sia

US

Can

ada

HK

- H

SC

EI

Fra

nce

Chi

na

Kor

ea

Aus

tral

ia

HK

UK

Bra

zil

Japa

n

Chi

le

Indi

a

(%)


Exhibit 13. Index performance breakdown by countries for January 2011

1.8%

-0.6% -1.0%

(12)

(8)

(4)

0

4

8

Fra

nce

US

Rus

sia

HK

Japa

n

Can

ada

Aus

tral

ia

Kor

ea

Chi

na UK

HK

- H

SC

EI

Chi

le

Bra

zil

Indi

a

(%)


Exhibit 14. Index performance breakdown by countries for February 2011

4.1%

-0.4% -0.5%

(8)

(4)

0

4

8

Japa

n

Can

ada

Chi

na US

Rus

sia

Fra

nce

UK

Aus

tral

ia

Bra

zil

HK

- H

SC

EI

HK

Indi

a

Chi

le

Kor

ea

(%)


Emerging markets had a mixed performance in 1Q11

By monthly performance, emerging markets started to catch up; France and the US markets posted the best returns in January 2011

Japan and Canada were the best performers in February 2011



Exhibit 15. Index performance breakdown by countries for March 2011

6.5%

0.8% 0.8%

(10)

(5)

0

5

10

15In

dia

Kor

ea

HK

- H

SC

EI

Chi

le

Rus

sia

Bra

zil

HK

Chi

na

Aus

tral

ia

US

Can

ada

UK

Fra

nce

Japa

n

(%)


Exhibit 16. MSCI China and sector valuation – Sectors with current forward PE lower than historical average forward PE (January 2003 – April 2011)

HighHigh

High

HighHigh

Low Low Low Low Low

High

Low0 x

10 x

20 x

30 x

40 x

MSCI China Utilities Discretionary Financial Industrial * Telecomservices

±1 std. Average forward PE Current forward PEForward PE

Note: Pricing as of 6 April 2011. * We made adjustment as there are outlying numbers in 2009 which we believe do not objectively reflect market valuation


Exhibit 17. MSCI China and sector valuation – Sectors with current forward PE greater than historical average forward PE (January 2003 – April 2011)

High

High

High

High High

High

Low Low Low LowLow Low0 x

10 x

20 x

30 x

40 x

MSCI China IT Healthcare Energy Staples Material *

±1 std. Average forward PE Current forward PEForward PE

Note: Pricing as of 6 April 2011. * We made adjustment as there are outlying numbers in 2009 which we believe do not objectively reflect market valuation


India and Korea were the best performers in March 2011

Valuations of discretionary and financials look appealing…

…in contrast to IT and healthcare sectors where 2011 forward PEs are much higher than the historical average



Exhibit 18. Market performance under 2004 inflation

20

25

30

35

10/1

/200

3

12/1

/200

3

2/1/

2004

4/1/

2004

6/1/

2004

8/1/

2004

10/1

/200

4

12/1

/200

4

2/1/

2005

4/1/

2005

6/1/

2005

8/1/

2005

0

3

6

9

MSCI China index price Monthly CPI (RHS)

Down 30% from peak

4Q03 - 1Q04: CPI trends up, index

went down

Mid 04: Market consolidation

during CPI peak

Post 3Q04: Market rally amid

CPI declining

(%)

Source: WIND, Bloomberg, Nomura research

Exhibit 19. Market performance under current inflation

58

61

64

67

70

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

2.5

3.5

4.5

5.5 MSCI China price Monthly CPI (RHS)

Down 14% from peak in Nov-2010

(%)


CPI weighed on market performance in the 2003-04 cycle…

…and is again during this inflation cycle



2Q11 outlook

Sector rotation to continue As we see it, the central bank’s second 25bp rate hike in 2011 (announced on 5 April) and upcoming administrative measures for price controls by the National Development and Reform Commission (NDRC) suggest that inflation could again surprise on the upside. We expect range trading and sector rotation to continue in 2Q11 in the face of high inflation and still tightening liquidity.

During the current inflation cycle since CPI reached 3.3% in July 2010, no sector outperformed the MSCI China Index for more than three straight months with the exception of the energy sector (outperformed from August 2010 to December 2010). This was all the more than so in 1Q11, when not one sector outperformed for more than two consecutive months. Given no significant improvement in market liquidity, we expect sector rotation to continue in 2Q11.

We highlight three likely focal points for the market in the current quarter: 1) CPI and continued price controls; 2) NIM expansion at Chinese banks; and 3) a possible slowdown in economic growth. We think rising inflation in tandem with a declining real economy spells the biggest risk in the second quarter, as the negative impact on corporate earnings from the previous tightening policy is likely to be felt in 2Q 11.

CPI and price controls

CPI showed no sign of decelerating during the first two months of this year (4.9% for January and February). Surging food CPI looks to be passing through to non-food as well. Targeting 4% CPI for 2011F has incurred significant pressure for policymakers, particularly in 1H11 when considering the relatively low base set in 1H10. Together with a tight supply-demand balance in agri-products, loosening liquidity globally, rising commodity prices, cost-push and imported inflation, as well as the possibility of extreme climate events, our economics team forecasts a 2011F CPI of 4.9%.

According to the ‘Government report’ presented by Premier Wen Jiabao on ‘Two Sessions (The Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC))’, the Premier stated that combating inflation remains top of the government’s agenda for 2011F. Due to the lagged effects of market-based approaches on curbing inflation, including interest rate and required reserved ratio (RRR) hikes, the government is also relying on administrative measures to directly implement price controls on certain products that are believed to be closely tied to the surge in CPI. The National Development and Reform Commission (NDRC) first carried out price controls on certain food products in November 2010 after the October CPI accelerated to 4.4%, from 3.6% in September 2010.

Price controls are again taking centre stage, with the NDRC recently expanding controls to non-food sectors. According to Caixin.com, a liquor industry conference has convened twice in the past week in a bid to stabilise liquor prices. According to ‘NDRC criticised the price hike of liquor industry’ published by Caixing.net on 6 April 2011, NDRC officials have publicly criticised liquor producers for allegedly collaborating in raising prices. The NDRC has also urged coal firms not to raise prices, especially for thermal coal.

According to our utilities and basic material analyst, Ivan Lee, China’s local spot price will likely rise significantly heading into June, on the following factors: 1) coal imports have declined owing to the international price (around RMB880/t at Newcastle plus transportation (RMB70/t) being 20%-plus higher than local spot (RMB770/t)); 2) low coal inventory; and 3) increasing summer demand from June. Nomura forecasts an 8% rise in the average spot price in 2011F and another 5% rise in 2012F, though the latest coal shortage could intensify the situation. We think power companies will be forced to buy more coal products from the spot market and hence will be subject to higher costs. Coal producers with relatively large spot sales (relatively small contract sales) should

Sector rotation likely to continue in 2Q11 given no significant improvement in liquidity

CPI could again surprise on the upside in the short term

Key themes in 2Q11

Curbing inflation is the government’s main priority

Increasing price control efforts by policymakers



receive a boost in the coming several months, we believe. Moreover, potential price hikes in daily chemical products and Tingyi’s (322 HK, BUY, TP: HK$24.0) products have been postponed after the NDRC expressed its concern, according to The Wall Street Journal on 6 April 2011, titled ‘Tingyi postponed its scheduled price hike’.

We believe price controls have already started to weigh on the performance of consumer stocks, and we expect this to remain the case. CPI will likely remain high in 2Q11, making it difficult to implement further price hikes, especially for consumer staple companies and utilities whose price changes have a significant impact on overall inflation.

Though their share-price performance recovered slightly in March, staples remain the weakest-performing sector in the MSCI China index. In our view, short-term weakness in retail sales in China and high CPI will likely continue to impact the share-price performance of staples.

On a 10-year view, staples have in general outperformed the discretionary sector, with the exception of three occasions (2003-04, 2007-08, 2H10 to date) when CPI exceeded 3%. China’s recent interest rate hike ahead of the release of CPI data could be taken as an indication that March CPI will surprise on the upside. In our view, this does not bode well for the short-term performance of staples.

China will announce March retail sales data on 15 April, and we see this as a key data point, since it has implications for overall retail sales trends in the medium term (following weak February data) and, by extension, the performance outlook of staple and discretionary stocks. In general, the outperformance of Chinese staple names relative to discretionary stocks over the past 10 years has been underpinned by growing income levels in China and the resulting increase in spending on staples.

Exhibit 20. Top performers vs worst performers during inflation cycle (July 2010 – March 2011)

Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Q310 Q410 Q111

Discretionary ▲ ▼ ▼ ▼ ▲ ▼ ▼ ▲ ▼ ▼ Staples ▲ ▼ ▼ ▼ ▼ ▼ Energy ▼ ▲ ▲ ▲ ▲ ▲ ▲ ▲ Financial ▼ ▼ ▲ ▼ ▼ ▲ Healthcare ▼ ▲ ▲ ▼ ▼ ▼ ▲ ▼ Industrial ▲ ▼ ▲ ▼ ▼ IT ▲ ▼ ▲ ▲ ▲ ▼ ▲ ▲ ▲ Material ▲ ▲ ▲ ▲ ▲ ▲ ▲ Telco ▼ ▼ ▲ ▲ ▼ ▼ Utilities ▲ ▼ ▼ ▼ ▲ ▼ ▼ Monthly return

MSCI China (%) 4.1 (2.6) 8.3 3.8 (2.2) (0.6) (0.2) (1.9) 5.2 9.8 0.8 2.9

HSCEI (%) 3.8 (4.2) 8.8 6.1 (2.7) (1.0) (1.0) 0.4 6.5 8.2 2. 4.9

CPI (%) 3.3 3.5 3.6 4.4 5.1 4.6 4.9 4.9 5.3 3.5 4.7 5 0

Note: ▲stands for top THREE performers and ▼ stands for worst THREE performers in comparison with MSCI China Index monthly returns


Consumer staples are under pressure



Exhibit 21. Outperformers vs underperformers during inflation cycle (July 2010 – March 2011)

Jul-1 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Q310 Q410 Q111

Discretionary O O O U U U O U U O U U

Staples U O O U U U U U U O U U

Energy U O O O O O U O O O O O

Financial O U U O U U U O O U O O

Healthcare U O O U U U U O U O U U

Industrial O U O U U U O U U O U U

IT O U O U U O O O U O O O

Material O O O U O O O U O O U O

Telecom U O U U O O O U U U U U

Utilities U O U U U O U U O U U O

Monthly return

MSCI China (%) 4.1 (2.6) 8.3 3.8 (2.2) (0.6) (0.2) (1.9) 5.2 9.8 0.8 2.9

HSCEI (%) 3.8 (4.2) 8.8 6.1 (2.7) (1.0) (1.0) (0.4) 6.5 8.2 2.3 4.9

CPI (%) 3.3 3.5 3.6 4.4 5.1 4.6 4.9 4.9 5.3 3.5 4.7 5.0 Note: “O” stands for “Outperform” and “U” stands for Underperform in comparison with MSCI China Index monthly returns


Exhibit 22. Food inflation comparison (2007-08 vs current)

0

5

10

15

20

25

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Food inflation during 2007-2008

Food inflation in 2010~2011

(%)

Price control at provincial level since Jun 07

Price control nationwide since Jan 08

Food inflation started to pick up in Jan 07 in last cycle

Food CPI peaked at 23% in Feb 2008 in last cycle

Same scenario in Jan 2010

Food CPI hit 11% in Feb. 2011

Month

Source: CEIC, Nomura research

Exhibit 23. Food inflation comparison (2003-04 vs current)

0

3

6

9

12

15

18

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Food inflation in 2010~2011

Food inflation during 2003-2004

(%)

Food inflation started to pick up in Sep 03

Food CPI peaked at 14.6% in July 2004 in last cycle

Month


Food inflation seems to be nearing a peak, going by what happened in 2007-08…

…and in 2003-04



Exhibit 24. Relative performance for staples over discretionary

% (400)

% 0

% 400

% 800

% 1,200

% 1,600Ja

n-99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Relative performance for staples over discretionary(%)


Exhibit 25. Milk production vs relative performance of staples over discretionary

0

50

100

150

200

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

0

150

300

450

600

Liquid milk production (10,000 ton)

Relative performance-Staples to Discretionary (RHS)

(%)


Exhibit 26. Retail sales breakdown by weight (2000-2010)

0

25

50

75

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Staples as % of total consumption Discretionary as % of total consumption

(%)

Note: All data are for above designated size enterprise according to National Bureau of Statistics of China

Source: National Bureau of Statistics of China, CEIC, Nomura research

Staples have outperformed discretionary since 2003…

…and we note a close correlation with milk production

But staples are accounting for a smaller proportion of total consumption over time…



Exhibit 27. F&B and daily necessities as % of retail sales

10

13

16

19

22

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

3

4

5

6

7

F&B as % of consumption (LHS)

Daily necessities as % of consumption (RHS)

(%)(%)



Exhibit 28. Garment and household appliance as % of retail sales

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

5

7

9

11

13 Garment as % of consumption (LHS)

Household appliance as % of consumption (RHS)

(%) (%)



Exhibit 29. Petro products, auto and jewellery as % of retail sales

0

10

20

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Feb-11

1

2

3

4

Petro products as % of consumption (LHS)

Auto as % of consumption (LHS)

Jewelry as % of consumption (RHS)

(%) (%)



…as is F&B …

…and garment and household appliance

Discretionary consumption is accounting for a greater proportion of total consumption



Exhibit 30. Price performance under inflation - staples

% (3)

% 0

% 3

% 6

% 9

Jan-

01A

pr-0

1Ju

l-01

Oct

-01

Jan-

02A

pr-0

2Ju

l-02

Oct

-02

Jan-

03A

pr-0

3Ju

l-03

Oct

-03

Jan-

04A

pr-0

4Ju

l-04

Oct

-04

Jan-

05A

pr-0

5Ju

l-05

Oct

-05

Jan-

06A

pr-0

6Ju

l-06

Oct

-06

Jan-

07A

pr-0

7Ju

l-07

Oct

-07

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09A

pr-0

9Ju

l-09

Oct

-09

Jan-

10A

pr-1

0Ju

l-10

Oct

-10

Jan-

11

(50) %

(25) %

0 %

25 %

50 %

&Consumer-Staple sector relative performance against MSCI China Index (Under/Outperform) (RHS)Monthly CPI (LHS)

CPI=3%

During inflation period: Consumer-Staple sector

UNDERPERFORM the market

Pre- and post- inflation periods: Consumer-Staple sector

OUTPERFORM the market

(%) (%)

&


Exhibit 31. Price performance under inflation – discretionary

% (3)

% 0

% 3

% 6

% 9

Jan-

01

Apr

-01

Jul-0

1O

ct-0

1Ja

n-0

2A

pr-0

2Ju

l-02

Oct

-02

Jan-

03

Apr

-03

Jul-0

3O

ct-0

3Ja

n-0

4A

pr-0

4Ju

l-04

Oct

-04

Jan-

05

Apr

-05

Jul-0

5O

ct-0

5Ja

n-0

6A

pr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr

-07

Jul-0

7O

ct-0

7Ja

n-0

8A

pr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr

-09

Jul-0

9O

ct-0

9Ja

n-1

0A

pr-1

0Ju

l-10

Oct

-10

Jan-

11

(50) %

(25) %

0 %

25 %

50 %

&Consumer-Discretionary sector relative performance against MSCI China Index (Under/Outperform) (RHS)Monthly CPI (LHS)

CPI=3%

During inflation period: consumption sector

During and post-inflation period:

Consumer-Discretionary sector

Pre- and post- inflation periods: consumption

t OUTPERFORM

Pre-inflation periods: Consumer-Discretionary sector

OUTPERFORM the market

`

(%) (%)

&


Exhibit 32. CPI vs Consumer Confidence Index & Satisfaction Index

90

95

100

105

110

115

120

125

130

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

(5)

0

5

10

15

20

25

30

35 CPI (RHS)

Consumer Confidence Index (LHS)

Consumer Satisfaction Index (LHS)

(%)

Source: WIND, Nomura research

Consumer staples generally underperform the market during high inflation…

…as does consumer discretionary

High inflation erodes consumer confidence



Exhibit 33. Relative performance for food over retailing — Japan

(900)

(700)

(500)

(300)

(100)

100

300

Jan

-72

Jan

-74

Jan

-76

Jan

-78

Jan

-80

Jan

-82

Jan

-84

Jan

-86

Jan

-88

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Relative performance-Food over Retailing (JP Nikkei 225)(%)


Exhibit 34. Food expenditure as % of total

20

25

30

35

40

45

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

Food expenditure as % of total

China: 2010 food expenditure as % of total = 36%

(%)

Source: Statistical Survey Department, Statistics Bureau, Ministry of Internal Affairs and Communications, Nomura research

Bank stocks – NIM expansion to continue

A look back at what we said in our 7 December, 2010, report: China Strategy: 2011 Outlook – Higher ground.

“With lower new loan quotas in 2011F, the profitability outlook for banks in 2011 will be more dependent on the interest rate outlook, in our view. We forecast four quarterly symmetrical interest rate hikes in 2011F, for a total increase of 100bps. This should help banks to achieve better profits in 2011F, driving sentiment on banking stocks. Despite share price underperformance due to fund raising and policy uncertainties, banking sector earnings have been on the rise since 2008. On the valuation side, we find that China banking stocks are trading at only 9.2x 2011F earnings and 7.3x 2012F earnings, and 1.7x and 1.5x price to book for 2011F and 2012F, respectively, with RoEs in both years forecast to exceed 20%.”

Our banking team reiterated its Bullish stance on Chinese banks in its 17 March report: Wider NIM more than offsets lower loan growth… (http://www.nomura.com/research/getpub.aspx?pid=425009).

The recently released FY10 results of Chinese banks highlighted NIM expansion on the back of interest rate hikes. All the banks reported NIM expansion in FY10, especially in 4Q10, following two rate hikes in October and December (Exhibits 35 and 36). The Big Four Chinese banks reported NIM expansion of more than 10bps apiece in 4Q10. Moreover, Jiang, Jianqing, president of ICBC guided that NIM further

NIM expansion for banks…

In Japan staples have underperformed discretionary

China’s food expenditure as a percentage of total consumption — heading south

We like the banking sector in 2011



expanded by more than 8bps in January-February (see our research report on ICBC, 30 March 2011 http://www.nomura.com/research/getpub.aspx?pid=427309).

The PBoC announced a second interest rate hike in 2011 on 5 April. The hike is slightly asymmetric, with deposit rates rising by 25bps but lending rates rising by 25bps (less than 12 months), 30bps (1-3 years) and 20bps (over 3 years), respectively. The structure of the rate hike is therefore more complex than in previous rounds. Of note, the PBoC raised the demand deposit rate by 10bps to 0.50%, following on from a 4bps hike during the last round of hikes.

Nomura’s banking analyst Lucy Feng believes that 1Q11 results will feature significant margin expansion at almost all Chinese banks, driven by previous rounds of rate hikes as well as improving pricing power.

Nomura economist Chi Sun brought forward her expectations for the next rate hike. Chi now expects one more 25bps hike in 2Q and another in 3Q, rather than one in 3Q and another in 4Q. We see the banking sector as a potential beneficiary of this change in expectations. The banking sector continued to perform well in terms of share-price performance in 1Q11, and we expect appealing valuations (9.3x FY11F earnings and 7.2x FY12F earnings, 1.8x FY11F book value and 1.4x FY12F book value, with FY11F ROE of 21%, on Nomura forecasts), expanding NIM expectations and improving asset quality to support Chinese banks’ market performance in 2Q11.

Exhibit 35. China Big Four banks NIM change (2004-2011F)

27 bps0 bps

54 bps

-216 bps

0 bps

50 bps

135 bps

100 bps

-240 bps

-120 bps

0 bps

120 bps

240 bps

2004 2005 2006 2007 2008 2009 2010 2011F*

China Big 4 banks NIM change

1 year lending rate change

Nomura NIM estimate: +9~15 bps

* Nomura estimated

Source: Bloomberg, company data, Nomura research

Exhibit 36. China big four banks NIM change (1Q10-4Q10)

0 bps 0 bps 0 bps

50 bps

-10 bps

0 bps

10 bps

20 bps

30 bps

40 bps

50 bps

1Q10 2Q10 3Q10 4Q10

China Big 4 banks NIM change

1 year lending rate change

2010 Calendar:20 Oct.: +25bps26 Dec.: +25bps


…resulting in significant margin expansion

In our view, banks look set to record NIM expansion amid interest rate hikes…

…starting in 4Q10



Exhibit 37. A- and H-shares: premium / discount

Ticker (HK listed) Ticker (CN listed) Company 4/6/2011 (%)

939 HK 601939 CH China Construction Bank Corp 24

998 HK 601998 CH China Citic Bank Corp Ltd (18)

1288 HK 601288 CH Agricultural Bank of China Ltd 31

1398 HK 601398 CH Industrial & Commercial Bank of China 22

1988 HK 600016 CH China Minsheng Banking Corp Ltd 6

3328 HK 601328 CH Bank of Communications Co Ltd 18

3968 HK 600036 CH China Merchants Bank Co Ltd 18

3988 HK 601988 CH Bank of China Ltd 10 Note: Pricing as of 6 April 2011


Possible macro growth slowdown

We think the risk of a slowdown in growth of the real economy is the major risk in 2Q11, with previous tightening policies, including interest rate and RRR hikes, potentially dragging down corporate earnings and, in turn, weighing on the equity market. Consumption has yet to pick up, growth in exports is decelerating, and government-backed fixed asset investment is cooling, and the combined impact has clear implications for future economic development, in our view. With Nomura’s economics teams forecasting GDP growth of 9.7% in 2Q11, we think the possible slowdown in economic development is the biggest risk to the equity market.

Growth in nominal retail sales of consumer goods in the first two months of 2011 fell short of market expectations, slipping to 15.8% y-y, about 3.3pp lower than the December 2010 data. Given the CPI stood at 4.9% for the first two months of 2011, real growth in retail sales of consumer goods was only 10.9%, the lowest reading since January 2008. Rising inflation has actually pushed down real retail sales of consumer goods since mid-2010, when the CPI started to accelerate while growth in nominal retail sales was flat. We attribute this to the consumption slowdown in property and autos. Surging CPI has also affected consumer confidence.

Decelerating export growth and unsustainable fixed asset investment could further weigh on economic development, in our view. We think the trade structure of China is at the tipping point from low-end, labour intensive products to more value-added products as a result of rising costs in China, including surging wages (average wage CAGR of 15% over the past decade per CEIC data) and higher land costs. We think China products are losing their competitive edge over time which may lead to decelerating growth in exports from a long-term perspective. According to the General Administration of Customs of the People’s Republic of China (China Customs), China recorded its first quarterly trade deficit in six years of US$1bn for 1Q11, compared with a US$14bn trade surplus for 1Q10.

Announced by the State Council, China initiated an aggregate RMB4tn investment plan in November 2008 aiming to stimulate the economy in response to the financial crisis. According to the National Bureau of Statistics of China, the RMB4tn investment plan was completed by end 2010. Our economics team forecasts fixed asset investment will cool to 22% in 2011 and 21% in 2012, from almost 24% in 2010, to reflect slower investment.

Possible economic growth slowdown — major potential risk for 2Q11

H share stocks generally enjoy a premium over respective dual-listed A shares

Consumption growth in real terms has decelerated since mid-2010

China recorded its first quarterly trade deficit in six years

Investment likely to slow



Exhibit 38. Retail sales nominal vs real

2

7

12

17

22

27

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

(4)

(0)

4

8

12

16

CPI (RHS)

Nominal retail sales y-y % (LHS)

Real retail sales y-y % (LHS)

(%) (%)


Exhibit 39. Retail sales and growth – autos

0

50,000

100,000

150,000

200,000

250,000

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

(40)

0

40

80

120

160

Auto monthly sales (LHS) y-y % (RHS) (%)(RMBmn)



Exhibit 40. Retail sales and growth – garment

0

25,000

50,000

75,000

100,000

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

(25)

0

25

50

75

Garment monthly sales (LHS) y-y % (RHS) (%)(RMBmn)



Growth in retail sales fell sharply both in nominal and real terms…

…due to slowing auto…

…and garment sales…



Exhibit 41. Retail sales and growth – F&B

0

25,000

50,000

75,000

100,000Ja

n-01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

(25)

0

25

50

75

F&B monthly sales (LHS) y-y % (RHS) (%)(RMBmn)



Exhibit 42. Retail sales and growth – jewellery

0

5,000

10,000

15,000

20,000

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

(30)

0

30

60

90 Jewelry monthly sales (LHS) y-y % (RHS) (%)(RMBmn)



Exhibit 43. Retail sales and growth – household appliances

0

15,000

30,000

45,000

60,000

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

(20)

0

20

40

60

Household appliance monthly sales (LHS) y-y % (RHS) (%)(RMBmn)



…as well as F&B consumption…

But jewellery sales seem immune to this trend

Even household appliance sales growth dropped



Exhibit 44. Consumer Confidence Index

90

100

110

120

130Ja

n-91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Consumer Confidence Index

12 per. Mov. Avg. (Consumer Confidence Index)


Exhibit 45. Macro-economy forecast

% y-y growth unless otherwise stated 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012

Real GDP 9.6 9.8 9.4 9.7 9.9 10.0 9.0 9.4 10.3 9.8 9.5

Consumer prices 3.5 4.7 5.0 5.2 4.9 4.3 5.2 5.4 3.3 4.9 5.2

Core CPI (excl. food & energy) 1.1 1.5 2.2 2.4 2.6 2.7 2.4 2.5 0.9 2.5 2.6

Retail sales (nominal) 18.4 18.8 20.1 19.7 19.9 20.1 20.3 20.6 18.4 20.0 21.0

Fixed-asset investment (nominal, ytd) 24.0 23.8 23.0 23.5 22.5 22.0 20.5 22.5 23.8 22.0 21.0

Industrial production (real) 13.5 13.3 12.8 14.2 15.1 16.0 15.1 14.1 15.7 14.5 14.2

Exports (value) 32.3 25.2 26.5 18.5 13.0 14.0 17.5 11.2 31.3 17.0 12.0

Imports (value) 27.1 29.6 32.6 20.0 18.0 20.0 15.0 18.0 38.7 22.5 17.0

Trade surplus (US$bn) 65.7 63.1 (0.8) 43.4 55.5 48.8 (1.0) 20.0 183.0 138.0 69.0

Current account (% of GDP) 5.2 3.1 1.7

Fiscal balance (% of GDP) (1.6) (1.3) (1.0)

Net increase in RMB Loans (RMBtn) 8.0 8.0 8.4

1-yr bank lending rate (%) 5.31 5.81 6.06 6.56 6.81 6.81 7.06 7.31 5.81 6.81 7.56

1-yr bank deposit rate (%) 2.25 2.75 3.00 3.50 3.75 3.75 4.00 4.50 2.75 3.75 5.00

Reserve requirement ratio (%) 17.00 18.50 20.00 20.50 21.00 21.00 21.00 21.00 18.50 21.00 21.00

Exchange rate (CNY/USD) 6.70 6.62 6.56 6.40 6.32 6.22 6.14 6.06 6.62 6.22 5.90 Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome)

Source: CEIC, Nomura Global Economics

China’s consumer confidence index has been declining over time



Exhibit 46. 12-month moving average net exports y-y % (January 2004 – February 2011)

(100)

% 0

100

200

300

Jan&

Feb

-04

May

-04

Aug

-04

Nov

-04

Mar

-05

Jun-

05

Sep

-05

Dec

-05

Apr

-06

Jul-0

6

Oct

-06

Jan&

Feb

-07

May

-07

Aug

-07

Nov

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Apr

-09

Jul-0

9

Oct

-09

Jan&

Feb

-10

May

-10

Aug

-10

Nov

-10

Mar

-11

Net export y-y % (12-mth moving avg)(%)

Note: We manually sum up the January and February data to avoid extraordinary seasonality.


Exhibit 47. Fixed-asset investment y-y %

RMB4trn stimulus plan initiated

23

26

29

32

35

Feb

-08

Apr

-08

Jun-

08

Au

g-08

Oct

-08

De

c-08

Feb

-09

Apr

-09

Jun-

09

Au

g-09

Oct

-09

De

c-09

Feb

-10

Apr

-10

Jun-

10

Au

g-10

Oct

-10

De

c-10

Feb

-11

Rmb4trn stimulus plan

completed

(%)

Source: WIND, CEIC, Nomura research

Exhibit 48. PetroChina relative performance vs oil price

0

300

600

900

1,200

1,500

Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

0

30

60

90

120

150

PetroChina relative performance (LHS)

Opec crude oil price (RHS)

Opec crude oil price: US$(%)


Growth in net exports trending down

Fixed-asset investment cooling post RMB4tn investment stimulus



Exhibit 49. Sinopec relative performance vs oil price

0

300

600

900


0

30

60

90

120

150

Sinopec relative performance (LHS)




Exhibit 50. CNOOC relative performance vs oil price

(300)

% 0

300

600

900

1,200


0

30

60

90

120

150

CNOOC relative performance (LHS)






Event spotlight

Tainted meat scandal Although consumer staples were hit by price controls to combat inflation, we see investment opportunities triggered by certain specific events. We evaluated the prevailing meat scandal and believe that it will have limited negative impact on the meat industry. We think China Yurun Food Group (1068 HK, BUY, TP: HK$39.0) is a beneficiary (for reasons mentioned later in this report). Moreover, we expect corporates that are integrated into the industry chain vertically from raw materials to final products are better placed as this arrangement can buttress quality control and economies of scale. For distribution channels, the large supermarkets and agri-product trading platforms are likely to receive support from the government for tighter food quality controls and stricter detection methods are likely to be implemented.

The meat scandal may weaken consumer confidence in domestic meat products, and in turn lifting demand for imports. We think US and EU producers should benefit — 43% of China’s imported meat products came from the US and EU in 2010, as per WIND.

What is going on? The scandal of Clenbuterol-tainted pig feed (also called ‘lean meat powder’) was initially made public by the government-backed CCTV (China Central Television) on 15 March, 2011. It follows another major food safety case involving melamine-tainted milk power in 2008, and comes on the heels of a year-long programme conducted by China’s Ministry of Agriculture (MOA) to eliminate the use of illegal additives in pig feed.

According to Wikipedia, Clenbuterol is a sympathomimetic amine used by sufferers of breathing disorders as a decongestant and bronchodilator. People with chronic breathing disorders such as asthma use this as a bronchodilator to make breathing easier. It is most commonly available as the hydrochloride salt clenbuterol hydrochloride. Clenbuterol is banned as an additive in pig feed in China because it can end up in the flesh of pigs and is poisonous to humans if ingested. The chemical will most likely accumulate in the animal’s organs, such as the liver.

How serious is it? The meat scandal originated in Henan province, central China. Henan Shuanghui Investment (000895 CH, Not rated), China’s largest meat producer, was arguably worst hit. Trading in its A shares has been suspended since 15 March, 2011, after the stock fell by 10% in a single day. Management convened a staff conference on 31 March, 2011, according to the Chinese-language Nanfang Daily (2 April 2011), where the chairman of the board Wan Long indicated that total losses could reach RMB12.1bn.

The latest scandal came to light at a time when consumer confidence in food safety in China was already weak. Recall the food safety concerns raised in 2008, when melamine-tainted milk powder killed at least six infants and sickened over 300,000 children across the country. Consumer confidence in the country's dairy industry slumped, with consumption of liquid milk in China falling 2.4% in 2008 (to 35.4mn mt) and then 16.4% in 2009 (29.6mn mt), from a 2007 peak of 36.3mn mt.

We believe that one concern in the market now is that the meat scandal could spread to other meat producers, just as occurred in the milk industry. In our opinion, though, the Clenbuterol-tainted pig feed scandal will have only a limited impact on the meat industry as a whole. Our rationale:

Government has no incentive to crack down on the meat industry — In our view, the ideal outcome for the government would be to completely eliminate use of illegal additives in pig feed in short the term and regain consumer confidence in meat products in the long run.

Tainted meat scandal gaining public attention

Shuanghui was worst hit

The tainted meat scandal is arguably not as serious as the dairy scandal of 2008, in our view. We spot potential winners and losers

Global implications

We believe the meat scandal is different from the dairy scandal of 2008



Too big to lose — Pork is an important component of the Chinese diet, arguably the most important. Consumption of pork and pork products reached 50.7mn MT in 2010, accounting for around 60% of meat consumption in China. We think this reliance on pork means people are more likely to choose well-known major meat producers such as China Yurun (1068 HK, BUY, TP: HK$39.0) than stop consuming pork altogether.

Meat scandal has had less of a real world impact than the milk scandal — The meat scandal so far has not had health implications of the magnitude of the tainted milk scandal, when six lives were lost and over 300,000 children were sickened.

Social discontent not as serious as tainted milk powder case — While some of the details of the case are as yet unknown, we think people are inclined to see the meat scandal as a regional one rather than an industry-wide one.

Tolerance of food safety incidents seems to be increasing — According to China’s Ministry of Health, the number of food poisoning cases increased to 271 in 2009, from 97 a decade ago.

Who benefits? Given our view that the negative impact of the tainted pig feed scandal is likely to be felt regionally rather than industry-wide, we think other meat producers, such as China Yurun Good Group (1068 HK, BUY, TP: HK$39.0), stand to benefit. The shares are up only 1.8% since the meat scandal hit the headlines on 15 March to HK$26.1 on 31 March 2011 (vs 3.7% of HSI), and we would look for further share price appreciation in the short term. We note that Suning Appliance’s (002024 CH, Not rated) share price was up more than 30% to RMB8.5 in the month following official confirmation that Gome Electrical (493 HK, BUY, TP: HK$4.3) chairman of the board Huang Guangyu was under investigation (19 November 2008) (vs 19.5% of HSI).

Nomura consumer analyst Emma Liu believes that the meat scandal will benefit Yurun in the long term. According to management, Yurun’s operations have not been affected by the scandal and its slaughtering volume growth has remained strong since news of the scandal broke. Management believes the government is likely to further tighten control of the industry. We believe this could accelerate industry consolidation, to the benefit of Yurun in the long run.

In the long term, we expect the government to strengthen food safety through implementation of stricter measures. Corporates that are vertically integrated — from raw materials through to final products — are likely to be well positioned in such a scenario. As for distribution channels, we think the large supermarkets and agri-product trading platforms are likely to receive support from the government in food quality control, with stricter detection methods likely to be implemented. Any further weakening in consumer confidence in domestic meat products would likely heighten demand for imported products.

Long-term beneficiaries

Yurun will likely benefit, in our view



Exhibit 51. Suning share performance since confirmation that Gome's chairman was put under investigation

0

8

16

24

32

21-N

ov-0

8

22-N

ov-0

8

23-N

ov-0

8

24-N

ov-0

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25-N

ov-0

8

26-N

ov-0

8

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ov-0

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28-N

ov-0

8

29-N

ov-0

8

30-N

ov-0

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1-D

ec-0

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2-D

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8

3-D

ec-0

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4-D

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5-D

ec-0

8

6-D

ec-0

8

7-D

ec-0

8

8-D

ec-0

8

9-D

ec-0

8

(%)


Exhibit 52. Yurun share performance since meat scandal

(20)

(15)

(10)

(5)

0

5

14-M

ar-1

1

15-M

ar-1

1

16-M

ar-1

1

17-M

ar-1

1

18-M

ar-1

1

19-M

ar-1

1

20-M

ar-1

1

21-M

ar-1

1

22-M

ar-1

1

23-M

ar-1

1

24-M

ar-1

1

25-M

ar-1

1

26-M

ar-1

1

27-M

ar-1

1

28-M

ar-1

1

29-M

ar-1

1

30-M

ar-1

1

31-M

ar-1

1

(%)


Exhibit 53. Mengniu share performance since milk scandal

(68)

(51)

(34)

(17)

0

10-S

ep-0

8

11-S

ep-0

8

12-S

ep-0

8

13-S

ep-0

8

14-S

ep-0

8

15-S

ep-0

8

16-S

ep-0

8

17-S

ep-0

8

18-S

ep-0

8

19-S

ep-0

8

20-S

ep-0

8

21-S

ep-0

8

22-S

ep-0

8

23-S

ep-0

8

24-S

ep-0

8

25-S

ep-0

8

26-S

ep-0

8

27-S

ep-0

8

28-S

ep-0

8

29-S

ep-0

8

(%)


Suning’s share price rose significantly after Gome’s chairman was put under investigation

Yurun’s share price has started to perform

The 2008 dairy scandal seriously hit milk producers like Mengniu…



Exhibit 54. Yili share performance since milk scandal

(60)

(45)

(30)

(15)

0

10-S

ep-0

8

12-S

ep-0

8

14-S

ep-0

8

16-S

ep-0

8

18-S

ep-0

8

20-S

ep-0

8

22-S

ep-0

8

24-S

ep-0

8

26-S

ep-0

8

28-S

ep-0

8

30-S

ep-0

8

2-O

ct-0

8

4-O

ct-0

8

6-O

ct-0

8

8-O

ct-0

8

10-O

ct-0

8

(%)


Exhibit 55. Imported dairy products and growth

0

100

200

300

400

500

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Ma

r-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Ma

r-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

(40)

0

40

80

120

160 Imported dairy products (LHS) y-y % (RHS)(US$mn) (%)


Exhibit 56. Imported meat products breakdown by territories

0

100

200

300

Jan

-08

Ma

r-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan

-09

Ma

r-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan

-10

Ma

r-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Meat imported from US (US$mn) Meat imported from EU Others


…and Yili

…but triggered an increase in imports of dairy products

We think US and EU meat producers should benefit from the meat scandal



Exhibit 57. Liquid milk consumption and growth

Milk scandalin H208

0

10,000

20,000

30,000

40,000

50,00019

89

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(40)

(20)

0

20

40

60 Sales volume-liquid milk (LHS)

y-y % (RHS)

(%)('000 mt)

Source: USDA Foreign Agricultural Service, Nomura research

Exhibit 58. Food poisoning in China

Food poisoning # of cases # of poisoned people # of people died

1999 97 4,999 103

2000 150 6,237 135

2001 185 15,715 146

2002 128 7,127 138

2003 379 12,876 323

2004 397 14,586 282

2005 256 9,021 235

2006 596 18,063 196

2007 506 13,280 258

2008 245 10,016 162

2009 271 11,007 181

2010 220 7,383 184 Source: Ministry of Health, Nomura research

Milk consumption has dropped since the 2008 dairy scandal

Food safety is a big concern in China



Valuation method and risk to price targets

How we value the shares Gome

Valuation method

Our price target of HKD4.3 is based on 22x FY11F P/E (EPS: RMB0.155), in line with its historical 12-month forward P/E. We see potential for upside revision due to better-than-expected store efficiency and store numbers.

Investment risks

Lower-than-expected SSS and margins.

China Life

Valuation method

Our PT of HKD40 is premised on a New Business (NB) multiple of 21.7x derived by a risk discount rate (RDR) of 11% based on China Life’s EV assumptions. We use our explicit VoNB growth forecasts for FY11-13F and assume 16% VoNB growth over the next 13 years (FY14-26F). The valuation is based on a 15-year basis and assumes no perpetuity growth, an approach similar to standard actuarial practice, as long-term growth is deemed too uncertain and therefore has close to zero value. We apply the target NB multiple to China Life’s FY12F New Business Value and then add the FY11F Embedded Value.

Investment risks

Key downside risks include poor returns from the A-share market, which would affect sentiment on insurers in general, in our view, as well as intensified competition leading to a continued squeeze in NB margins for life insurers, especially China Life, which hopes to recapture market share.

Tingyi

Valuation method

Our PT of HKD24 is based on 30x 12-month forward EPS of USD0.1, a 30% premium to the F&B sector average. We apply a 30% premium to reflect Tingyi’s premium brand, extensive distribution network and strong execution. We apply an earnings-based valuation method, which is in line with our valuation method for the whole F&B sector.

Investment risks

Downside risks include weaker-than-expected sales growth and larger-than-expected cost pressure.

Yurun

Valuation method

Our price target of HKD39.0/share is based on a sum-of-the-parts valuation. We apply a P/E of 23x (at par to the sector average) to its 12-month forward core EPS of HKD1.52 and 11.5x (half of the P/E multiple for its core EPS) to value its government subsidy per share of HKD0.43.

Investment risks

An unexpected outbreak of pig disease across the country and food safety scandals within the food processing sector or at Yurun.



ICBC

Valuation methodology

Our price target of HKD7.60 is based on 2.21x P/BV multiplier and FY11F BVPS of RMB2.76. Our sustainable ROE assumption is 15.8%. We use the Gordon Growth Model [target P/BV = (sustainable ROE – long-term growth)/(cost of equity – long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 11.5% and a terminal growth rate of 7.9%. We derive our terminal growth figure by applying a 50% payout ratio to our long-term sustainable ROE.

Investment risks

As the largest bank in China, ICBC and its performance remain closely tied to the Chinese economy. Hence, we believe that severer-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth, in our view. The concept of market and operation-related risks has only been introduced to the bank over the past few years. Moreover, fewer-than-expected rate hikes in 2011F is likely to pose a downward risk to our NIM assumption.

China Unicom

Valuation

Our DCF-based price target of HKD15.80 uses a WACC of 11.2% and a long-term growth-to-perpetuity rate of 1.0%.

Investment risks

The risks to our investment view include: 1) irrational tariff competition — if China Mobile or China Telecom were to lower mobile tariffs in an attempt to gain market share, we believe China Unicom might respond by launching similar tariff plans; 2) the regulatory environment — any significant change in the regulatory environment could have important implications for mainland telecom operators; and 3) new technologies may disrupt the industry landscape — the introduction of new technologies could complement or cannibalise existing technologies (i.e., GSM, GPRS and EDGE). Given that telecom operators have invested heavily in their existing networks, the potential obsolescence of networks could lead to asset write-offs, in our view.



Appendix

Appendix

Exhibit 59. P/E for Nomura covered sectors (FY11F)

0 20 40 60 80

Financials

Oil & Gas/Chemicals

Property

Health Care & Pharmaceuticals

Industrials

Basic Materials

Transport/Logistics

Conglomerates

China - Total

Telecoms

Technology

Consumer Related

Power & Utilities

Media & Internet

Gaming, Hotels & Leisure

(PER)

Source: Nomura research

Exhibit 60. Price performance for Nomura covered sectors (1M)

(4) 0 4 8 12 16

Property

Basic Materials

Power & Utilities

Oil & Gas/Chemicals

Financials

China - Total

Industrials

Consumer Related

Gaming, Hotels & Leisure

Media & Internet

Health Care & Pharmaceuticals

Conglomerates

Telecoms

Technology

Transport/Logistics (%)


Valuations of financials and property sectors seem appealing

Property sector posted the best price performance over the past month



Exhibit 61. Property price estimates for 2011

Property price change target (y-y)

First-tier city

Beijing <=0%

Shanghai <8%

Guangzhou <10%

Shenzhen <10%

Second-tier city <10%~15%

Third-tier/below city <9~50%


Exhibit 62. MSCI China consensus 2011 EPS growth by sector

50

36

2521 21 20

13 13 12 117

0

25

50

-Inf

orm

atio

nte

chno

logy

-Mat

eria

l

-Hea

lthca

re

-Ene

rgy

-Fin

ance

MS

CI

Chi

na

-Con

sum

er--

Sta

ple

-In

dust

rial

-Util

ities

-Con

sum

er--

Dis

cret

iona

ry

-Tel

ecom

serv

ices

(%)


Exhibit 63. % of 2011 consensus EPS has been revised for MSCI China Index (January 2011 – 2011YTD)

36

22 20 20

9 95 3 1

(6)

(14)(20)

0

20

40

-Inf

orm

atio

nte

chno

logy

-Ene

rgy

-Ind

ustr

ial

-Hea

lthca

re

MS

CI

Chi

na

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sum

er--

Dis

cret

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ry

-Fin

ance

-Tel

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ices

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eria

l

-Con

sum

er--

Sta

ple

-Util

ities

(%)


Estimates of property price growth

Consumer staples and discretionary are expected to report less EPS growth than the market index, on our estimates

Index EPS has been revised up…



Exhibit 64. Consensus estimate 2011 EPS revisions

5.2

5.4

5.5

5.7

5.8

6.0Ju

n-10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

1,040

1,080

1,120

1,160

1,200

1,240MSCI China EPS revision

HSCEI EPS revision (RHS)

(LHS)


Exhibit 65. Monthly performance breakdown by sector – July 2010

10.0%

4.5% 4.1% 3.8%

(4)

0

4

8

12

IT

SH

CO

MP

Indu

stria

l

Mat

eria

l

Dis

cret

iona

ry

HS

I

Fin

anci

al

MS

CI

Chi

na

HS

CE

I

Util

ities

Sta

ples

Ene

rgy

Tel

ecom

Hea

lthca

re

(%)


Exhibit 66. Monthly performance breakdown by sector – August 2010

0.0%

-2.3% -2.6%

-4.2% (6)

(3)

0

3

6

Hea

lthca

re

Util

ities

Sta

ples

Tel

ecom

Dis

cret

iona

ry

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CO

MP

Mat

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l

Ene

rgy

HS

I

MS

CI

Chi

na

Indu

stria

l

IT

HS

CE

I

Fin

anci

al

(%)


…for both MSCI China and HSCEI

IT was the best performer in July 2010

Healthcare was the best performer in August 2010



Exhibit 67. Monthly performance breakdown by sector – September 2010

8.9% 8.8% 8.3%

0.6%

0

5

10

15

20

Dis

cret

iona

ry

Mat

eria

l

Hea

lthca

re IT

Ene

rgy

Sta

ples

Indu

stria

l

HS

I

HS

CE

I

MS

CI

Chi

na

Fin

anci

al

Tel

ecom

Util

itie

s

SH

CO

MP

(%)


Exhibit 68. Monthly performance breakdown by sector – October 2010

12.2%

6.1%3.8% 3.3%

(10)

(5)

0

5

10

15

SH

CO

MP

Fin

anci

al

Ene

rgy

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CE

I

MS

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Indu

stria

l

IT

Mat

eria

l

Tel

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Sta

ples

Util

ities

Dis

cret

iona

ry

Hea

lthca

re

(%)


Exhibit 69. Monthly performance breakdown by sector – November 2010

-0.4%

-2.2% -2.7%

-5.3%

(9)

(6)

(3)

0

3

Ene

rgy

HS

I

Mat

eria

l

Tel

ecom

MS

CI

Chi

na IT

Hea

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Indu

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HS

CE

I

Fin

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Dis

cret

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ry

Sta

ples

SH

CO

MP

Util

ities

(%)


Consumer discretionary was the best performer in September 2010

Financials was the best performer in October 2010

Energy was the best performer in November 2010



Exhibit 70. Monthly performance breakdown by sector – December 2010

0.1%

-0.4% -0.6% -1.0%

(12)

(8)

(4)

0

4

8E

nerg

y IT

Mat

eria

l

Tel

ecom HS

I

Util

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s

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CO

MP

MS

CI

Chi

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HS

CE

I

Indu

stria

l

Fin

anci

al

Hea

lthca

re

Sta

ples

Dis

cret

iona

ry

(%)


Exhibit 71. Quarterly performance breakdown by sector – 3Q10

8.2%9.8%10.7%11.1%

0

10

20

30

Mat

eria

l

Dis

cret

iona

ry IT

Hea

lthca

re

Indu

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l

Sta

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HS

I

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SH

CO

MP

MS

CI

Chi

na

HS

CE

I

Util

itie

s

Fin

anci

al

Tel

ecom

(%)


Exhibit 72. Quarterly performance breakdown by sector – 4Q10

5.7%3.0% 2.3% 0.8%

(20)

(10)

0

10

20

Ene

rgy

SH

CO

MP

HS

I

Fin

anci

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HS

CE

I

IT

MS

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Chi

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Mat

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l

Indu

stria

l

Tel

ecom

Sta

ples

Hea

lthca

re

Util

itie

s

Dis

cret

iona

ry

(%)


Energy was the best performer in December 2010

Material was the best performer in 3Q10

Energy was the best performer in 4Q10





Any Authors named on this report are Research Analysts unless otherwise indicated

Analyst Certification We, Henry Wu, Yang Luo and Michael Shen, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures Mentioned companies Issuer name Ticker Price Price date Stock rating Sector rating Disclosures China Life Insurance 2628 HK 30.30 HKD 08-Apr-2011 Buy Not Rated 4,58,123 China Unicom 762 HK 14.42 HKD 08-Apr-2011 Buy Not Rated 3,4,8,47,48,55,58,123 China Yurun Food 1068 HK 27.95 HKD 08-Apr-2011 Buy Not Rated Gome Electrical Appliances 493 HK 2.85 HKD 08-Apr-2011 Buy Not Rated 4 ICBC 1398 HK 6.63 HKD 08-Apr-2011 Buy Not Rated 4,12,50,58,61

Disclosures required in the U.S.

47 Manager/Co-Manager in the past 12 months Nomura Securities International Inc. and /or its affiliates has managed or co-managed a public or Rule 144A offering of the company's securities in the past 12 months.

48 IB related compensation in the past 12 months Nomura Securities International, Inc and/or its affiliates has received compensation for investment banking services from the company in the past 12 months.

50 Nomura Beneficial Ownership of Securities Disclosures Nomura Securities International, Inc and /or its affiliates beneficially owns 1% or more of the common equity securities of the company.

123 Market Maker - NSI Nomura Securities International Inc. makes a market in securities of the company.

Disclosures required in the European Union

3 Lead manager/co-lead manager of securities/related derivatives offering Nomura International plc or an affiliate in the global Nomura group has been lead manager or co-lead manager over the previous 12 months of a publicly disclosed offer of the issuer's securities or related derivatives

4 Market maker Nomura International plc or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related derivatives of the issuer.

8 Investment banking services Nomura International plc or an affiliate in the global Nomura group is party to an agreement with the issuer relating to the provision of investment banking services which has been in effect over the past 12 months or has given rise during the same period to a payment or to the promise of payment.

12 Nomura 1% shareholdings Nomura International plc and/or its affiliates in the global Nomura group have shareholdings exceeding 1% of the total issued share capital of the issuer.

Disclosures required in Hong Kong

55 Nomura financial interest/business relationships disclosures: Nomura International (Hong Kong) Limited has received compensation or mandate for investment banking services within the preceding 12 months from the issuer.

58 Nomura financial interest/business relationships disclosures: Nomura International (Hong Kong) Limited or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related derivatives of the issuer.

61 Nomura financial interest/business relationships disclosures: Nomura International (Hong Kong) Limited and/or its group company which carries on a business in Hong Kong in proprietary trading or market making, in aggregate own/(s) 1% or more of the securities of the issuer as of the previous month-end.

Previous Rating Issuer name Previous Rating Date of change China Life Insurance Not Rated 02-Nov-2010 China Unicom Neutral 11-Feb-2010 China Yurun Food Neutral 14-Nov-2008 Gome Electrical Appliances Neutral 27-Jan-2010 ICBC Strong Buy 10-Dec-2008



China Life Insurance (2628 HK) 30.30 HKD (08-Apr-2011) Rating and target price chart (three year history)

Buy (Sector rating: Not Rated)

Date Rating Target price Closing price 02-Nov-2010 40.00 34.50 02-Nov-2010 Buy 34.50 08-Oct-2010 Not Rated 33.50 26-Aug-2009 45.00 34.30 26-Aug-2009 Buy 34.30 12-Aug-2009 33.00 33.45 28-May-2009 27.00 27.75 20-Jan-2009 24.00 21.95 13-Oct-2008 25.00 26.00 13-Oct-2008 Neutral 26.00

For explanation of ratings refer to the stock rating keys located after chart(s)

China Unicom (762 HK) 14.42 HKD (08-Apr-2011) Rating and target price chart (three year history)


Date Rating Target price Closing price 04-Mar-2011 15.80 13.24 13-Oct-2010 13.50 11.26 11-Feb-2010 10.80 8.93 11-Feb-2010 Buy 8.93 25-Jun-2009 10.00 10.32 22-May-2009 Neutral 9.46 01-Apr-2009 9.50 7.61 27-Nov-2008 16.20 8.97 27-Nov-2008 Buy 8.97 26-Aug-2008 14.15 13.12 24-Apr-2008 16.56 17.18


China Yurun Food (1068 HK) 27.95 HKD (08-Apr-2011) Rating and target price chart (three year history)


Date Rating Target price Closing price 19-Nov-2010 39.00 27.85 14-Jul-2010 34.00 25.45 09-Apr-2010 31.00 24.50 11-Jan-2010 28.00 22.40 16-Nov-2009 21.00 17.50 31-Jul-2009 16.20 12.26 14-Nov-2008 12.10 9.37 14-Nov-2008 Buy 9.37 27-Aug-2008 12.60 12.74 27-Aug-2008 Neutral 12.74 04-Jun-2008 13.50 11.70 04-Jun-2008 Buy 11.70 10-Apr-2008 13.20 10.50




Gome Electrical Appliances (493 HK) 2.85 HKD (08-Apr-2011) Rating and target price chart (three year history)


Date Rating Target price Closing price 07-Dec-2010 4.30 3.05 07-Apr-2010 4.10 2.90 27-Jan-2010 4.00 2.61 27-Jan-2010 Buy 2.61 23-Sep-2009 2.40 2.12 24-Jun-2009 2.10 1.76 24-Jun-2009 Neutral 1.76 14-Nov-2008 1.30 1.19 14-Nov-2008 Reduce 1.19


ICBC (1398 HK) 6.63 HKD (08-Apr-2011) Rating and target price chart (three year history)


Date Rating Target price Closing price 14-Jan-2011 7.60 6.08 22-Oct-2010 7.30 6.14 30-Jul-2010 7.00 5.82 13-May-2010 7.70 5.62 03-Feb-2010 7.36 5.72 18-Dec-2009 7.50 6.08 31-Aug-2009 6.70 5.19 26-Jun-2009 6.25 5.35 26-Mar-2009 4.94 4.03 10-Dec-2008 4.97 4.38 10-Dec-2008 Buy 4.38 30-Apr-2008 7.45 6.05


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Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*. 40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.



Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.



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