Key investment themes: Inflation and policy risk should start moderate. Policy sensitive sector could reverse theunder-performance. Market valuation is close to the historical trough on bearish sentiment. Upcoming earningdowngrade risk is largely priced in. Expect China policy to place more emphasis on “pro-growth”. Policy easing targeting thesmall and medium enterprises already begun. Raising wages will continue to support consumption. Social housing and public utilitiesbecomes the new driver for fixed asset investment growth. Domestic demand will largelyoffset export slowdown.
- 1. For Professional Investors Only China ConfidentialEXCEL CHINA FUND Agnes Deng Co-Portfolio Manager of Excel China Fund & Head of Hong Kong Equities at Barings February 2012For Dealer Use OnlyFebruary 2012
2. Excel Funds Management Inc. is Canadas first and only emerging markets focused mutual fundprovider. For over 12 years, we have been partnering exclusively with best in class, on-the-groundportfolio managers that bring Canadian investors firsthand insight and expertise in these flourishingeconomies. Through our funds, investors gain early exposure to companies positioned to becomefuture leaders in some of the worlds fastest growing markets. Excel Funds maintains a highly rankedfund family that is focused on emerging market growth opportunities.1 3. China MarketInvestment Strategy 4. Inflation and policy risk should start moderate. Policy sensitive sector could reverse theunder-performance. Market valuation is close to the historical trough on bearish sentiment. Upcoming earningdowngrade risk is largely priced in. Expect China policy to place more emphasis on pro-growth. Policy easing targeting thesmall and medium enterprises already begun. Raising wages will continue to support consumption. Social housing and public utilitiesbecomes the new driver for fixed asset investment growth. Domestic demand will largelyoffset export slowdown.3 5. Tightening bias to remain, key is when it will peak outSource: NBS, CEIC, UBS estimates (January 2012)4 6. China: Purchasing Manager Index Interest rate(PMI)EconomicExpansionEconomicContraction China shifting policy, but slowlySource: HSBC as at January 2012 Source: CLSA as at January 20125 7. YoY growth rate of M2 Loan-to-deposit ratioWe do not share the view of an imminentbanking crisis in ChinaSource: YoY growth rate of M2 CLSA as at January 2012; Loan-to-deposit ratio - CEIC, RBS as at January 20126 8. Central Government Debt Outstanding (as a % of GDP)China appears to be able to service its debtwith ease, even if it had to absorb all local government debtSource :IMF, RBS as at September 20117 9. China: average annual wageWage inflation in different sectors Doublecomparedwith 2010Note: Assuming the average annual wage for 2015 = twice that for 2009, as 2010 figureis not availableSource: (China: average annual wage) Ministry of Human Resources and Social Security, Daiwa Securities Group as of 30 September 2010;(Wage inflation in different sectors) CEIC, HSBC as at September 20118 10. Offshore-listed Chinese stocks are trading below the historicalmean in P/E termsForward P/E for MSCI ChinaSource: Goldman Sachs as at January 20129 11. Increase exposure in policy sensitive sector valuation largely priced in policy risk and concern of economic slowdownProperty stocks become attractive on low valuation and recovery of transaction volumeFocus on earnings visibility and quality growth ideas in Technology and Internet sectorRevisit the export sector focus on market leaders which play consolidator roles and with strong balance sheet Source: Barings10 12. Chinas Team andInvestment Process 13. Agnes DengHead of HK ChinaEquitiesInvestment Experience:13 YearsInvestment ManagersAnalystsWilliam Fong Jim Chen Winston Ke Derick Leung Lin TangZhi Zhi Tan Nicola LaiInvestment Experience: Investment Experience: Investment Experience: Investment Experience: Investment Experience: Investment Experience: Investment Experience: 12 Years9 Years 6 Years6 Years3 Years6 Years 6 Years(Taiwan Specialist)Strategic Policy GroupPortfolio Analytics Risk Management Asian Country Specialists Source: Barings12 14. CheapValuation ExpensiveWe seek to identify Unrecognized GrowthHigh opportunities at their earliest stages in an unconstrained investment universe. Growth at a reasonableprice90/120 rule : 90-120% of market PERGrowthLow We seek under-recognised growth companies that will deliver positive surpriseSource: BaringsSource: Barings13 15. GROWTH VALUATIONMANAGEMENTLIQUIDITY CURRENCY UnrecognizedFavorableCredibleAbility to finance Sensitivity togrowthrisk/rewardmanagement growth currencyResearch augmented by regular contact with target companies Enterprise Value/Earnings Before Interest, Tax, Depreciation and Amortization14 16. Consumer - C. Staples - Healthcare Construction - C. Disc. - Retails Financials: Banks .Insurance . BrokerageProperty- Commercial- Residential Telecoms Manu-IT + InternetfactureTransportation:Airline . Shipping . Port . Toll RoadCommodities- EnergyUtilities- Basic Material- IPP CoalEffective, Efficient and Focus15 17. Stock Universe1720Screening ProcessPrimary Companies Researched 169Index Stocks Covered 78Index weight researched 84.4%Non-index names researched 911 & 2 rated stocks 104Company visit in last twelve months 1001* Active comprehensive coverage and rating Data as of 31 January 2012, Source: Barings, MSCI, Factset * Data as at 30 June 201116 18. Common, transparent stock Stock Score versus Benchmarkresearch and scoring system June 2007 to June 2011 All research ideas scored by conviction: 1 (outperform) to 5 (underperform) Same treatment on index stocks vs non index stock, small-mid caps vs big caps Portfolio focused on companies scored 1 and 2 System engenders accountability, transparency and communicationTransparent methodology of conviction based scoring17 19. We buy when we identify Triggers for a sell Unrecognised earnings growth prospects Stock is downgraded to sell Bottoming of earnings expectations and We detect deterioration in fundamental outlookvaluations We believe valuations have fully discounted Catalyst that will lead to the stock being re-rated growth prospects We have a significantly more attractive idea Focus on stocks rated 1 to 2IPO Process Selective in IPO subscription Focus on long term investment conviction Clear target on both price and position sizeA disciplined approach to buy and sell18 20. Portfolio Construction& Fund Performance 21. Greater focus on China direct plays, due to their compelling valuation and growth prospects Source: Baring Asset Management20 22. Sector Allocation vs Index* Fund (%) Index (%)*Major Underweight/Overweight PositionsInformation Tech 24.46.0Consumer Disc13.26.0Health Care4.0 0.8[Cash] 2.3--Materials5.0 5.3Industrials5.9 6.6Utilities -- 2.1Consumer Staples 0.9 5.3Energy 13.419.0Telecom Services 4.0 12.7Financials 27.036.2Focusing on the secular growth sectors * Index - MSCI China Source: Baring Asset Management21 23. Portfolio CharacteristicsMarket Capitalization ComparisonPortfolio Index*Portfolio Benchmark* (%) (%) (%) (%)Forward P/E (FY2) 10.2x8.9x Over US$10 bn39.863.9Price/Book2.2x 1.9x US$1-10 bn 51.334.7ROE22.8% 21.4%Below US$1 bn 7.7 1.4Number of Stocks 60 148 Weighted Avg (US$ bn)24.154.3Portfolio Turnover Risk SummaryThe rolling 12 month portfolio 79.2%Tracking Error vs. Index*8.1%turnover (adjusted)Beta vs. Index*1.1 Remarks: Investment involves risk. Past performance is not an indication of future performance. Please refer to the Regulatory Disclosure. Source : MSCI, Style Research, Barings * Index: MSCI China22 24. Agnes Deng, CFAHead of Hong Kong China Equities Last updated: 30th January 2012Investment Director, Asia Pacific EquityLocation: Hong KongInvestment Experience: 13 YearsAgnes is the investment manager of the Baring Hong Kong China Fund and Greater China Fund Inc. She also takes the lead role in Hong Kong China specialistresearch. Agnes joined Baring Asset Management in 2007 from Standard Life Investment (SLI) in Asia where she was an Investment Director with considerableexperience in running portfolios focusing on the Hong Kong China as well as the Asian region. The SLI China Fund she managed consistently ranked in the top quartilepositions in the peer group performance surveys. Agnes also worked closely with Standard Lifes asset management joint venture in China and providedrecommendations on strategy and asset allocation. Agnes received a BA in English Literature from Xiang Tan University (Hunan) China and an M.B.A. from the McGillUniversity, Montreal, Canada. Agnes was awarded the CFA designation in 2001. She speaks English, Mandarin and Cantonese fluently.William Fong, CFAInvestment Director, Asia Pacific EquityLast updated: 30th January 2012Location: Hong KongInvestment Experience: 12 YearsWilliam is the lead manager of Baring China Select Fund and Baring China Growth Fund. He also manages a number of dedicated Hong Kong China portfolios includingthe co-manager role of Greater China Fund, Inc. His research responsibilities include Hong Kong, China and Taiwan. He is also a member of the Technology Globalsector team. William joined Baring Asset Management in 2004 from Primasia Securities where as an Investment Analyst specialising on Taiwanese stocks. He received aB.B.A. (Hons.) in Finance from The Chinese University of Hong Kong. William was awarded the CFA designation in 2003. He is fluent in Cantonese, English andMandarin. 23 25. Jim Chen, CFAInvestment Manager, Asia Pacific Equity Last updated: 30th January 2012Location: Hong KongInvestment Experience: 9 YearsIndustry Experience: 11 YearsJim is an investment manager responsible for institutional China portfolios in our Hong Kong China equities team. He joined Barings in July 2010 from Sumitomo MitsuiAsset Management (Hong Kong) where he managed Greater China funds and led the China research analyst team. Prior to that, he worked for CITIC Capital Holdingsas a fund manager of its China funds. Jim received a BA in International Trade from Wuhan University China, an MA in Financial Economics from the University of Maine,USA, and an MBA from Northeastern University, Boston, USA. He is also a CFA Charterholder. Jim speaks English, Cantonese and Mandarin fluently.Winston Ke, CFASenior Investment Analyst, Asia Pacific EquityLast updated: 30th January 2012Location: Hong KongInvestment Experience: 6 YearsWinston has research respons