China Market Strategy - 'Growth' and 'Reform'： The key words for 2013

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™ Client-Driven Solutions, Insights, and Access 02 January 2013 Asia Pacific/China Equity Research Strategy China Market Strategy ECONOMICS AND STRATEGY 'Growth' and 'Reform': The key words for 2013 Figure 1: Even post recent rally, China still does not look expensive 0123456Dec 02Dec 03Dec 04Dec 05Dec 06Dec 07Dec 08Dec 09Dec 10Dec 11Dec 12MSCI China - trailing P/B (x)Avg+1SD-1SD Source: MSCI We update our outlook on the Chinese stock market for 2013: ■ The macro stabilisation trend continues. The past few months’ data indicate that the trend of stabilisation and mild recovery continues in China. Among the demand variables, infrastructure investment growth remains strong. Property investment and retail sales, on the other hand, have shown signs of recovery. However, export growth may bottom out in 1H13, while industrial investment growth could slow further. ■ Reform initiatives. Another factor which could influence the market is the government’s decision on more comprehensive economic reforms. If that happens, investors could turn more bullish on China’s long-term growth outlook, which, in turn, would be positive for the market. ■ Index targets, model portfolio and top picks. Our 12-month index targets for MSCI China, H share and Shanghai A are 70, 14,000 and 2,600, respectively, implying potential upsides of 12-23%. In our model portfolio, we continue to like beta plays but call a switch from investment-related sectors such as materials to consumer discretionary plays. Our top picks are CCB, Air China, Brilliance China, China Pacific and Shenhua. Research Analysts Vincent Chan 852 2101 6568 vincent.chan@credit-suisse.com Peggy Chan, CFA 852 2101 6305 peggy.chan@credit-suisse.com 02 January 2013 China Market Strategy 2 Focus charts and table Figure 2: Weaker recovery see in 2013 versus 2003 Figure 3: Property investment is recovering 7.0 6.6 8.9 8.0 8.1 8.1 10.8 7.9 9.6 9.9 9.2 8.9 8.1 7.6 7.4 7.7 7.8 8.3 8.3 7.9 3Q014Q011Q022Q023Q024Q021Q032Q033Q034Q033Q114Q111Q122Q123Q124Q12F1Q13F2Q13F3Q13F4Q13FGDP grow th(%) -1001020304050-40-20020406080Mar 97Mar 98Mar 99Mar 00Mar 01Mar 02Mar 03Mar 04Mar 05Mar 06Mar 07Mar 08Mar 09Mar 10Mar 11Mar 12YoY% (3MMA)YoY% (3MMA)Floor Space StartedFAI (RHS) Source: CEIC, Credit Suisse estimates Source: CEIC Figure 4: Retail sales growth should accelerate in 2013 Figure 5: Declining share of bank funding 051015202530Jan 96Jan 97Jan 98Jan 99Jan 00Jan 01Jan 02Jan 03Jan 04Jan 05Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11Jan 12NominalReal 0.00.20.40.60.81.01.21.4-20020406080100120Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 12Jul 12MLT Corporate LoanForex LoanEntrusted LoanTrust LoanCorporate BondEquityTotal (RHS)% of totalRmb trillion Source: CEIC, Credit Suisse estimates Source: CEIC Figure 6: Slight pick-up in total demand seen in 2013 2011 YoY (%) Nominal Rmb bn % of total 04-08 09-10 11 12E 13E Jan-Nov'12 Retail Sales 18,140 29.9 15.6 17.0 17.1 14.5 15.5 14.2 Exports (Rmb adjusted) 12,257 20.2 22.6 6.4 14.8 4.5 8.0 4.8 Urban Fixed Asset Investment 30,193 49.8 26.3 27.5 23.8 20.9 19.3 20.9 Infrastructure 9,170 15.1 19.9 29.4 9.9 16.8 22.5 16.4 Real Estate 7,568 12.5 26.0 26.7 29.7 21.4 19.5 22.2 Industrial 11,766 19.4 34.2 26.4 31.0 21.9 15.0 21.7 Services 1,689 2.8 28.2 32.1 38.2 34.0 30.0 34.0 Total Demand 60,590 100.0 21.3 18.2 19.9 15.7 16.1 15.6 Source: CEIC, Credit Suisse estimates 02 January 2013 China Market Strategy 3 'Growth' and 'Reform': The key words for 2013 Macro stabilisation trend continues Last few months’ data indicate that the trend of macro stabilisation and mild recovery continues in China. Among the demand variables, infrastructure investment continues to be the key driver of growth. It has been accelerating rapidly since the second quarter of last year. On the other hand, property investment and retail sales have shown signs of recovery. However, while there are some signs of export recovery, we remain skeptical as to whether export growth has bottomed out. Moreover, industrial investment is a major concern, and the slowdown could continue in 2013. Combining all these, we believe that the overall demand growth in 2013 will be