HONG KONG / CHINA MONTHLY REPORT ：HK market will benefit from the “January Effect”

January 2013 HONG KONG / CHINA MONTHLY REPORT HK market will benefit from the “January Effect” HK market continued to benefit from the bottoming out of A-Share market. HSI closed near the yearly high with a single month return of 2.84%. Though it was much smaller than the 7.66% monthly return of HSCEI, the return of HSI also reflected the improvement in China economic situation as China-related stocks shared 50% the HSI market cap. After Shanghai Composite Index hit the yearly low of 1,949 to trigger a rebound and broke the resistance of 2,000, it also broke its 200-day MA indicating a strong technical outlook of the China market. The strong momentum in China-related stocks pushed up HSCEI and HSI and improved the market sentiment. It showed that investors were optimistic about the market outlook. We estimate that HK market will continue to surge in the short term on the portfolio rebalancing activities of institutional investors in January. The overall performance for A-Share market was relatively poor in 2012. However, after the Shanghai Composite Index rebounded from the trough at 1,949 to break 2,200, market believes that China stock market has already bottomed out and will continue to surge in 2013. So, we expect that the capital inflows in the China stock market can lead to better performance of the related stocks. Particularly, quite a lot of funds have already flown into the China stock index ETF since early Dec last year. The inflow of funds to ETF can bring positive impact on HK market. We believe that the “January Effect” will help HSI to continue its rally. Particularly, the funds will flow into the China insurance stocks and other finance stocks. That may drive the turnover for the whole market to surge. Since investors were optimistic about China stock market, China-related stocks became the major movers of the HK market. Finance sub-index moved up by 4.23% and outperformed the HSI. Besides, C&I sub-index and property sub-index gained 2.02% and 4.23%, respectively. However, utilities sub-index was weak and became the only sub-index that entered the negative territory. It dropped 0.84% for the whole month. As China property stocks kept rising on the surge in China property market and HK property market continued to break record, property sub-index gained the most for the whole year with an annual return of 37.57%. Utilities sub-index underperformed the other sub-indexes and gained 14.09% only. Besides, HSCEI surged 7.66% in Dec on a sharply increase in China related stocks. It gained 15.09% on the yearly basis. The Red-chips index gained 3.25% in Dec and 23.06% for the whole year. CITIC Pacific (267 HK) surged 18.1% and became the best performing blue-chip. It surged by 18.1%. However, COSCO Pacific (1199 HK) lost the most by 10.8% in Dec. The best performer in HSCEI was China Air (753 HK) with monthly gain of 26.2%, while the worst performer in HSCEI was Weigao Group (1066 HK). However, it only dropped by 3.7% in Dec. January 2013 Hong Kong / China Research Team TEL: 852 28260001 castor.pang@cpy.com.hk Contents Market outlook ..................................... p.1 - 2 Stock Picks China Property Sector .............................p.3-8 China Insurance Sector ............................p.9-13 China Natural Gas Sector.........................p.14-17 China & Hong Kong Banking Sectors...........p.18-21 Hong Kong/ China share performance HSI Valuation Summary .............................p.22 H-share Valuation Summary .......................p.23 January 2013 2 Market outlook Core Pacific - Yamaichi Table 1: Performance of HSI and its sub-indexes: Dec 2012 Close Close 1 mon change (%) Ytd change (%) HSI 22,656.92 22,030.39 2.84 22.91 HSC 13,136.24 12,876.44 2.02 18.06 HSF 31,231.56 29,964.91 4.23 25.41 HSP 31,383.11 30,908.62 1.54 37.57 HSU 51,797.82 52,236.48 -0.84 14.09 HSCEI 11,436.16 10,622.67 7.66 15.09 HSCCI 4,531.12 4,388.65 3.25 23.06 Source：Bloomberg From technical point of view, HSI bottomed out at 18,056 in early-Jun last year and formed a medium-term up-channel. This up-channel was broken in mid-Nov and another up-channel formed. However, HSI could not break the resistance of 22,700 before the end of 2012. It was mainly because HSI had already increased 4,000 points or 22% in 2012. Investors became more cautious and more time and momentum are needed to break the resistance. However, we believe 22,700 was only a short-term resistance. As A-Share market has not peaked out yet and still ha