Mr & Mrs Asia - CLSA [PDF]

Mr & Mrs Asia Moving up the J-curves Special report

Spring 2010

Mr & Mrs Asia

Anirudha Dutta

Contents

[email protected] (91) 2266505056

Executive summary ............................................................................ 3

Amar Gill, CFA

Global growth engine ......................................................................... 4

(65) 65122337

Aaron Fischer, CFA (852) 26008256

Bhavtosh Vajpayee, CFA

Rise of Asia’s middle class................................................................ 19 Sector profiles

(852) 26008388

Autos.........................................30

Property .....................................93

Daniel Tabbush

Banks ........................................40

Technology ...............................104

(66) 22574631

Consumer ..................................58

Telecoms..................................114

Elinor Leung, CFA

Education ...................................85

Transport .................................123

(852) 26008632

Geoff Boyd

Appendices

(65) 64167853

1: Penetration versus disposable income ............................................... 136

Nicole Wong

2: Consumer expenditure .................................................................... 138

(852) 26008207

Nimish Joshi (91) 2266505054

Robert Bruce (852) 26008522

3: Disposable income-penetration correlation ........................................ 140 4: Penetration of consumer goods ........................................................ 143 5: Chindonesia by numbers ................................................................. 144 All prices quoted herein are as at close of business 12 April 2010, unless otherwise stated.

The dragon, the elephant and the komodo

2

[email protected]

19 April 2010

Mr & Mrs Asia

Executive summary

Moving up the J-curves J-curve hypergrowth over the next five to 10 years

China, India and Indonesia’s (Chindonesia) consumer sectors should exhibit Jcurve hypergrowth over the next five to 10 years on rising incomes and a propensity to consume and take risks. Easier access to finance, increasing urbanisation and an optimistic outlook will also drive consumption. This report examines the macro underpinnings of our thesis, particularly the burgeoning middle class, and highlights our top picks in eight sectors on a five-year horizon.

Chindonesia contributed a quarter of global GDP growth in past five years

Chindonesia contributed more than 25% of global GDP growth over the past five years and significantly outperformed developed economies in terms of stockmarket returns. Even more noteworthy is that in the face of the 2008 global financial crisis, the emerging-market trio exhibited relative resilience and maintained healthy growth trends.

Major consumer sectors are on the cusp of strong expansion

The emergence of Asia, particularly China, as a major consumer of industrial metals, minerals and manufactured products has been evident over the past decade. While India has been lagging China, its expansion rates remain among the highest in the world. Major consumer sectors in the region are on the cusp of five to 10 years of J-curve hypergrowth as the middle class enjoys rising incomes and exhibits its propensity to consume and take risks. Availability of finance, growing urbanisation and widely optimistic sentiment will also be key drivers of this growth.

Middle class to make up 30% of Asia ex-Japan’s population in five years

We estimate that the middle class makes up 19% of Asia ex-Japan’s population, and that should rise to 30% in five years, or an 11% Cagr. The aggregate number of those in the region’s middle class will increase from 570m currently to 945m by 2015. China will account for two-thirds of the new members, while Chindonesia will represent 90% of the 375m increment. We expect the social cluster’s consumption spending to increase from US$2.9tn to US$5.1tn over this period.

Many sectors will witness exponential growth

Our analysis also suggests demand growth in most sectors is likely to be exponential, as average per-capita disposable income approaches the critical US$3,000 level, beyond which discretionary spending kicks in. The best example is car sales. While 2009 sales of 10.3m have made China the largest autos market in the world, its total vehicle population is just 62m and penetration remains low at 5%.

Our top picks

Our top picks in China (including Hong Kong), India and Indonesia include Air China, Baidu, Bank of China, Cathay Pacific, China Resources Land, Dongfeng Motor, HDFC Bank, Maruti Suzuki, SAIC and Unitech.

J-curve trajectory

Mobile subscribers

800

(m)

China

India

700 600 500 400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Economist Intelligence Unit, CLSA Asia-Pacific Markets

19 April 2010

[email protected]

3

Mr & Mrs Asia

Section 1: Global growth engine

Global growth engine In our summer 2005 Chindia: The shape of things to come report, we wrote: ‘A sustained surge in consumption will primarily drive Chindia’s future growth acceleration . . . Lifestyle change is visible with demand for better housing, educational and healthcare services, financial services and infrastructure. No other economy in the world has such a compelling demographic profile.’ Add Indonesia into the mix and we believe this emerging-market trio will represent 90% of the region’s new middle-class entrants over the next five years. Demographics and an increasing proportion of middle-income families will drive consumption and consumerism in these three countries over the next decade. In many cases, it will be a J-curve hypergrowth trajectory, akin to what we have seen in the telecoms sector over the past 15 years. Figure 1

Figure 2

Mobile subscribers

Asia ex-Japan private consumption¹

800

Telecoms sector enjoyed J-curve hypergrowth over the past 15 years

(m)

China

45

India

700

(%)

41.3

40

600 500

35

400 30

300

25.2

200

25

100 0 1995

20 1997

1999

2001

2003

2005

2007

Source: CLSA Asia-Pacific Markets

2009

1999

2001

2003

2005

2007

2009

¹ As a share of US private consumption. Source: CEIC, CLSA Asia-Pacific Markets

Global economic data show China, India and Indonesia enjoyed real-GDP Cagrs of 11.3%, 8.4% and 5.6% over 2004-09. Together they represented over 25% of the world’s incremental growth. During the same period, the three stockmarkets delivered 145-170% returns, versus the Dow Jones Industrial Average’s (DJIA) 4%. Figure 3

Chindonesia contributed to a quarter of global GDP growth in past five years

Real-GDP growth 16

(%)

Chindonesia¹ World

14

12.4 11.3

12 10

10.4 8.9

9.5

8.7

8.0

8 6

4.9

4.5

5.1

5.2 3.9

4

3.0

2 0 (0.8)

(2) 2004

2005

2006

2007

2008

09CL

10CL

¹ Weighted using nominal US$-denominated GDP. Source: CEIC, Datastream, IMF, CLSA Asia-Pacific Markets

4

[email protected]

19 April 2010

Mr & Mrs Asia


Figure 4

Major outperformance over the past five years

Stockmarket returns versus gold and DJIA

500

MSCI China

MSCI India

Golds comdty

DJIA

MSCI Indo

400 300 200 100 0 Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Source: Bloomberg, CLSA Asia-Pacific Markets

Resilience to financial crises China, India and Indonesia withstood the global slowdown well

Impressively, these economies have shown relative resilience to the recent global financial crisis. Over 2007-09, China, India and Indonesia delivered real-GDP Cagrs of 9.1%, 6.8% and 5.3%, against the global growth rate of 1.1%. Government intervention and stimulus packages aided the expansion, like elsewhere in the world. Figure 5

High growth in 2008 and 2009

Real-GDP Cagr, 2007-09 10

(%)

9.1 8.4

8 6.8

6

5.3

4 2

1.1

0 World

China

India

Indonesia

Chindonesia¹

¹ Weighted using nominal US$-denominated GDP. Source: CEIC, Datastream, IMF, CLSA Asia-Pacific Markets

Domestic demand and infra spend made up for China’s decline in exports

19 April 2010

The market expected the global turmoil to hurt China given its high dependence on exports. However, even as exports declined 18.1% and 5.5% in 2009 for China and India, the two economies still reported healthy growth. The size of China’s stimulus package (15% of GDP) meant that it was one of the few global economies to weather the storm well. In comparison, India’s stimulus measures were modest and mostly focused on direct and indirect tax reduction and increased salaries for government employees, due as per the recommendations of sixth Pay Commission. We should also see India’s 6.2% GDP growth in 2009 in the context of a 23% below-normal rainfall last year, a multi-decade low. In the past, similar severe shortages in rainfall had led the economy into recession.

[email protected]

5

Mr & Mrs Asia


Figure 6

High growth rates despite poor monsoons

India’s GDP growth in relation to monsoons

(%)

25

(%)

Deviation of monsoon from normal

20

12

GDP growth YoY (RHS) 10

15 10

8

5 0

6

(5) (10)

4

(15) (20)

2

(25) 0

(30) FY88

FY90

FY92

FY94

FY96

FY98

FY00

FY02

FY04

FY06

FY08

Source: IMD, CSO, CLSA Asia-Pacific Markets Figure 7

Fiscal stimuli Brazil

Fiscal stimuli (% of GDP) 0.2

Britain

China

1.1

15.0

Investments and other spending Additional long-term measures US$152bn, including investment in housing over 15 years and an extension of "Bolsa Familia" antipoverty programme Infrastructure, schools and housing - US$4bn

Tax cuts

Non-financial bailouts Credit line for exporters and strategic industries

Key financial support

VAT reduction US$18bn

Loan for the auto industry US$3bn; working capital for small businesses - US$14bn

1.1

VAT reforms for companies; lower tax on home sales; increased tax rebates on exports Rebates and credits on investments US$15bn Income and payroll tax - US$21bn

Indirect subsidies for auto and consumer durable industries; lower export tariff on steel

Funding guarantees US$358bn; capital injections - US$53bn; asset purchases US$72bn; nationalisations US$215bn; liquidity support - US$286bn None

Public housing - US$60bn; rural areas - US$15bn; infrastructure US$300bn; areas hit by earthquake - US$130bn

Loan guarantees US$423bn; capital injection - US$53bn Loan guarantees US$520bn; capital injection - US$185bn Lending to non-bank finance companies

0.4

None

1.6

Loan guarantees; fund for bank recapitalisation - US$222bn

2.0

Unsecured, subordinated loans to largest banks Funding guarantees - US$1.5tn; asset purchases - US$700bn (of which bank capital - US$290bn); AIG - US$150bn; conservatorship - US$200bn; term programmes US$900bn; commercial paper and money-market funds - US$2.3tn

1.1

US$4bn, mainly for middle-income earners

France

1.5

Infrastructure, research and support for local authorities

Germany

3.1

Infrastructure - US$23bn; social benefits

India

1.3

Infrastructure and social services (education, health, housing) US$4bn; capital spending by state governments - US$6bn; refinancing of infrastructure lending - US$8bn

Cuts in central excise and custom duties; removal of surcharges from personal income tax

Indonesia

1.6

Infrastructure - US$1.3bn; business subsidies - US$0.5bn

Japan

2.0

Social benefits, reduction in highway tolls and incentives to hire workers

Reduction in personal income tax US$4.7bn; cut in import duties US$1.4bn US$12bn, mainly housing

Russia

1.1

Raised unemployment benefits

Cut in corporate tax US$15bn

USA

5.8

Energy - US$58bn; science US$17bn; infrastructure US$92bn; benefits - US$71bn; education - US$159bn; health US$154bn; housing - US$13bn

US$275bn, of which US$140bn to individuals

Auto industry - US$8bn

Auto aid - US$2bn; loan guarantees to non-financial companies Flow of credit at reasonable rates to exporters, small businesses, commercial-vehicle makers. Small Industries Development Bank of India made an aggregate disbursement of US$750m None

Indirect support to construction industry; pledge to support other struggling industries Auto industry, loans or loan guarantees to companies in strategic industries Loans for auto industry US$21bn

Authority to buy loan portfolio from struggling banks

Impact (% of GDP) 0.2

6.0

2.4

1.3

5.8

Source: www.economist.com, CLSA Asia-Pacific Markets

6

[email protected]

19 April 2010

Mr & Mrs Asia


Domestic economies held up

Figure 8

Figure 9

China’s real GDP

India’s real GDP China real GDP growth GDP growth ex-exports

(% YoY)

20

India real GDP growth GDP growth ex-exports

(% YoY)

14 12

15

10 8

10

6 4

5

2 0

0 80

84

88

92

96

00

04

08

FY80

FY84

FY88

FY92

FY96

FY00

FY04

FY08

Source: CEIC, CLSA Asia-Pacific Markets

Narrowing the gap with global majors Companies in China and India are catching up with global majors

It is interesting to see some other changes sweeping through the markets. In 2001, global outsourcing giant Accenture’s market cap and sales were 5x and 20x that of Infosys. Today, the two companies have the same market cap and Accenture’s revenue is 5.2x that of the Indian player. In terms of profitability, Infosys is within touching distance of Accenture. In an entirely different sector, multinational ABB’s market cap was 25x that of Bharat Heavy Electricals (BHEL) in 2001, so was its revenue. Now, its market cap is 1.8x that of BHEL and its revenue in 2009 was 5.5x. Over the past decade, companies in China and India have scaled up rapidly as they exploited the business opportunities thrown up not only by the domestic market (BHEL) but also globally (Infosys). Figure 10

In a decade, market caps have converged

Accenture and Infosys market-cap differential

6

(x) Market cap of Accenture was 5x that of Infosys at the start of the decade

5 4 3 2 1 0 Aug 01

Jan 05

Oct 06

Jun 08

Mar 10

Figure 11

Figure 12

Accenture and Infosys sales convergence

Accenture and Infosys’ net income

(x)

3,000

118.2

2,500

Revenue of Accenture was 118x that of Infosys in 1998; 5.2x in 2009

Infosys

(US$m)

Accenture

2,000 1,500 1,000 5.2

500 FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

0 FY99

160 140 120 100 80 60 40 20 0

FY98

Infosys plays catchup with Accenture

May 03


19 April 2010

[email protected]

7

Mr & Mrs Asia


Figure 13

BHEL narrows the market-cap gap with ABB

ABB and BHEL market-cap differential

30

(x) Market cap of ABB was 25x that of BHEL at the start of the decade

25 20 15 10 5 0 Apr 01

Nov 03

Feb 05

May 06

Aug 07

Nov 08

Figure 14

Figure 15

ABB and BHEL sales convergence

ABB and BHEL’s net income

Revenue of ABB was 25x that of BHEL in 1996; 5.5x in 2009

25.2

20

BHEL

(US$m)

Mar 10

ABB

3,000 2,000

15

1,000

10

5.5

0

5

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY96

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

(1,000) FY96

0

FY00

25

4,000

(x)

FY99

30

FY98

35

FY97

BHEL has been able to capitalise on the India growth opportunity

Jul 02


Focus shifting from commodities to consumer Dominance in industrial commodities and products is now a given

Over the past five years, the dominance of China and India, particularly the former, both as a producer and consumer of minerals, metals, materials and oil & gas has dramatically increased. As these commodities continued to grab headlines, the focus on the consumer sector has been less significant.

The same is likely to happen to consumer sectors in five to 10 years

We expect consumers in China, India and Indonesia to drive consumption in Asia over the next five to 10 years. During the next five years, these countries will see a net addition of 103m people to the 20-60 years age group. We believe consumption in these countries will grow strongly over the next five to 10 years, led by higher incomes, higher propensity to consume, better risktaking ability, easier availability and access to finance, rising urbanisation and an optimistic outlook. Figure 16

Figure 17

China apparent steel consumption¹

China crude-steel production¹

13CL

12CL

11CL

10CL

09CL

08A

10 07A

20

10

06A

20

05A

30

04A

40

30

03A

40

(%)

02A

50

01A

50

00A

60

99A

(%)

98A

60

93A 94A 95A 96A 97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09CL 10CL 11CL 12CL 13CL

China now accounts for about 50% of the world’s steel consumption

¹ As a percentage of world consumption and production. Source: AIIS, CLSA Asia-Pacific Markets

8

[email protected]

19 April 2010

Mr & Mrs Asia


Figure 18

Chindia’s contribution to world mineral production, 2008

Chindia has also added major capacity in the past 10-15 years

Mineral

Unit

World production

China production

India production

Chindia as % of world

Alumina Copper

k tonnes

60,496

22,748

1,815

40.6

k tonnes

18,619

3,700

1,195

Crude steel

26.3

m tonnes

1,299

498

55.1

42.6

Iron ore

m tonnes

2,145

785

207

46.2

Gold

tonnes

2,385

282

3.75

12.0

Lead

k tonnes

8,558

3,030

124

36.9

Magnesium

k tonnes

11,600

2,188

2,512

40.5

Zinc

k tonnes

11,688

3,913

1,017

42.2


As Figures 19-22 below show, China, India and Indonesia are at different stages of the hypergrowth phase, with China already in the midst of it. China’s growth is likely to remain strong over the next five years. India and Indonesia, in most cases, are at the cusp of starting that stage. They will commence their hypergrowth phase as a larger proportion of the population enters the middle-income group over the next five years. Figures 23-24 show the shift in consumption to the east is well underway. Figure 19

Figure 20

Refrigerator penetration versus disposable income

Camera penetration versus disposable income

Ownership of refridgerator (% of household)

120 100

Thailand

Singapore

Malaysia

Ownership of camera (% of household)

120

Taiwan Korea

HK Japan

100

80

Malaysia

Taiwan Korea

Thailand

80

HK Japan

Singapore

Philippines

60

60

China y = 21.546Ln(x) - 109.42

Philippines

2 R = 0.7631

40 Indonesia India

20

y = 20.925Ln(x) - 110.78

40

2 R = 0.5642

China Indonesia

20 Disposable income per capita (US$)

0 0

5,000

10,000

15,000

20,000

25,000

30,000

Disposable income per capita (US$)

India

0 0

5,000

10,000

15,000

20,000

25,000

30,000

Figure 21

Figure 22

PC penetration versus disposable income

Air-conditioner penetration versus disposable income

Ownership of PC (% of household)

100 80

Korea

70

Taiwan

60 50

China

30

y = 23.818Ln(x) - 153.98

Indonesia India

10 0

China Korea

40

R2 = 0.9472

Thailand Philippines

20

Singapore

70

50 Malaysia


30

Malaysia

20

Thailand Philippines Indonesia India

10 0

0

5,000

10,000

15,000

20,000

Japan HK

Taiwan

80

HK

Singapore

90

60 40

Ownership of air-conditioner (% of household)

100 Japan

90

25,000

30,000

0

5,000

y = 24.167Ln(x) - 161.44 2 R = 0.8195

Disposable income per capita (US$) 10,000

15,000

20,000

25,000

30,000

Source: Euromonitor

19 April 2010

[email protected]

9

Mr & Mrs Asia


Chindonesia leads in incremental private consumption

Figure 23

Figure 24

Private-consumption growth

Consumption delta is moving east

600

Chindonesia

(US$bn increase)

USA

1,500

500

(US$bn increase)

1,000

400

500

300 200

0

100

China, India and Indonesia

(500)

0 (100)

USA and Eurozone

(1,000) 99 00 01 02 03 04 05 06 07 08 09

99 00 01 02 03 04 05 06 07 08 09


Supportive demographics India should be the biggest beneficiary of the demographic dividend

Among developed nations, the USA is well placed

While India is likely to be the biggest beneficiary of the demographic dividend, for China the challenge will be to become richer before it starts growing old. Indonesia is another potential beneficiary in Asia. ‘Over the next decade, the workforce of Indonesia will rise by another 21m people, whereas Japan, Europe and Russia will see further demographic decline,’ says our Indonesia country and research head Nick Cashmore. Figure 25

Figure 26

US demographics, 2009

US demographics, 2015

100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4

Male

15

India is best placed to reap demographic dividend

10

100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4

Female

5

0

5

10

15

Male

15

10

5

Female

0

5

Figure 27

Figure 28

India demographics, 2009

India demographics, 2015

100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4

Male

80

60

40

20

100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4

Female

0

20

40

60

80

Male

80

60

40

20

10

15

Female

0

20

40

60

80

Source: US Census, CLSA Asia-Pacific Markets

10

[email protected]

19 April 2010

Mr & Mrs Asia


In China, demographics is a concern

Figure 29

Figure 30

China demographics, 2009

China demographics, 2015

100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4

Male

80

Indonesia is well placed

60

40

20

100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4

Female

0

20

40

60

Male

80

80

60

40

20

Female

0

20

40

Figure 31

Figure 32

Indonesia demographics, 2009

Indonesia demographics, 2015

100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4

Male

12

8

4

100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4

Female

0

4

8

12

Male

12

8

4

60

80

Female

0

4

8

12


A burgeoning consumer group Youth and inexperience drive consumption, as does urbanisation

Our strategist Russell Napier wrote in his recent Solid Ground report ‘Buy chaos, sell order’: ‘When it comes to economics, youth and inexperience, key drivers of consumption, are often more rewarding than the age and guile that brings conservatism and savings.’ For the purpose of this study, we focus on the middle class because we believe the group will be the biggest driver of Asia’s consumption story. The younger population entering the middle class will not be tied down by the baggage of a socialist past and their propensity to consume will be very different from the middle-aged generation.

The middle class will make up 30% of the population in five years

We estimate the middle class makes up 19% of Asia ex-Japan’s population and this will rise to 30% in five years, or an 11% Cagr. During the same period, the aggregate number of Asians in this social group will increase from 570m presently to 945m. To put it in perspective, this will be nearly three times the population of the USA and nearly as much as India’s total. China will account for two-thirds of those entering the Asia ex-Japan middle class, growing its middle-class members to 600m. Altogether, China, India and Indonesia will represent 90% of the 375m increment, with India’s total reaching 140m. The new entrants, along with the rising incomes of the existing members, will drive consumerism in the three economies.

19 April 2010

[email protected]

11

Mr & Mrs Asia


Figure 33

Growth will be fastest in India, but China will remain dominant

Rise of the Asian middle class

1,000

(m)

900 800 700

Other Asia ex-Japan Indonesia India China

10.7% Cagr

600 500 400 300 200 100 0 2009

2010

2011

2012

2013

2014

Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets

Income and consumer-product penetration The car and the mobile stories are likely to be repeated

It is clear that China and India are emerging as major centres for consumption. In 2009, the mainland became the world’s largest market for cars with sales of 10.3m units. Meanwhile, India also reached annual auto sales of 1.6m cars. The two countries are also the largest mobile markets globally by subscriber numbers. However, in most cases India is about eight to 10 years behind China in terms of penetration, affordability and income gap. As Figures 37-40 show, the correlation between various consumer products and disposable income is very high. Figure 34

China became the world’s largest car market in 2009

Total passenger-vehicle sales (No.) Europe Japan USA Total Australia China India Indonesia Korea Malaysia Singapore Taiwan Thailand Total

1999 16,855,000 5,761,643 16,880,711 39,497,354 774,191 1,496,210 615,527 85,131 1,246,801 286,391 52,378 413,449 246,388 5,216,466

Figure 35

2009 17,525,000 4,808,000 10,430,936 32,763,936 929,366 10,300,182 1,631,777 608,000 1,449,000 529,298 73,005 294,423 520,000 16,335,051

Change 670,000 (953,643) (6,449,775) (6,733,418) 155,175 8,803,972 1,016,250 522,869 202,199 242,907 20,627 (119,026) 273,612 11,118,585

Figure 36

In notebook affordability, India lags China by 8-10 years 16

China notebook afforability

14

India notebook affordability

In air travel, China is already in a hypergrowth phase Per-capita round-trip air travel

10.00

HK

12

Malaysia Thailand

8 6

Brunei

y = 7E-05x

0.9716

2

R = 0.8855 Australia

USA

Japan

Korea

Indo, Phil, Cambodia

0.10

4

Singapore

New Zealand

1.00

10

China

2 2000

2002

2004

2006

2008

2010

2012

2014

Per-capita GDP (US$)

India, other Asian countries

0.01

0 1998

Change (%) 4 (17) (38) (17) 20 588 165 614 16 85 39 (29) 111 213

0

10,000

20,000

30,000

40,000

50,000


12

[email protected]

19 April 2010

Mr & Mrs Asia


Figure 37

Figure 38

Asia: Correlation - disposable income and penetration

China: Correlation - disposable income and penetration

Microwave PC Cable TV Dishwasher Cassette/radio Fridge Telephone Video camera Cooker Internet-enabled PC Hi-Fi Mobile phone Satellite TV Motorcycle Vacumm cleaner Air-conditioner Black/white TV Camera Passenger car DVD player Colour TV Tumble drier Shower Bicycle CD player Videotape recorder Washing machine Video game console

(%) 0

20

40

60

80

Broadband-enabled PC Passenger car Internet Enabled Computer Videotape recorder Shower Dishwasher Tumble drier Vacumm cleaner PC Cooker Microwave Cable TV Fridge Cassette/radio Washing machine Air-conditioner Hi-Fi Camera Video camera Black/white TV Motorcycle DVD player Mobile phone Freezer Video game console Telephone Colour TV Bicycle CD player

100

(%) 0

20

40

60

80

100

Figure 39

Figure 40

India: Correlation - disposable income and penetration

Indo: Correlation - disposable income and penetration

PC Internet-enabled PC Air-conditioner DVD player Broadband-enabled PC Mobile phone Dishwasher Hi-Fi Freezer Passenger car Camera Telephone Shower Microwave Colour TV Motorcycle Cassette/radio Washing machine Cooker Video game console Vacumm cleaner Fridge Satellite TV Tumble drier Cable TV Video camera Bicycle Videotape recorder Black/white TV CD player

(%) 0

20

40

60

80

DVD player Cable TV Dishwasher PC Passenger car Vacumm cleaner Camera Air-conditioner Shower Tumble drier Mobile phone Telephone Microwave Internet-enabled PC Freezer Fridge Cooker Hi-Fi Broadband-enabled PC Washing machine Bicycle Black/white TV Video camera Cassette/radio Motorcycle Colour TV CD player Video game console Satellite TV Videotape recorder

100

(%) 0

20

40

60

80

100

Source: Euromonitor

Access to finance will be a key enabler

19 April 2010

A key driver of consumerism will be access and availability of finance. Consumer-credit penetration in these countries is very low, but it will grow steadily as a larger part of the population comes into the bankable category, banks and other financial intermediaries spread their network and become able to assess and price risk properly and the younger population’s propensity to take credit increases. China will face a challenge as its banking system changes from a command and control-driven regime to a more market-driven one.

[email protected]

13

Mr & Mrs Asia


Figure 41

Figure 42

Credit-card penetration

Population catered by each bank branch

USA Japan HK Korea Taiwan Sing UK Aus Brazil Malay Thai China Phil Indo India

Indo

238 237

15.9

India

172 153

15.2

Thai

131

13.3

Malay

108

12.4

Phil

71 52

11.3

Japan

39

9.4

Korea

18

6.8

HK

12 6

5.3

Sing

3

(%)

3

0

24.4

China

194

50

100

150

200

4.3

Taiwan

250

('000)

3.8

0

5

10

15

20

25

30


An upbeat middle class The three countries’ middle class remained optimistic amid slowdown

Optimism of China, India and Indonesia’s middle-income population was evident in our two Mr & Mrs Asia studies (2007 and 2009). Their positive attitude was unsurprising in 2007, as the survey took place amid a protracted economic boom and soaring stockmarkets when unemployment was low and incomes were rising. What took us by surprise was that in 2009, when seven of the 11 countries where we conducted our survey reported negative GDP growth, a significant number of our respondents were upbeat about their future and employment prospects and wanted to buy property and cars. As our head of thematic research Amar Gill then wrote, ‘On balance, Mr & Mrs Asia are positive about the future.’ Figure 43

Desire to buy property not dented by the economic slowdown

Mr & Mrs Asia, 2009: Share of respondents planning to buy property in next 12M

Indonesia

34

HK

31

Malaysia

28

India

27

Philippines

22

Thailand

19

Singapore

18

Taiwan

16

Korea

14

China

14

Japan

(% of respondents)

6

0

5

10

15

20

25

30

35


Discretionary spending kicks in at US$3,000 percapita disposable income

14

We believe discretionary spending kicks in at per-capita disposable income of about US$3,000. Our analysis also shows demand growth in most sectors is likely to be exponential, the classic hockey-stick model, as a rising proportion of the population reaches middle-income levels. The best example is car sales. While China has become the largest car market in the world in 2009, its total vehicle population is just 62m and penetration level remains low at 5% (1% in India and 3% in Indonesia). This compares to 80% in the USA. Thus, it is easy to see why growth in car sales and most other sectors can be high for many years to come. The sector that has probably surpassed the hypergrowth phase is telecoms, which we believe is seeing stable growth.

[email protected]

19 April 2010

Mr & Mrs Asia


Figure 44

Optimism evident in employment prospects

Mr & Mrs Asia, 2009: Expectations for employment prospects over next 12M (%)

Improve

Remain same

Indonesia

Worsen

1 1

98

India

65

Philippines

30

51

Singapore

24

47

China

43

11

HK 5

22

43 59

8

Thailand

19

54

14

Korea

18

41

24

Japan

24

39

40

Taiwan

25

29

43

Malaysia

30

26

66

14

0

5

81

20

40

60

80

100

Figure 45

Even in China, ownership levels continued to see strong growth

GDP per capita versus vehicle density Light-vehicle ownership (units/'000 population)

800

y = 0.0154x + 30.001 2 R = 0.9235

700 New Zealand

Australia

600 Japan

500 400 Malaysia

300

Taiwan

India Pakistan Vietnam

200

Korea

Singapore

Thailand

Hong Kong

Philippines Indonesia

100

Nominal GDP per capita (US$)

China

0 0

10,000

20,000

30,000

40,000

50,000


The auto story will get repeated in other sectors

Many consumer sectors, from property to consumer electronics to fastmoving consumer goods (FMCG), will repeat the success of the car and the telecoms story. Whenever a paradigm shift in technology takes place, developing countries in Asia are likely to catch up faster as they leapfrog one generation of technology and go straight into adapting the latest, as has happened in the case of mobile telephony, at an early stage. With 726m subscribers, China is the largest mobile-phone subscriber market in the world today and India, with 519m subscribers, is the second-largest.

Who will be the winners?

While Asia’s consumption growth story is not in doubt, the winners are not always clear. Certainly, not every company will be a winner, even though most sectors are likely to witness robust growth. As we highlighted in our previous

19 April 2010

[email protected]

15

Mr & Mrs Asia


Chindia reports, The shape of things to come in 2005 and A new economic world order by 2020 in 2006, many winners will come from other countries. A case in point is the consumer-durable market in India. In this intensely competitive industry, where margins are very narrow, Korean players LG and Samsung have been able to carve out a niche with attractive price points, strong brand building and constant product innovation. LG, which expects a turnover of Rs170bn in 2010, targets to have 12% of its global sales from India by 2015. Meanwhile, Nokia’s sales from India are about Rs225bn and it has emerged as the largest FMCG company in the country. Figure 46

Mobile penetration

Technology and low costs drive growth

Mobile penetration (%)

100

China

India

Indonesia

USA

80 60 40 20 GDP per capita (US$) 0 0

10,000

20,000

30,000

40,000

50,000

Source: Euromonitor, CLSA Asia-Pacific Markets Figure 47

Figure 48

Cable-TV penetration versus disposable income

Washing-machine penetration versus disposable income

Ownership of cable TV (% of household)

100

HK

100

80 70

Korea

60

Taiwan

50

China

40

Philippines

30 20 10

Ownership of washing machine (% of household)

120

90

Japan

Malaysia

80

40

2

Malaysia

Indonesia

0

5,000

y = 21.656Ln(x) - 113.66 R2 = 0.7998

Philippines

R = 0.5138

0

Singapore

China

Thailand

India

Japan HK

60

Singapore

y = 0.002x + 23.74

Thailand

Korea Taiwan

Indonesia

20

India



0 10,000

15,000

20,000

25,000

30,000

0

5,000

10,000

15,000

20,000

25,000

30,000

Source: Euromonitor

Middle class’ consumption spending will rise to US$5.1tn in five years

16

This report uses Euromonitor’s disposable-income data, adjusted for grey income. Our sector research heads have looked at their respective areas to assess the potential, risks and challenges to the growth story and identify the stocks they believe will be winners. We estimate Asian middle class’ consumption spending will rise from US$2.9tn to US$5.1tn over the next five years. We assume modest currency appreciation of 20-22% for the renminbi, the rupee and the rupiah over this period. Of the US$2.15tn increase, China is likely to account for 69%, India 16% and Indonesia 4%. While China will see the largest increase in absolute terms, India’s middle-class spending will rise faster at an 18% Cagr (versus 15% for China).

[email protected]

19 April 2010

Mr & Mrs Asia


Figure 49

Increase in disposable income will drive consumption

Per-capita disposable-income Cagr with and without currency impact 14

(%)

12 10 8 6 4 2 0 China

India

Indonesia


Growth rates in India will rise, but China will lead in aggregate spend

In general, we expect higher growth rates in consumer spend in India than China. However, the latter will dominate in sheer absolute numbers. Looking at the different penetration versus disposable income charts, it is evident that China and Indonesia are ahead of India in the J-curve. While China is likely to have a few more years of robust growth, India is at the cusp of the hypergrowth phase and should enjoy an extended period of stronger growth over the next five to 10 years vis-a-vis China. Autos, financial services, consumers and telecoms are sectors where India is likely to experience higher growth rates. In consumer, technology, air travel and real estate, China will continue to outgrow India.

Top picks

Below we summarise the views of our sector heads and their top picks. Notwithstanding cyclical ups and downs, we attempt to identify the best players in each sector that are likely to capitalise from the emerging opportunities. As the top picks we recommend here are based on a five-year horizon, there may be instances where they are inconsistent with our nearterm recommendations, especially given the market run-ups over the past 12 months. Hence, in some cases present valuations may appear high. These may not be QARP (quality at reasonable price) stocks, but QAAP (quality at any price) stocks.

Autos: Hyundai, Maruti, SAIC, Dongfeng

In autos, Geoff Boyd believes by 2020, China will have a vehicle population of 322m, up at a 16.6% Cagr, and about 35-44m in India (versus 14.8m now). Over the next five to seven years, China should remain the more attractive market. His top picks in the region are Hyundai Mobis, Maruti, SAIC A shares and Dongfeng H shares.

Banks: Bank Central Asia, HDFC Bank, Bank of China

One sector that has shown strong performance over the past decade is banking and financial services, particularly in India and Indonesia. Faster economic growth will drive credit penetration, so will favourable demographics, easier access to credit, improved ability of banks to assess and price risk and increasing choices of products and services for the consumer. Daniel Tabbush estimates consumer credit can grow 15-23% in China, India and Indonesia over the next five to 10 years, with Indian banks leading in the profitability stakes. Bank Central Asia, HDFC Bank and Bank of China are his top picks in the region.

19 April 2010

[email protected]

17


Mr & Mrs Asia

Consumers: Sands China, United Spirits, Baidu

Aaron Fischer expects discretionary spending to increase at a Cagr of 18% in India, 15% in China and 13% in Indonesia. While he likes all three markets, he believes India is the most compelling given that there is a greater appetite to spend as income increases. Sands China, United Spirits and Baidu are his top picks in the region.

Education: Megastudy

Nimish Joshi expects the education sector to be a big opportunity in both China and India. Our Mr & Mrs Asia studies in 2007 and 2009 highlighted how education remains one of the most important items in family budget, in good and bad times. Korea’s Megastudy is our top pick given attractive valuations and that the company has a China strategy. Other interesting companies in the space are Educomp and New Oriental.

Property: China Resources Land, Unitech

Nicole Wong finds striking similarities between the property sector in Hong Kong in late 1960s/early 1970s and what is happening in China, India and Indonesia now. Like Amar, she believes average incomes hide a lot and do not reflect the true purchasing capacity of the middle-income families in these countries. Low ownership and easier access to mortgages will drive strong growth in the property markets in India. China Resources Land and Unitech are her top picks in the region.

Telecoms/internet: China Mobile, Bharti, Baidu

Elinor Leung believes China, India and Indonesia remain the three countries with growth prospects in mobile telephony, although they are also approaching middle age and therefore, the hypergrowth phase is likely over. With increased competition and large investments in next generation of technology, business is certainly challenging in the near term. In the longer run, she is bullish on Bharti and China Mobile. Meanwhile, Elinor is very excited about the next big thing in these countries - the internet. She believes China has just entered the hypergrowth phase in this area and Baidu is her top pick.

Technology: Acer, Canon, Lenovo, Samsung Electronics, MediaTek

In technology, Bhavtosh Vajpayee believes rising affordability and increasing penetration will result in secular growth, and consumer demand will gain share over enterprise spending. He also expects China to see hypergrowth in the next five years, while India will enter that phase only from 2015, when its affordability levels should reach where China was in 2008. Acer, Lenovo, Canon, Samsung Electronics and MediaTek are Bhavtosh’s top picks to play this opportunity.

Transport: Air China, Cathay Pacific

Robert Bruce forecasts the number of air passengers in 17 countries in Asia to reach 737m by 2014, or a Cagr of 8.5%. China will lead the boom and become the world’s largest source of outbound passengers at 95m, representing a tripling over the next 10 years. Robert’s growth expectations for India over the next five years is a modest 8.9%, which will take the number of passengers to 67m, nearly twice the present number. Air China is his top sector pick. Cathay Pacific is Aaron’s next best pick to play the growth in outbound air-passenger traffic.

18

[email protected]

19 April 2010

Mr & Mrs Asia

Section 2: Rise of Asia’s middle class

Amar Gill, CFA [email protected] (65) 65122337

Rise of Asia’s middle class Beginning with Christopher Wood’s Asia’s Billion Boomers report in 2002, we have been highlighting the power of the region’s long-term domestic-demand story for nearly a decade. Our groundbreaking works, including the two Mr & Mrs Asia surveys (2007 and 2009) on the middle class, support our view that Asian countries will increasingly dominate global consumption. We estimate that the middle class, defined as those with discretionary spending power, makes up 19% of Asia ex-Japan’s population. This is set to rise to 30% in the next five years, growing nearly 11% per annum. A large segment in China getting past the threshold income - with per-capita incomes in China, India and Indonesia in US-dollar terms rising 8-12% - helped by likely currency appreciation, will drive the increase.

GDP per capita a misleading indicator for spending power

GDP per capita, often used as an indicator of spending power, is misleading, as barely two-thirds of national income goes to households. The skew in distribution also results in the average household getting much less than percapita estimates. However, official data exclude grey income from the parallel economy. This could be 30% or more of GDP in developing Asia. The buying power of the middle class is also underestimated if purely on nominal exchange rates without adjusting for local currencies’ buying power.

Including grey economy, middle class in Asia exJapan estimated at 570m

We take these factors into account and focus on median disposable income adjusted for the grey economy. Discretionary spending appears to kick in at around US$3,000 per capita, equivalent to US$10,000 per household with three or more persons. Currently Asia ex-Japan has some 570m people, 19% of the overall population, earning this level of income or higher. Forces in place that will push up the middle-class numbers include: economic growth; a rising share of GDP going to households as labour growth slows, a factor that will pull up wages; the hordes just below who will cross into the threshold of middle-class income; and appreciating currencies to lift the buying power of Asian consumers. Figure 50

China at US$1,900 median income will have large increase in segment with discretionary spending power

Median-income levels and % of population with discretionary spending power

(% of population) Thailand

Malaysia

China Indonesia

India and Indonesia at lower income level but percentage growth in the middle class will be larger

Philippines

Korea

India

0

2,000

4,000

6,000

8,000

Taiwan

10,000

Singapore

12,000

Hong Kong

14,000 16,000 Median income (US$)


An 11% Cagr set to take the region’s middle class to 945m in five years

19 April 2010

These numbers are necessarily all approximations but our analysis implies compounded growth of near 11% pushing some 375m Asians into this income segment over the coming five years, taking to 945m those with discretionary spending power. China is likely to contribute to two-thirds and China, India and Indonesia together represent more than 90% of those entering the Asia ex-Japan middle class in this period.

[email protected]

19

Mr & Mrs Asia


Figure 51

Estimated to rise by US$2.15tn over the next five years, of which over half will come from existing middle-class families, nearly 20% from new entrants into middle-class bracket and about 1/4 from currency appreciation

Growth in Asia ex-Japan discretionary spending, 2009-14 6,000

(US$bn)

5,000

557 387

4,000 1,206

3,000 5,092

2,000 2,941

1,000 0 Est 2009 discretionary spending

Spending growth Spending by new by current middle entrants to class middle class

Currency impact on buying power

Projected 2014 discretionary spending


Discretionary spending set to grow faster than middle-class size

Discretionary spending power will rise with higher incomes for the existing middle class, new entrants into this income threshold and the effect of appreciating currencies on buying power. We estimate discretionary spending in the region to rise nearly 12% per annum. It should almost double over five years in China while India’s discretionary spend is set to rise 126% on a smaller base.

China is at 8%; Indonesia at 5%; India at 2% of US GDP per capita

These estimates, implicitly assuming an upswing in Asia with currency appreciation, are subject to cyclical hiccups. Quite certainly, the growth will not be in a straight line. However, the fast-developing Asian economies have the building blocks in place for structural growth, namely education investment, infrastructure, property rights, liberalisation of the economies, high savings and investment, urbanisation, the shift from agriculture to manufacturing, etc. China, Indonesia and India’s GDP per capita are just 8%, 5% and 2% of US income levels. As average incomes rise, the expanding middle class will be an overarching theme for investing in Asia.

Estimating disposable incomes Household disposable income is just under twothirds of GDP for Asia

Disposable income is defined as household income less taxes. To the extent that corporations are sizable and retain a large amount of profits, average household income could be significantly lower than GDP per capita. A further adjustment for available income to households is tax rates. We use Euromonitor’s estimates of disposable income for this report. On average, disposable income is about 64% of GDP per capita for the Asian countries that we cover, excluding Japan. Disposable income is only around 60% of GDP per capita for China, Singapore, Korea and Thailand. In absolute terms, the difference is striking in Singapore where GDP per capita for 2009 is US$36,902 but disposable income per capita is just US$22,290. While Singapore’s GDP per capita is higher than that of Hong Kong, its average disposable income is lower.

China’s disposable income 58% of its GDP per capita

20

China’s 2009 disposable income of US$2,136 is 58% of its US$3,697 GDP per capita, as big companies retain a large share of the economic pie. For India, disposable income at US$836 is 19% lower than GDP per capita, while Indonesia’s disposable income of US$1,553 is two-thirds of its GDP per head.

[email protected]

19 April 2010

Mr & Mrs Asia


Figure 52

Singapore, Korea, China: per-capita disposable income lower than GDP

GDP and disposable income per capita, 2009 Singapore Hong Kong Korea Taiwan Malaysia Thailand GDP per capita

China

Disposable income per capita

Indonesia Philippines

(US$)

India 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Source: Euromonitor, CLSA Asia-Pacific Markets

Grey income Including grey economy, emerging economies in Asia at least 30% larger

Official figures, however, do not capture the grey economy. Black can be viewed as a shade of grey. That is, crime and bribery are only part of undeclared income. Other aspects of the grey economy not captured in national accounts include income of street peddlers, unofficial contract staff, prostitutes and the like, who do not fill tax returns, as well as doctors who underdeclare their income, policemen on the take and politicians with bank accounts in Switzerland. The grey economy in developing Asia is huge. Recent reports estimate that in Afghanistan, bribery alone makes up 23% of GDP while reports indicate that in 2006 Indians have US$1.5tn (1.5x its GDP then) in Swiss bank accounts.

No official estimates on the size of the grey economy

Clearly, there are no official estimates on how large the grey economy is. There is no tax adjustment for this additional portion of incomes, thus relative to disposable incomes (after tax) it is likely to be a significant addition to actual incomes and spending power in these countries. If the grey economy is around 20% of GDP in China, then it would push up disposable incomes to 30% above the official data. We estimate the grey economy to be around 30% of GDP for India and Indonesia, implying around 35% higher disposable incomes. We put it at around 20% of disposable income in the Philippines, Malaysia and Thailand. Conservatively, we take it as immaterial in Singapore, Hong Kong, Korea and Taiwan - although even in corruption-free Singapore, the oldest profession is clearly thriving and is one sector importing talent from around the region.

Who’s got spending power? Income skew results in median being lower than mean

19 April 2010

The happy mean can hide an unhappy median. Mean income, based on total income divided by total population, does not take into account the skew in incomes. This can be severe in developing countries. While sounding paradoxical, the average person’s income is usually not the average income. Most often the average family income, ie, the median income, is quite a bit lower than the mean. However, with the top quintile of households taking in about half of total income in most countries, there is a large group with spending power well above the average.

[email protected]

21

Mr & Mrs Asia


We use statistics from the World Bank on the dispersion of incomes. In China, the top 20% get 52% of total household income. In India and Indonesia, around 45% of total household income goes to the top 20%. The lowest quintile for family income accounts for just 4% of total household income in China and 8% in India and Indonesia. Figure 53

Top 20% of households take about 50% of income in most places

Distribution of income in Asian economies (%) China Hong Kong India

Gini coefficient 46.9 43.4 36.8

Lowest 20% 4.3 5.3 8.1

Fourth 20% 8.5 9.4 11.3

Third 20% 13.7 13.9 14.9

Second 20% 21.7 20.7 20.4

Highest 20% 51.9 50.7 45.3

Indonesia Korea Malaysia Philippines Singapore Thailand

34.3 31.6 49.2 44.5 42.5 42.0

8.4 7.9 4.4 5.4 5.0 6.3

11.9 13.6 8.1 9.1 9.4 9.9

15.4 18.0 12.9 13.6 14.6 14.0

21.0 23.1 20.3 21.3 22.0 20.8

43.3 37.5 54.3 50.6 49.0 49.0

Source: CLSA Asia-Pacific Markets, World Bank

The table below makes various adjustments to income. It gives the official GDP per capita for 2009, shows the corresponding disposable income and adjusts up for our ballpark estimates of the grey economy. From this, we estimate median income using the World Bank data on income distribution. What a dollar buys in different markets varies quite significantly

The last column adjusts income levels for purchasing-power parity. Generally, national accounts of each country are converted into dollars at market exchange rates for comparison. But what a dollar buys obviously varies quite significantly. An annual income of US$10,000 is not only very different in terms of buying power in the USA and Asia. Converted into local currency it would also provide quite different standard of living in say Hong Kong, Singapore or Korea compared to China, India or Indonesia. Figure 54

GDP per capita overestimates median income

Per-capita GDP, disposable income adjusted for grey economy and PPP (2009) (US$)

GDP per capita

China HK India Indonesia

3,697 29,912 1,035 2,333

Disposable income per capita 2,136 25,551 836 1,554

Korea Malaysia Philippines Singapore Taiwan Thailand

16,937 6,595 1,721 36,902 16,059 3,983

10,711 4,287 1,328 22,290 10,861 2,384

Disposable Median disposable Median disposable income adjusted income adjusted income adjusted for grey economy for grey for PPP 2,777 1,883 2,730 25,551 17,403 18,712 1,128 832 1,364 2,098 1,599 2,579 10,711 5,145 1,593 22,290 10,861 2,861

9,447 3,252 1,072 15,946 9,579 1,983

10,050 4,394 1,730 13,747 13,122 2,478

Source: CLSA Asia-Pacific Markets, Euromonitor, World Bank

For current spending power of middle class, we ignore PPP adjustments

22

Our interest is in the spending of the middle-class on discretionary items. In most countries, these items are not very differently priced across countries, ie, fridge, LCD television, notebook computer, iPod, and a car will have a fairly similar price in various markets based on current exchange rates. There might be some differences locally. For example, if a television is made in Malaysia and exported to the region, it is likely to cost less at home. Internationally traded products that might be cheaper in given markets where they are manufactured will differ from country to country. The bulk of the difference in PPP, however, comes from locally produced items rather than [email protected]

19 April 2010

Mr & Mrs Asia


internationally tradable middle-class goods. We, thus, focus on median disposable income without PPP adjustments. (If we adjusted for PPP, the US$stated incomes and size of the middle class would be much larger as most of the markets we cover have undervalued currencies.) Need to multiply percapita income by 3-5x to get household income

Regionally, we find that car ownership takes off in Thailand when GDP per capita is US$4,000 and mean disposable income is just below US$3,000 (while median income is only about US$2,000). Mean incomes of about US$3,000 appears to be about the level where the ability to spend on discretionary items kicks in, as car ownership reflects. This is not a very high figure for annual income, but bear in mind the distinction between per-capita income and household income: per-capita estimates divide by the whole population including children and elderly dependents. Average household income is higher than per-capita income by a factor representing the average household size, which is between three and five in most of Asia. For Thailand, at the income level where car ownership starts to shoot up, the grey-adjusted mean income is about US$3,000, which translates to family or household income of close to US$12,000 per annum. That is certainly a level of income where households can afford to spend on discretionary items. Figure 55

Car ownership takes off in Thailand at disposable income near US$3,000 which translates to around US$10,000 household income

Car ownership and disposable income per capita

800

y = 0.0249x + 35.063

Light-vehicle ownership (units/'000 population)

2

R = 0.8803

700 New Zealand

600

Australia Japan

500 400

Korea

Malaysia India

300

Taiwan

200

Thailand

Hong Kong

Philippines Indonesia

100


China

0 0

5,000

Singapore

10,000

15,000

20,000

25,000

30,000

Source: Ashwin Chotai, Euromonitor, CLSA Asia-Pacific Markets Figure 56

Just over 60% of the region’s middle class is in China, and 10% is in India

Composition of the middle class in Asia ex-Japan

Singapore 1%

Thailand 3%

Taiwan 4%

Philippines 1% Malaysia 3% Korea 9% Indonesia 5%

India 10%

China 63%

Hong Kong 1% Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets

19 April 2010

[email protected]

23

Mr & Mrs Asia


Households in the bracket is about one-fourth of the figure for population with spending power

We use US$3,000 as the level of individual income where discretionary spending of Asia ex-Japan’s middle class kicks in. An estimated 570m in the region are at this level of income or higher in 2009, or almost one-fifth of the population. Of these, just over 60% or about 360m live in China. Close to 60m, or approximately 5% of India’s population, make up the next largest segment of the middle class by this definition. India has more people with some element of discretionary spending power than the entire 48m Korean population. We estimate some 27m or 12% of Indonesians also have discretionary spending power. (Note the number of households in the middle class is around a quarter of the population estimate, given average households of around four persons.)

The big shift Drivers of middleclass growth

Economic growth is obviously a key factor determining how fast the middle class grows. Other determinants include changes in the share of total GDP going to households; how many people are just below the level of income where discretionary spending kicks in; and changes in buying power of consumers resulting from currency movements. Figure 57

Currency appreciation will help lift disposable income in dollar terms

Projected five-year Cagr in median disposable income

China India Indonesia Philippines Thailand Taiwan Malaysia Korea Singapore (%)

Hong Kong 0

2

4

6

8

10

12

14


China will see the biggest absolute increase in the middle class in 2010-15

These factors are all working in favour of China, which will continue to have the largest number of people joining the middle class over the coming years. China’s GDP is likely to keep growing at around 9% per annum over the medium term, as it continues to industrialise at a fairly rapid rate while some 55% of the population still lives in rural areas and works on the farms. As growth in China’s total labour force slows, however (the result of its one-child policy since the 1970s), factories in the coastal regions will have to offer higher salaries to attract rural workers from further inland. Thus, households’ share of GDP, at around 60%, will rise. Conservatively, we expect the share of GDP to households to rise by 1.25ppts over the next five years, adding around 0.3ppts per annum to disposable-income growth. The renminbi is also set to appreciate, which will strengthen the buying power of the Chinese consumer. In our calculations, we assume Beijing would allow the currency to appreciate to reduce its PPP undervaluation by half over the next five years. This would lead to a 22% rise in the renminbi to Rmb5.55/US$ by 2014, adding about 4% per annum to the buying power of the Chinese. Our number is conservative against most street estimates.

24

[email protected]

19 April 2010

Mr & Mrs Asia


Figure 58

Median income for China to rise from US$1,900 to US$2,700, pushing 17% of its population into the middle class in just five years

China: Large expansion of the middle class as median income rises

(% of population)

60

Increase in median income (2009-14)

50

Population above US$3,000 income (area bottom right below line)

40 30 20

Per-capita income (US$)

10 0 0

1,000

2,000

3,000

4,000

5,000

6,000


Each year 3.5% of Chinese cross the discretionaryspending threshold

China has a huge population and a large segment just under the level of income where discretionary spending kicks in. For 2009, median income adjusted for the grey economy is almost US$1,900. We estimate some 27% of the population are at the US$3,000 level of income or higher. With renminbi appreciation, per-capita disposable income in dollar terms should rise by 12% per annum (allowing for some reduction in the relative size of the grey economy). Median income should rise to US$2,700 by 2014 when about 44% of the population earns US$3,000 income or more. China’s middle class, growing at 11% per annum, is equivalent to 3.5% of the population crossing the discretionary-spending threshold each year. This would add almost 250m people, allowing its middle class to expand to just over 600m by 2014.

Discretionary-spending power for additional 80m in India in next five years

India will have the next largest increase in middle-class numbers of around 80m, taking it to almost 140m by 2014. In percentage terms, its growth is set to be the highest. Some 5% of its population currently have middle-class spending power, earning more than US$3,000. This should more than double to 11% in five years: disposable income rising approximately 10% per annum should take 1.2% of its population across the income threshold each year. Figure 59

Middle class to rise from 19% of Asian population in 2009 to 30% by 2014

Percentage of population in the middle class Malaysia China Thailand Asia ex-Japan 2014 Indonesia

2009

Philippines India

(%) 0

10

20

30

40

50

60

70


19 April 2010

[email protected]

25

Mr & Mrs Asia


Currently, India’s middle class is around one-sixth the size of China’s. On this small base, we estimate by 2014, the Indian middle class will rise by 135% (an approximately 19% Cagr). India should, thus, represent around one-fifth of those entering the middle class in the region. China and India will account for about 85% of the increase in the middle class in Asia ex-Japan over the coming five years. Indonesia’s middle class is set to nearly double to 54m. The region we term Chindonesia will account for more than 90% of the region’s middle-class growth. Figure 60

Actual increase unlikely to be in a straight line

Asian middle class

1,000

(m)

China

India

Indonesia

Other Asia ex-Japan

900 10.7% Cagr

800 700 600 500 400 300 200 100 0 2009

2010

2011

2012

2013

2014


Growth is subject to economic cycle

In total, we estimate 375m people in Asia ex-Japan to join the middle-class spending bracket over the coming five years, representing an increase of 66% or a Cagr of 11%. From an estimated 570m at end-2009, the region’s middle class should reach 945m by 2014. In reality, the growth, subject to the economic cycle, is unlikely to be in a straight line.

We expect the renminbi to appreciate to Rmb5.55/US$ by 2014

We have also factored in modest currency appreciation. As indicated above, we estimate the renminbi to appreciate by 22% over the next five years. We assume the rupee and rupiah to also appreciate by about 20%, representing about a third of their current undervaluation on our PPP estimates. Figure 61

Currency appreciation to add 4ppts per annum to per-capita income growth and pushes up growth of middle class by a third

Per-capita disposable income with and without currency impact

14

(%)

12 10 8 6 4 2 0 China

India

Indonesia


26

[email protected]

19 April 2010

Mr & Mrs Asia


Currency effect to be a bigger factor in boosting Asia’s buying power

Without the currency effect, we calculate Asia’s middle class will reach 825m in five years, or up 8% per annum. The currency effect adds one-third to our middle-class growth estimates, boosting the size of this group by 15% for 2014. It would also strengthen the dollar buying power of existing middleclass members. Appreciating currencies will be an added factor, with the renminbi set to resume its surging trend and other currencies being allowed to appreciate more freely as well.

Discretionary-spending boom Three key drivers of discretionaryspending growth

The burgeoning of the middle class will lead to a massive increase in discretionary-spending power for Asia. The spending surge will be a function of (1) those currently in the middle class having rising incomes and thus spending more (2) spending of those that enter into the middle class, and (3) buying power of both groups lifted by currency appreciation. We estimate the existing middle class will increase their spending by a Cagr of around 9.5% in real terms. The size of the middle class is projected to increase by 66%, but the income and spending power of new entrants into this income threshold is much lower compared to the existing middle class. Much of the expenditure of the new entrants will still be on basic goods; we assume only half their spending would be discretionary. Hence on our calculation the entrants to the middle class would only push discretionary spending up by 16% over five years. This should help push discretionary spending for the region up 73% over the next five years, or a Cagr of 11.6%. Figure 62

Indonesia, India and China lead growth in the size of middle class and in discretionary spending within the region

Middle-class population and spending Cagr, 2009-2014CL

India China Indonesia Asia ex-Japan Philippines Thailand Malaysia Taiwan

Growth in middle-class population

Korea

Growth in discretionary-spending power

Singapore

(%)

Hong Kong 0

5

10

15

20


Chindonesia to account for around 85% of increase in spending power of the region

On these estimates, consumption spending of the middle class will rise from US$2.9tn to US$5.1tn over the next five years. Of the US$2.15tn increase, China should account for 69%, India 16% and Indonesia 4%. Together, they will account for around 85% of the increment. China in absolute terms will see the largest increase in discretionary spending. However, in growth terms, India’s middle-class spending will rise faster. We estimate its middle class will more than double in size over the next five years, boosting discretionary spending by 126% (18% Cagr), compared to 99% for China (15% Cagr). We forecast 82% growth in Indonesia’s discretionary spending, or almost a 13% Cagr, slightly higher than the 12% Cagr we expect for the overall region.

19 April 2010

[email protected]

27

Mr & Mrs Asia


Figure 63

We estimate discretionary spending in India to rise 126% in next five years

India’s middle-class spending, 2009-14 450

(US$bn)

400

60

350 96

300 250 New entrants into the bracket to contribute 42% of the increase

76

200

417

150 100

185

50 0 Est 2009 discretionary spending

Spending growth Spending by new Currency impact by current middle entrants to middle on buying power class class

Projected 2014 discretionary spending


Consumption spending, particularly on discretionary items, is set for a takeoff in Asia, driven by the burgeoning middle class. The bulk of this will be in the China, India and Indonesia. Around two-thirds will be in China, but India is set to see the fastest discretionary-spending growth in the region. Indonesia’s discretionary spending is a fraction of China and India’s, but in dollar terms its spending growth should surpass most other countries in Asia. This underscores the need to pay greater attention to these three large emerging Asian economies when examining discretionary spending regionally.

28

[email protected]

19 April 2010

Mr & Mrs Asia

Sector profiles Autos - In high gear ......................................................................... 30

Banks - Lend me more...................................................................... 40

Consumer - Richer, younger and spending ....................................... 58

Education - Top priority at all times ................................................. 85

Property - Room to grow .................................................................. 93

Technology - Decade of the consumer ............................................ 104

Telecoms - Getting crowded ........................................................... 114

Transport - On the move ................................................................ 123

All prices quoted herein are as at close of business 12 April 2010, unless otherwise stated.

19 April 2010

[email protected]

29

Mr & Mrs Asia

Autos

Autos - In high gear

Geoff Boyd

In 2009, China became the world’s largest car market, dethroning the USA. As consumer aspirations and incomes rise, the large Asian countries are becoming the growth engines of the global auto industry. We estimate that China’s hypergrowth phase is likely to continue for the next five years and that is when India will enter into a hyper-growth phase, based on GDP/capita versus car penetration analysis.


Taewoon Kim (82) 23978439

Top picks

Determining the hyper-growth timeframe

Astra Int’l Market cap Price

ASII IJ US$20,039m Rp44,550

Hyundai Mobis Market cap Price

012330 KS US$13,370m 153,000 won

Maruti Suzuki Market cap Price

MSIL IB US$8,979m Rs1,372.0

Nissan Motor Market cap Price

7201 JP US$39,588m ¥813

SAIC Market cap Price

600104 CH US$19,312m Rmb20.22

China had a 28.8% Cagr passenger car sales 200209, versus India’s 11.9%

It is apparent that India and Indonesia’s auto markets should continue to expand alongside continued economic growth, based on low penetration rates. However, our goal is to focus on the question of if and when we might see an acceleration of the growth rate (ie, a consistent 20-30% Cagr). Any acceleration of the auto demand curve is likely to surprise investors, just as it did with China in 2009, and of course, surprises drive stocks. China’s steeper demand curve is not shocking when put into the context of Japan and Korea before it, as Figure 65 details. However, 2009 car sales nearly doubled most projections from 2005, so China’s timeframe for acceleration appears underestimated (likewise, a 1995 study by the International Energy Agency also appears to have estimated only half the overall auto population for both India and China in 2010, although they were reasonably close with Indonesia). We ask if the market might also be underestimating India or Indonesia’s growth outlook.

Historical reference shows a wide range of outcomes How fast has India and Indonesia expanded in the past decade, versus other countries? Figure 64 might be surprising, as it implies that Indonesia grew at a faster rate of growth than even China, at 614% versus 588%. However, it is wrong to view it this way as Indonesia suffered some of the biggest hits from the Asian crisis, and as a result had an artificially low base effect in 1999. Reviewing a longer timeframe one can see that between 1990 and 2009, Indonesia’s new car sales grew at a 4.3% Cagr, while India was at 10.7% and China at 19.3% (China grew at a 22.7% Cagr overall from 2002-09, but 28.8% in the passenger car market.)

Figure 64

Figure 65

Passenger-vehicle sales (units)

China, Korea and Japan’s vehicle history

1999

2009

Chg

Chg (%)

USA

16,880,711

10,430,936

(6,449,775)

(38)

Europe

16,855,000

17,525,000

670,000

4

Japan

5,761,643

4,808,000

(953,643)

(17)

Total

39,497,354

32,763,936

(6,733,418)

(17)

China

1,496,210

10,300,182

8,803,972

588

Korea

1,246,801

1,449,000

202,199

16

India

615,527

1,631,777

1,016,250

165

Taiwan

413,449

294,423

(119,026)

(29)

52,378

73,005

20,627

39

Singapore Indonesia

85,131

608,000

522,869

614

Malaysia

286,391

529,298

242,907

85

Thailand

246,388

520,000

273,612

111

Australia

774,191

929,366

155,175

20

5,216,466

16,335,051

11,118,585

213

Total


30

700

Vehicles/'000 population (units)

China Japan

600

Korea

500 400 300 200

China 46 versus Japan's 622 and Korea's 356

100 0 1966 1973 1980 1987 1994 2001 2008 2015 2022 2029 Source: Korea Automobile Manufacturers Association (Kama), Japan Automobile Manufacturers Association (Jama),CLSA Asia-Pacific Markets

[email protected]

19 April 2010

Mr & Mrs Asia

Autos

Using China’s history, India’s auto population could reach 60m by 2018

India and Indonesia are currently experiencing vehicle penetration rates of 12.8 and 29.1 per 1,000 people respectively. Focusing on this parameter, China hit India’s current level of penetration in 2000 and Indonesia’s current level in 2006, while Indonesia hit India’s current level in 1990. If we mapped out China’s penetration level growth onto India’s projections, we derive an auto market population of nearly 60m by 2018 (ie, similar to China in 2009), which is 4x the current nearly 15m (a 16.8% Cagr). New car sales by 2018 might be 10.1m on an annual basis, on this metric.

However, Indonesia’s history derives a much lower outcome

However, using Indonesia’s history, and their growth projection from 1990 would derive an Indian car population of only 26.5m by 2018 (3.5m new car sales by 2018). So, on the optimistic scenario, this methodology derives a 60m auto population, but the more pessimistic scenario, also based on an actual country’s real world experience is much lower. The key driver of this large gap was historical GDP growth between China and Indonesia.

Figure 66

Historical Cagr of new auto sales (units)

1990

1999

2003

2005

2009

1990-09 Cagr (%)

1999-09 Cagr (%)

2003-09 Cagr (%)

2005-09 Cagr (%)

13,844,432

16,880,711

16,652,084

16,965,344

10,430,936

(1.5)

(4.7)

(7.5)

(11.4)

16,855,000

16,855,000

16,855,000

17,525,000

0.4

0.7

1.0

7,558,793

5,761,643

5,695,120

5,725,311

4,808,000

(2.4)

(1.8)

(2.8)

(4.3)

21,403,225

39,497,354

39,202,204

39,545,655

32,763,936

2.3

(1.9)

(2.9)

(4.6)

China

362,941

1,496,210

2,960,603

4,594,124

10,300,182

19.3

21.3

23.1

22.4

Korea

890,734

1,246,801

1,301,700

1,143,899

1,449,000

2.6

1.5

1.8

6.1

India

180,916

615,527

755,771

947,649

1,631,777

12.3

10.2

13.7

14.6

Taiwan

551,447

413,449

406,807

503,420

294,423

(3.2)

(3.3)

(5.2)

(12.5)

Singapore

35,181

52,378

97,823

131,882

73,005

3.9

3.4

(4.8)

(13.7)

Indonesia

224,478

85,131

314,115

489,201

608,000

5.4

21.7

11.6

5.6

Malaysia

162,515

286,391

420,449

547,434

529,298

6.4

6.3

3.9

(0.8)

Thailand

316,280

246,388

411,767

586,147

520,000

2.7

7.8

4.0

(2.9)

Australia

606,700

774,191

894,158

968,149

929,366

2.3

1.8

0.6

(1.0)

3,296,011

5,216,466

7,465,370

9,780,023 16,335,051

8.8

12.1

13.9

13.7

USA Europe Japan Total

Total

Source: Ashvin Chotai, Automotive News, CLSA Asia-Pacific Markets

GDP per capita remains the key driver During the motorisation phase, car sales grow much faster than GDP

Based on detailed empirical studies (ie, the International Energy Agency study), GDP per capita is the most important driver for auto penetration. The study’s key point is that during a motorisation phase, a country’s growth will be faster than pure GDP growth. For instance, in Japan the number of cars per capita more than quadrupled between 1965 and 1975, while per capita GDP doubled. West Germany had a similar experience before Japan. We plot the relationship between auto penetration and GDP in Figures 67-68.

GDP analysis we believe derives a more likely and narrow outcome

Thus, if we track an estimated GDP growth level, it should help us with our India estimates. GDP per capita grew at a 5.4% Cagr from 1983 to 2007, but was closer to 13% from 2001 to 2009, which includes rupee appreciation versus the US dollar too. Overall, using our economics team forecasts, we have 2018 GDP per capita at US$2,394 and 2020 at $2,632. Based on this level of GDP growth in Korea and China, (1985 for Korea, 2007 for China) we

19 April 2010

[email protected]

31

Mr & Mrs Asia

Autos

derive the motorisation penetration level of 27-33 vehicles per 1,000 people. This translates to a 35-44m auto population by the 2018-20 (versus 14.8m now). In short, by doing this analysis, we believe we are deriving a more likely and narrower level of confidence on the long-term outlook. Figure 67

Figure 68

Overall global vehicle penetration vs GDP per capita

Vehicle penetration vs GDP per capita for Asian countries

Light-vehicle ownership (unit/'000 population)

800 700

Light-vehicle ownership (unit/'000 population)

180

y = 0.0156x + 15.827 R2 = 0.9537

160

y = 0.0225x - 11.243 R2 = 0.8965

New Zealand Australia

600 India Pakisatan Vietnam

500 400

100

Singapore

Philippines Malaysia

Taiwan

60

Hong Kong

0

10,000

20,000

30,000

40,000

China

Indonesia

20


China

0

Philippines

40

Thailand

100

India Pakisatan Vietnam

80

Indonesia

200

Thailand

120

Japan

Korea

300

Malaysia

140


0

50,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Source: World Bank, CLSA Asia-Pacific Markets

Indonesia appears set to double its auto population by 2018-20

Doing the same exercise for Indonesia, GDP per capita growth is US$5,536 in 2020. Overlaying this with Korea we find a penetration rate of 63 per 1,000 people or a vehicle population of 16.1m, more than double current levels.

Adding PPP into the GDP analysis PPP analysis may add more clarity

Thus far, the analysis has focused on GDP per capita, but according to our economist, Eric Fishwick, purchase power parity (PPP) is designed to allow comparison of real income levels across countries and, therefore, are appropriate to use. If food, shelter, etc, is cheap in one country relative to another, the point at which they can afford relative luxuries like cars, TVs, etc, comes at a lower nominal income level. Figure 69

PPP is designed to allow comparison of real income across countries

Vehicles per 1,000 people historical data points vs GDP per capita in PPP terms Vehicles/'000 population (units)

50 45 40

Korea

Indonesia

China

India

35 30 25 20 15 10 5

GDP per capita based on PPP (US$)

0 0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Source: Kama, CEIC, Jama, CLSA Asia-Pacific Markets

32

[email protected]

19 April 2010

Autos

China and Korea were similar between 1983-87 and 2004-08

Mr & Mrs Asia

Reviewing GDP per capita in PPP terms, the numbers are remarkably similar for China and Korea in 1983-87 (Korea) and 2004-08 (China), ie, US$3,614 for China in 2004, US$3,825 for Korea in 1983, ending with US$5,970 for China in 2008 and US$5,851 for Korea in 1987. Likewise, the auto penetration rates are similar, at 19.6 vehicles/1,000 people for Korea in 1983, and 38.4 by 1987, while China was 20.7 in 2004 and 38.4 in 2008. This was a period of hypergrowth in motorisation for both countries, with auto sales Cagrs at 21.3% and 16.6% for Korea and China, and 27.3% and 22.7% if we review 1982-89 and 2002-09. This is shown in Figure 69. India’s PPP was US$2,780 in 2008, getting closer to the US$3,500 level of China and Korea. Our calculations suggest that by 2012 India might reach this level.

China moves towards 300m by 2020 Korea experienced accelerated growth of automobile penetration from the mid 1980s until the Asian Crisis of 1998-99. Since recovering, growth has been strong and steady, now similar to that of Japan in the late 1980s. In terms of the relationship between GDP and vehicle penetration, China is following the same trend as the Japanese and Korean economies as they emerged. We estimate a 279m vehicle population in China by 2020

By 2020, China will have moved to a 229 vehicle per 1,000 penetration rate if we simply plot it based on the Korean experience, as the 2010 penetration is the same as Korea in 1988 (both had similar rates the year after hosting the summer Olympics). This implies a 322m vehicle population, nearly double the 176m that the IEA estimated in 1995, and their 2010 estimate was also half the 2010 likely actual. However, our official forecasts on China are slightly more conservative, at 279m. We believe there are some qualitative aspects that will limit the growth rates set by Korea. The 279m level implies a 15% Cagr in vehicle population (322m is a 16.6% Cagr), whereas India is at a lower 10.4% Cagr to the 44m level mentioned previously, and Indonesia is expected to experience a slightly lower 9.6% Cagr (these are just auto population Cagr, not new car sales Cagr).

Higher motorisation levels at same income countries with auto manufacturing

Straight GDP growth forecasts are the most important element to estimating the speed of auto penetration rates in developing countries, but there are other bottom-up factors. Figure 70 details some of the parameters in China, India and Indonesia. The 1995 IEA study found that there were higher levels of growth at the same income in Latin America within countries that had assembly facilities and/or a domestic automaking industry. Presumably this is due to governments encouraging the local auto industry with a tax system favouring auto ownership, rather than being a greater obstacle (as is the case in Singapore or Hong Kong). This is an interesting point, as both China and India fit this criteria, as did Japan and Korea before them. Indonesia is not associated with its own manufacturers, but they do have assembly plants that serve the Asean region through low tax barriers.

Tata’s Nano will help accelerate headline auto penetration

The most important bottom-up driver to actual headline vehicle sales growth in India is likely to be Tata Motors’ introduction of the US$2,500 Nano, which considerably lowers the price point of the cheapest vehicles. However, many observers see this vehicle as a step up between a two wheeler and prior entry level vehicles, and even forecast the auto market both ex-Nano and including Nano. Ultimately however, it will likely cause competitive responses, and enlarge the official growth forecasts on auto sales. The company’s guidance is 100,000 in FY11 and 250,000 in FY12 (13% of 2009’s total new vehicle sales). This vehicle is expected to eventually be exported to Indonesia as well.

19 April 2010

[email protected]

33

Mr & Mrs Asia

Autos

Figure 70

Key auto-demand drivers Demand drivers

China

India

Indonesia

GDP per capita

US$3,263 - Based solely on GDP per capita, a comparison with Korea suggests hypergrowth will run until GDP pc approaches 1215,000.

US$1,016 - Based solely on GDP pc India, is about seven years behind China - due to enter hypergrowth phase within two years.

US$2,254 - GDP pc almost equivalent to China, suggests automobile industry is set to enter hypergrowth immediately.

Vehicle penetration

46/1,000 as of 2009, very low. Likely exponential growth. Korea comparison suggests continued hypergrowth for 10+ years.

13/1,000 equal to that of China 10 years ago. Suggests hypergrowth phase is about three years away.

3/1,000 extremely low relative to GDP per capita - represents huge potential for growth in the market.

Infrastructure development Roads

Focused on providing world class infrastructure with more capacity to support vehicles. Rural highway length set to rapidly expand, increasing rural employment and income.

Infrastructure lagging economic growth.

Major plans to increase development. Target to build 20km per day.

Of total road length 58% is paved, densely populated areas are in good condition, only 50% of rural are in reasonable condition.

Public transport development

Mass transit systems investment increasing. Expecting 33% increase in length of passenger railways.

Indian railways making a turnaround - employee productivity set to double by 2015.

Poor public transport facilities, mostly buses.

Limited railway transport.

High savings rate of 49.2%.

Savings rate of 32.9%.

Improved credit penetration.

28.9% savings but concentrated at corporate & top 20% of population. Interest rate is high with funding rate of 11% and lending/selling rate of 165 in car and 30% in motorcycle.

Higher demand for luxury vehicles. More emphasis on mid-sized to large vehicles. Ebike sales of 20m expected in 2009.

Predominantly small car market. 2010 Auto Show saw release of more small concept cars. Tata’s Nano set to expand auto market by 65%.

Predominantly motorcycles.

Most passenger vehicles are seven seaters to accommodate extended family and nannies.

Availability of financing

Consumer preferences

Demographics

Dependency ratio set to turn adverse by 2025. Median age predicted to be 37.9 by 2020.

About 50% of population to be earning age. Low dependency ratio, nuclear families.

Relatively young population. 44% below 25 years. Large family sizes, more dependents.

Regulation

Urbanisation policy restricts free movement of population.

Government focus on ecological sustainability; emission control laws.

Open to FDI. No urbanisation restrictions. Fuel subsidies decreasing, still over regulated labour markets.

Government expected to increase registration tax from 10% to 20%.

Tax reforms adverse impact on government revenue coming to an end - improvement of fiscal deficit to be spent on infrastructure.

Asean Free Trade Area allows free trade among Asean countries for products with at least 40% Asean content.

Overall tax rate is high and makes up about 30% of car price.

Possible roadblocks

Sustainability of political system; protests on the increase could be demands for democracy.

Slow pace of democracy.

Over regulated labour markets.

Demand is still predominantly for motorcycles.

Pollution; vehicular exhaust pollution could be taxed.

Road accidents are the biggest cause of death in China.

International and domestic terrorism threats; Maoist and Naxalite posing internal threats.

Traffic congestion too high in densely populated areas.

Interest rate set to rise.

Potential excise duty increase.


34

[email protected]

19 April 2010

Autos

Demographics are appealing in India

Mr & Mrs Asia

Moreover, India has a very young population, approximately 50% of whom are under 25. There is a trend towards smaller, nuclear families instigating a very low dependency ratio. In turn, this results in higher savings and a greater ability to purchase vehicles, as well as explaining the preference for small cars. Overall, competition is increasing in the market, proven at the Indian Auto Show this year where plans were exposed for five new, small concept cars to be launched in FY11, followed by two more in FY12. Competition may also help pricing affordability. In contrast, China has a rapidly ageing population with a dependency ratio that is set to turn adverse by 2025. High domestic savings alleviates pressure on the economy but there is some perception that pension reforms will be realised. The Chinese market tends towards mid-sized to large cars with a propensity for luxury vehicles as a demonstration of wealth. However, this may be changing in the latest wave of growth, delivered more by pure Chinese makers focusing on the entry level.

China’s government can boost consumption via more personal auto loans

Comparatively speaking, the ability to finance purchases differs considerably between China, India and Indonesia. In China’s case, with a very high domestic savings rate of 49.2%, there is substantial room to support growth by banks or others in auto financing, which in 2009 was considered to be 2025% of all new auto sales, but may have been as low as 8-10% in 2008 (versus 60% in India and 80% in more developed markets). Indonesia has a relatively high domestic savings rate but it is concentrated at the corporate and top 20% of the population. Interest rates are also traditionally high with a funding rate presently of 11% and a lending/selling rate of 16% in car and 30% in motorcycle.

Stimuli may decline but still a high level of road penetration expected

‘If you build it, they will come’, was the mantra of a famous Bull Durham movie classic Field of Dreams and also seems to be have been taken to heart by the Chinese government. It is focused on providing world class infrastructure which increases the capacity to support more vehicles. Projects are underway to rapidly expand national roadway lengths. China plans to increase the operating distance of national level expressways from approximately 55,000km in 2010 to 85,000km in 2020. Rural highway developments aim to increase length from approximately 3.1m km in 2010 to 3.7m km by 2020. This progress, in conjunction with upgrades from cement to bitumen surfaces should spark an increase in rural incomes and employment. China’s mass transit system investment has been increasing substantially with plans on track for a 33% enlargement of passenger railway systems between 2006 and 2020. This will be an additional 25,000km of new railways which could serve to diminish auto sales, particularly more subway lines, but historically this tends to go hand in hand with general economic growth.

Aspirational desire versus actual need?

One barrier to growth is traffic congestion, which weighs on the purchase decision. For instance, the “S curve” effect already seems to be showing signs of limiting growth rates in cities like Beijing, where the number of additional “ring roads” is limited. However, ultimately it tends not to affect the “aspirational” interest in ownership. For instance, Korea has 25% of the country’s population in the area of Seoul, which has an extensive subway, and suffers significant traffic concerns too. This is undoubtedly affecting the “need” of ownership, particularly among the young, but has not seemingly been too much of an obstacle to actual auto ownership growth. One factor however that may differ in markets like China is the advent of motorised bikes, or E-bikes, which were expecting sales of 20m in 2009. But as with

19 April 2010

[email protected]

35

Autos

Mr & Mrs Asia

other emerging markets, these two wheelers are often stop gap measures for many before they can afford their first car, particularly in seasonal cold weather climates (less so closer to the equator). India seems more positive on road development than before

India’s infrastructure development is severely lagging, perhaps to some extent preventing economic and auto growth. Developments are increasing but need to dramatically improve to sustain automobile penetration acceleration. The target is to build 20km of new roads every day in line with plans to construct 1.9m km of new rural roads and upgrade 0.2m km, a more than 35% increase on the existing network. Currently, India is building 9km per day, which is already up from just 2km per day when Kamal Nath took office in May 2009. In this regard, the country seems incrementally positive. Indonesia’s infrastructure is satisfactory in densely populated areas, but areas of sparse population remains poor. Only 50% of roads in rural areas are in reasonable condition. There are also poor public transport options available, mainly consisting of buses as most railway networks are located on the island of Java.

Pollution taxes could prohibit growth, or push it in alternative directions

Regulatory constraints in China include the urbanisation policy which restricts the free movement of the population, although these are slowly being removed. Beijing is also beginning to focus on the environmental impact of such intensive growth and there is pressure for emission control laws to be implemented. There is a possibility that vehicular exhaust pollution will be subject to tax, further increasing the cost of purchasing and maintaining a car. But conversely, this could lead to a strong push by Beijing for alternative engines, such as hybrid or battery powered, which might include subsidies. The internet has emerged as an important source of information about the industry as access across India accelerates. As a result, media and advertising exposure has been amplified, giving potential consumers greater access to information on product differentiation, availability and choice.

Difficult to quantify, but can not ignore the inflationary impact

One issue that is difficult to quantify, although our strategist Russell Napier often speaks of it, is the inflationary effect China will bear, and also contribute to globally. Nearly 300m vehicles by 2020, in conjunction with other fixed-asset-investment spend, etc, places upward pressure on commodities, both in making the vehicle but also fuel related. This may then lead to a slower level of penetration than what Korea’s impact was to the world in its motorisation phase.

Overall conclusion

36

China’s growth track still strong, a 15-20% Cagr over the next five years

Perhaps surprising to some, our first conclusion is that medium term to 2015, we do not necessarily believe India’s growth will be higher than China. China appears equivalent to where Korea was in 1988 in terms of GDP and auto penetration, and Korea grew new vehicle sales at a 22.4% Cagr from 198893. We see a robust five year vision for the China market generally, which could average a 15-20% Cagr. This may “feel” high to some, but actually is slightly below what Korea achieved and could be pushed by Beijing if this was their goal via more aggressive personal financing availability (done ultimately by Beijing to encourage a consumption driven side of GDP growth).

India will likely experience hypergrowth from 2015 onwards

We estimate India might experience hypergrowth, ie, accelerated and sustainable growth rates of a 20% Cagr, by 2015-20. However, it appears early to budget for this near term, unless factoring in pure incremental Nano vehicle

[email protected]

19 April 2010

Autos

Mr & Mrs Asia

growth on the overall market. Meanwhile, for Indonesia, we would need to see ongoing accelerated GDP growth rates to believe that auto sales are going to accelerate into the 20% growth range on a sustainable basis. This is not our base case, but we do envision double-digit growth of a 10% Cagr to 2020.

Stock picks Over the next three to five years, the China story remains more exciting

In terms of regional preference then, the China growth angle still excites us more than India near term. Generally, China’s automakers held back on capacity expansion entering 2009 and are still behind the demand curve. The big foreign JVs also held back in capacity expansion as their global sales were looking precarious entering 2009. However, the Chinese local automakers are adding capacity, in some cases aggressively, and tend to be more labour intensive, and were quicker to respond to the 2009 market conditions. Overall, we still forecast high industry utilisation rates in 2010, helping boost pricing at recent levels for this year.

Key risk is that the “E” side of the industry PE

The key risk however is that the “E” side of the industry PE is inflated on this demand surge and thus the fallout risk is such that there is more of a derating of the industry profit margins mid-term, once there is an adequate supply response, particularly by the foreign JVs. We view this as more of a 2H 2011-12 type scenario. The thematic issue of the Chinese investing in their own brands remains ongoing and thus competition could intensify due to this as well. Still, on a 2010 view, we would bet on industry profitability holding firm, and even expanding YoY during 1H.

BYD is our top BUY, but on valuations we prefer SAIC

Within China, we prefer the pure Chinese automakers Stocks we like - BYD has outperformed all expectations and surprisingly further raised their sales target for 2010 from 700,000 vehicles to 800,000. This remains a BUY, as we expect a detailed government plan on alternate fuel vehicles to help sentiment. But valuation-wise, we prefer SAIC (previously Shanghai Auto), which will most certainly be a force within China in the medium term, and likely in the export market eventually. However, it is only listed in the A-share market. H share-listed Great Wall continues to increase sales monthly, expanding its product line and will be a minor beneficiary of the cash for clunkers programme in China. Dongfeng was lowered to Outperform from Buy on valuation concerns during 4Q09, but its structural earnings in 2010 should be robust, especially if they can turn a profit in commercial vehicles for the first time. This is a joint-venture partner of Nissan in China, which is our top automaker pick in Japan currently (it also has a partnership with Honda and Peugeot) Stocks we do not like - Denway remains an Underperform. It was a sector underperformer in 2009 and with Honda cautiously expanding while focusing more on profits than growth, will mean Denway should underperform the market again in 2010. We believe Denway will see unit growth of 6% in 2010 while the market will grow at closer to 20% resulting in a continued loss of market share. We see little in the way of catalysts, other than as a laggard play.

In India, our five-year pick is Maruti Suzuki

19 April 2010

Stocks we like in India Our top five-year pick in India Autos is Maruti Suzuki (Maruti Suzuki is Suzuki Motor's consolidated subsidiary with 55% ownership). Indian car industry growth is poised to accelerate over the next five years as India’s per capita GDP is approaching levels where China and Korea saw the beginning of a multi-year high growth phase for car sales. Maruti will be the key beneficiary of this growth given its large product range in small cars, wide distribution

[email protected]

37

Autos

Mr & Mrs Asia

and service network and strong brand image. Even accounting for some nearterm market share losses to new competition, Maruti’s stock can deliver superior returns on a five-year view. Note, though, our India autos analyst Abhijeet Naik has downgraded Maruti at the start of the year, with a counterconsensus negative rating, on one-year concerns. Indeed, the stock has been a big laggard in India YTD.

Hero Honda will benefit from rural penetration, but cars are a better story

Stocks we are less confident about Incremental two-wheelers (2Ws) growth in India will come from rural areas. Given its superior network and product portfolio to cater to these vicinities, Hero Honda is a candidate as a five-year pick. However, we would place it lower in our pecking order than Maruti, as cars are likely to substantially outpace 2Ws in sales on a five-year view, on account of the big difference in penetration levels between the two categories. Moreover, we see some risk of competition Bajaj, Honda Motorcycles and Scooters India and Yamaha - eating into Hero Honda’s dominant 58% market share in 2Ws over the next five years (Hero Honda is Honda Motor's 28%-owned equity-method subsidiary).

We are concerned about Bajaj Auto’s foray into small cars

If Bajaj Auto replicates its product successes of FY2010 in the coming years, it has the potential to gain substantial market share from Hero Honda. However, given Bajaj’s sketchy track record with new launches prior to FY2010, this is not a certainty. We also have concerns on Bajaj’s foray into small cars, as well as on the growth prospects for its three-wheelers (3W) business. Bajaj’s export business has better prospects, especially if it manages to penetrate larger markets like China and Indonesia. However, the question marks on the domestic business make us reluctant to recommend Bajaj as a five year pick.

Without JLR, we would have been far more positive on Tata Motors

While we are very positive on Tata Motors’ India commercial-vehicle and car business, we are less sure of the long-term prospects of JLR. JLR should have a better 12 months ahead on account of new launches and multiple cost cutting measures, but we are not so confident of JLR’s ability to outperform its luxury segment peers like Audi, BMW and Daimler on a five-year view, given their superior product franchise. M&M has strong competitive advantages in its UV and tractor businesses on a five-year view. However, we view M&M’s entry into new business segments like cars, 2Ws, trucks, aircraft etc with caution. This combined with the conglomerate nature of the M&M stock pulls down M&M in our five-year pecking order in the sector.

Hyundai is the best play outside of Chindia on the Chindia theme

38

Hyundai Motor stands out in Chindia Hyundai Motor continues to be the global leader within the combined India plus China, with a rising 6% share in China and a third plant planned to take capacity close to 900,000 by 2012, from 600,000 now (3.5m globally). Meanwhile a steady 19% share is occurring in India, thanks to strong execution and a healthy brand image. The Indian share might be at risk from Japanese moves to compete at lower price points, but likewise, Hyundai believes a larger rural network will help them take some of Maruti Suzuki’s dominating 50% market share. We prefer sister company Hyundai Mobis currently versus Hyundai Motor, as it has been a laggard over the past six months and yet has a very bright outlook. Kia Motor’s outlook remains positive, but it has no presence in India. Korean automakers are generally marginal performers in Indonesia, too, as the market tends to be dominated by the Japanese manufacturers.

[email protected]

19 April 2010

Mr & Mrs Asia

Autos

Astra is our top pick

Astra is our top pick in Indonesia Astra International remains the key stock on growing car sales in Indonesia. It distributes half of the sales volume in the domestic market, having strong partners such as Toyota, Daihatsu, Isuzu, Peugeot and Nissan Diesel. It also owns a 50% stake in Astra Honda, which manufactures Honda motorcycles in Indonesia. The automotive division accounts for about half of Astra's earnings, with the remaining coming from palm oil, heavy equipment and mining service, and financial services (largely auto-financing). Astra International will continue to be the proxy to the Indonesia market given its diversified businesses, exposure to consumer spending, and main commodities (palm oil, coal) in Indonesia. The share-price performance will continue to be driven by commodity prices such as coal and palm oil, as well as interest rates, inflation and GDP growth that drives auto sales. Valuation is not extremely cheap at 14.8x 10CL PE, which is in line with the market and at the high end of its historical PE band. Yamaha is vying with Astra Honda for the No.1 spot in Indonesia’s two-wheeler market.

Figure 71

Asian automakers valuations with some large-cap global names Company Ashok Leyland Astra International Bajaj Auto BMW BYD Changan Auto - B Daihatsu Motor Daimlerchrysler Denway Motors Dongfeng Motor Faw Car - A Fiat Ord Ford Motor Fuji Heavy Futian Vehicle - A Geely Auto Great Wall Motor Harley-Davidson Hero Honda Hino Motors Honda Motor Hyundai Mobis Hyundai Motor Isuzu Motors Jiangling Motors - B Kia Motors Mahindra & Mahindra Maruti Suzuki Mazda Motor Mitsubishi Motors Nissan Motor Peugeot Sa Proton Renault SAIC Motor Scania AB Suzuki Motor Tata Motors Telco Tianjin Auto - A Tofas-Turk Otomo Toyota Motor Volkswagen Stamm Weichai Power

Code

Mkt cap EV (US$m)

EV/Ebitda (x)

AL IS ASII IJ BJAUT IS BMW GR 1211 HK 200625 CH 7262 JP DCX GR 203 HK 489 HK 000800 CH F IM F UN 7270 JP 600166 CH 175 HK 2333 HK HOG UN HH IS 7205 JP 7267 JP 012330 KS 005380 KS 7202 JP 200550 CH 000270 KS MM IS MSIL IS 7261 JP 7211 JP 7201 JP UG FP PROH MK RNO FP 600104 CH SCVB SS 7269 JP TTMT IS TELCO IN 000927 CH TOASO TI 7203 JP VOW GR 2338 HK

(US$m) 1,687 20,039 6,810 30,542 22,866 3,706 3,998 89,910 4,166 15,210 4,933 15,732 42,844 4,166 2,904 3,726 2,331 7,702 9,448 2,432 64,923 13,370 23,129 4,679 2,313 8,702 6,786 8,979 5,159 7,874 39,588 6,735 836 13,611 19,312 13,060 11,824 9,175 4,023 2,197 2,023 138,343 44,222 7,941

10CL 9.4 9.7 13.0 3.2 15.9 na 4.0 8.8 320.5 6.9 12.6 3.9 5.9 6.7 na 9.6 5.6 19.6 12.0 7.6 8.3 4.5 7.5 10.0 na 7.1 10.1 9.4 18.4 9.1 6.1 1.9 2.5 4.7 18.1 15.6 6.8 7.0 4.7 13.4 6.5 13.7 2.4 6.7

10CL 2,052 25,807 6,628 24,806 22,654 na 4,891 81,556 2,916 13,700 4,791 22,521 50,836 6,771 na 3,389 1,470 13,138 8,094 4,876 97,339 12,419 22,536 6,611 na 10,718 7,001 7,548 10,214 9,715 71,773 9,678 575 21,042 15,916 18,659 15,562 15,658 10,506 2,234 2,540 239,575 31,424 6,836

11CL 8.0 8.3 12.0 2.5 10.2 na 3.5 6.9 289.5 6.0 10.3 3.2 4.3 5.8 na 7.5 4.4 15.9 10.7 6.5 6.9 3.6 7.0 7.7 na 7.3 9.2 7.9 9.2 7.3 4.9 1.4 2.1 3.7 15.4 10.7 5.8 5.5 3.6 32.7 5.3 10.1 1.8 5.3

PE (x) 10CL 15.2 14.8 16.4 22.4 23.8 7.5 16.4 43.3 10.2 13.5 21.0 33.8 12.8 37.5 14.5 15.2 12.9 33.1 17.9 42.8 14.0 9.1 11.1 33.7 8.4 10.5 7.4 15.0 na 79.4 16.5 na 8.8 26.4 13.0 26.8 30.4 17.8 11.9 37.2 9.6 39.5 18.9 12.4

11CL 12.5 12.7 15.0 11.6 14.8 6.2 13.7 23.9 9.3 12.2 17.5 12.3 9.7 16.6 12.6 12.9 11.1 17.8 16.5 14.9 10.1 8.3 10.5 16.3 7.4 10.0 6.9 13.2 23.8 39.8 9.4 6.4 8.1 6.6 11.4 17.4 21.5 10.9 7.3 23.4 8.6 15.0 10.7 11.0

PB (x) 10CL 1.7 3.8 7.9 1.1 5.3 1.3 1.0 2.2 1.6 2.4 4.0 1.2 na 1.0 4.1 3.0 1.8 3.2 6.5 1.1 1.3 1.6 1.4 1.6 1.9 1.3 1.9 2.9 1.0 na 1.1 0.4 0.5 0.6 2.7 3.7 0.9 4.6 3.1 3.7 1.9 1.1 0.8 3.3

11CL 1.6 3.3 5.9 1.0 3.9 1.1 1.0 2.0 1.5 2.1 3.6 1.1 30.4 1.0 3.4 2.4 1.6 3.3 5.3 1.1 1.2 1.4 1.2 1.5 1.6 1.1 1.6 2.4 1.0 41.1 1.0 0.4 0.4 0.5 2.3 3.3 0.8 3.4 2.3 3.3 1.7 1.1 0.8 2.6

Div yield (%) 10CL 2.5 3.4 1.8 1.6 0.0 1.5 1.3 0.9 2.5 0.0 1.6 1.7 0.0 0.7 1.1 0.9 0.1 1.2 2.0 0.9 1.6 0.8 0.8 0.6 3.2 0.0 3.0 0.6 1.1 0.0 2.6 0.0 1.0 0.0 0.0 2.1 0.6 1.6 2.4 1.5 4.6 1.1 2.3 0.5

ROE (%)

11CL 10CL 11CL 3.4 11.9 13.4 3.9 27.7 28.0 2.1 57.3 45.2 2.4 4.9 8.9 0.0 25.4 27.7 2.4 22.7 23.2 1.6 6.7 8.1 1.5 5.0 9.0 2.7 16.9 16.6 0.0 19.3 16.6 1.6 21.8 20.8 2.0 2.8 9.3 0.0 (44.6) (20.5) 1.1 3.0 6.2 0.9 29.6 25.7 1.0 25.9 24.3 0.1 14.0 14.5 1.2 13.5 19.2 2.2 40.3 35.2 1.2 2.2 8.7 2.3 9.5 12.1 0.8 19.1 17.7 0.8 12.6 12.1 1.0 3.6 7.6 4.3 24.0 23.1 0.0 12.9 12.1 2.9 28.3 24.7 0.8 21.5 20.1 1.1 (6.3) 4.2 0.0 3.9 10.5 4.5 6.5 10.5 3.5 (0.2) 6.9 1.0 5.5 5.7 2.8 2.0 8.1 0.0 20.1 19.7 2.5 14.8 20.5 0.8 3.4 3.9 1.6 28.2 34.7 2.4 28.2 34.7 na 14.2 13.7 5.5 21.8 20.3 1.7 2.8 7.0 2.8 4.5 8.0 0.6 31.7 26.1


19 April 2010

[email protected]

39

Mr & Mrs Asia

Banks

Daniel Tabbush [email protected] (66) 22574631

Suangsuda Sinsadok (66) 22574630

Top picks Bank Central Asia BBCA IJ Market cap US$16,026m Price Rp5,850 Bank of China Market cap Price Bank Rakyat Market cap Price CCB Market cap Price

3988 HK US$142,983m HK$4.37 BBRI IJ US$11,774m Rp8,650 939 HK US$203,323m HK$6.75

HDFC Bank Market cap Price

HDBK IB US$19,945m Rs1,950.0

ICICI Market cap Price

ICICIBC IB US$24,334m Rs965.0

Banks - Lend me more Banks in China, India and Indonesia will see strong growth over the next five to 10 years, given low rates of credit penetration to the private sector and consumers in general, strong economic growth and a growing middle class. In the pages that follow, we model how credit/GDP, loan/deposit ratio and profit growth may look given historical relationships and our forecasts. One conclusion is that Indonesian banks have ample scope for continued high growth, with a limited need for capital or deposits. At the same time, India’s state banks show the greatest value over time, but with the most need for capital. Given their above and the higher-quality service, we prefer the private-sector banks. Within Asia, we are Overweight these three countries due largely to long-term growth prospects, but also cyclical strength. Figure 72

Average annual credit growth over the past 20 years¹

India Indonesia China Korea Philippines Australia UK Singapore Thailand HK Malaysia USA France Taiwan Japan

(%) 0

2

4

6

8

10

12

14

16

18

20

¹ China, Malaysia data begins 1997, most others 1990-91. Source: CLSA Asia-Pacific Markets

Service standards becoming important

Figure 73

Figure 74

Reason for choosing the present bank

Reason for choosing the next bank

Proximity

42.8

Salary acct

39.6

Own decision

27

Strong ATM network

18.4

Service provided by bank

More suitable savings account

15.9

Lower charges

8.8

Reference from friends

4.2

Student acct

(%)

1.8

0

10

41 27

Lower costs/charges

6.7

Demat acct

50

Better products

21.6

Parents/spouse

68

Better customer-service standards

20

30

40

50

Other reasons

9

0

(%) 20

40

60

80


Credit penetration Credit growth can persist at high rates for many years

40

The fastest growing markets in Asia will see some of the most attractive bank stock investments in Asia and possibly the world, over the coming five years. This has already proven to be the case for India’s and Indonesia’s banks, while there is not long-term data for China’s banks. Over 10 years India’s bank stocks are up 300-3,000% compared with 100% or lower for most in Asia. Over five years Indonesia’s bank stocks are up 150-250%, and India’s banks stocks are up 115-425%. With structurally strong returns and limited loan penetration, credit growth can persist at high rates for many years with

[email protected]

19 April 2010

Mr & Mrs Asia

Banks

little risk of nasty NPL formation. The likelihood of the latter is made greater with an exogenous shock, sharply higher interest rates in a short span of time and ahead of a real economic slowdown. This is something we are not forecasting. Figure 75

Bank performance over 10 years and five years with dividend 5Y (%) Axis Bank BoI SBI BCA HDFC BoB BRI HDFC Bank Bank Mandiri Union Bank ICICI Punjab Canara Danamon Corp Bank CCB BOC ICBC BoCom IDFC OBC CMB

Stock change

Div yield

Total returns

420 333 238 232 207 183 180 186 142 136 130 117

6 12 9 13 7 13 17 4 22 14 9 15

426 345 246 245 215 197 197 190 164 150 139 132

Axis Bank BoI HDFC BoB SBI OBC HDFC BANK ICICI Corp Bank Bank Mandiri Union Bank BCA

95 45 25

16 20 19 15 15 13 11 7 17 3

112 65 43 15 15 13 11 7 5 3

Canara BRI Punjab CCB BOC ICBC BoCom IDFC CMB Danamon

(11)

10Y (%)

Stock change

Div yield

Total returns

3,084 1,855 1,269 912 757 549 570 420 303

24 50 21 40 21 45 9 22 33 37 32 31

3,108 1,905 1,290 952 778 594 579 442 335 37 32 31

28 26 22 15 15 13 11 7 3 41

28 26 22 15 15 13 11 7 3 (18)

(59)

Note: BoI = Bank of India; SBI = State Bank of India; BCA = Bank Central Asia; HDFC = Housing Development Finance Corp; BoB = Bank of Baroda; BRI = Bank Rakyat Indonesia; CCB = China Construction Bank; BOC = Bank of China; ICBC = Industrial and Commercial Bank of China; BoCom = Bank of Communications; IDFC = Infrastructure Development Finance Corp; OBC = Orient Bank of Commerce; CMB = China Merchants Bank. Source: Datastream, CLSA Asia-Pacific Markets

Low credit/GDP suggests room for growth in China, India and Indonesia

Of these fast-growing countries, credit/GDP is lowest in Indonesia at 26%, followed by 47% in India and 127% in China. For China, the figure we believe is inflated, given the lack of a corporate bond market as well as the banks being used (the three state banks) to support infrastructure lending and loans to state-owned enterprises (SOE). Data is insufficient to adjust for this, we believe China’s credit/GDP ratio would be more in line with India if stripping out most SOE/government-related loans. Possibly a better gauge of relative banking penetration is consumer credit, where figures are low for all three, at 8% for Indonesia, 9% for India and 17% for China. Figure 76

Consumer credit to GDP in China is low, although total credit to GDP is high

Credit to GDP by country and consumer credit to GDP, 2009 (%) Hong Kong

Credit to GDP 153

Consumer credit to GDP 56

China India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Australia Japan

127 47 26 92 116 34 109 140 84 136 90

17 9 8 40 64 2 50 54 19 81 24


19 April 2010

[email protected]

41

Mr & Mrs Asia

Banks

Given the past relationship with credit growth and GDP growth, we see the highest multiple in Indonesia at 3.9x, meaning for GDP growth of 4.5% loan growth is 17.6%. The next highest is in India at 3.0x and followed by China at 1.7x. While there tends to be less data for China than other fast growing countries, the difference in the multiple is still interesting. To us it suggests that China’s credit growth versus its GDP growth is not at all out of line with peers, and in fact is better contained. This flies in the face of the generally greater concerns on China’s credit expansion than that of India or Indonesia.

China’s credit growth is not of concern

Figure 77

Average multipliers of loan growth to GDP growth and deposit growth to GDP growth Loan growth to real GDP growth (x) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average

China

India

Indo

2.0 1.1 0.7 1.6 2.7 2.1 1.1 0.9 1.3 1.3 1.6 3.8 1.7

4.9 2.9 0.7 4.2 2.8 1.7 4.2 2.1 2.7 4.1 2.5 3.9 2.8 3.7 5.8 2.9 2.5 2.6 1.6 3.0

1.4 3.3 3.4 2.9 3.2 6.2 (2.2) (68.0) 3.6 3.9 4.2 4.2 5.2 4.3 2.6 4.4 5.1 2.3 3.9

Deposit growth to real GDP growth (x) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average

China

India

Indo

2.1 1.8 1.6 1.9 2.1 2.2 1.5 1.9 1.4 1.2 2.1 3.2 1.9

14.2 3.1 3.1 3.6 1.7 2.1 4.6 2.7 2.2 4.2 2.5 4.2 2.0 1.7 2.6 2.5 2.5 3.0 1.6 3.4

2.1 3.2 3.6 2.6 3.2 4.0 5.7 (4.6) 11.5 2.8 3.4 1.0 1.4 1.4 3.1 2.6 2.0 2.5 3.1 2.9


A 15-20% Cagr of loan growth likely over the next five years

Given the historical relationship of loan growth to GDP growth, and our assumptions for long-term GDP growth, we arrive at a likely per annum loan growth range for each system over the coming several years. This would be 21-27% for India, 21-28% for Indonesia, and 12-17% for China. Feeding this into the numbers, this would put credit growth to GDP at 39% for Indonesia in five years, 69% for India and 138% for China. Figure 78

India is likely to see the fastest loan growth

Credit to GDP, loan growth and deposit growth Credit to GDP (%) 2009A 2010CL 2011CL 2012CL 2013CL 2014CL Loan growth based on GDP assumption 2010CL 2011CL 2012CL 2013CL 2014CL Deposit growth based on GDP assumption 2010CL 2011CL 2012CL 2013CL 2014CL

China

India

Indonesia

126.9 131.2 139.0 140.1 141.2 138.2

47.3 49.2 52.1 58.0 64.6 68.6

25.8 26.8 28.9 31.9 35.1 39.2

16.5 16.5 14.9 14.9 11.6

23.4 25.2 27.0 27.0 21.0

21.2 24.3 25.5 25.5 27.5

19.2 19.2 17.3 17.3 13.5

25.5 27.5 29.5 29.5 22.9

15.5 17.8 18.6 18.6 20.1


42

[email protected]

19 April 2010

Mr & Mrs Asia

Banks

In five years, credit growth/GDP can be of concern in China

Only on the China figures would we possibly be concerned with the relatively high figure in five years. However, this concern is somewhat mitigated by the lack of alternative forms of capital and banks being used for fiscal lending. Compared with Organisation for Economic Cooperation and Development (OECD) countries currently, this figure is not overwhelming, nor is it especially high versus Hong Kong’s 153%, at present. Estimating loan growth in this way - as a function of GDP growth - suggests per annum loan growth of 25% for India and Indonesia, and 15% for China, also figures which do not appear wild (especially for China). Figure 79

China’s credit to GDP is low

Credit to GDP (latest actual with China estimate in five years)

260

(%)

240 220 200 180 160 140 120 100 USA

France

UK

HK

China (est)

Australia


Fee income growth for Indian banks is accelerating

Indian banks have traditionally underutilised their distribution network and vast client base and moved into a harvest phase only over the past five years, supported by technological advancement. Rising affluence, favourable demographics and accelerating urbanisation has boosted the demand for financial products. As such, the sector’s fee-income growth has accelerated to a 27% Cagr over FY04-09 versus a mere 10% over FY99-04. We estimate fees from the distribution of third-party products and on card transactions to more than double over the next five years to Rs240bn, accounting for almost 26% of total fees in FY14. Figure 80

Retail fee income likely a Rs240bn opportunity for Indian banks

India: Retail fee

300

(Rsbn)

250

Life insurance

General insurance

Mutual funds

Credit card

(% YoY)

60

Growth (RHS)

200

70

50

Slowdown in life- insurance sales

40

150 30 100

20

50

10

0

0 FY05

FY06

FY07

FY08

FY09

10CL

11CL

12CL

13CL

14CL

Source: Company reports, CLSA Asia-Pacific Markets

19 April 2010

[email protected]

43

Mr & Mrs Asia

Banks

Loan-to-deposit ratios We assume China’s deposit growth will be ahead of its loan growth

Limited risks to bid up deposits aggressively . . .

Our assumptions for more aggressive GDP growth over time in Indonesia versus China also lift our loan-growth assumptions. One result is that China’s state bank ends up having the lowest LDRs after five years, at 51%. This is even lower than now, as we are assuming that the same deposit growth trends persist, which have been greater than loan growth. Bank Central Asia (BCA) still has one of the lowest LDRs at 64%, versus Mandiri’s 87%, Danamon’s 117% and Bank Rakyat Indonesia’s (BRI) 109%. Other than Corporation Bank at 62%, other state banks in India come in at 67-73%, with SBI at the high end of the range. Of the private Indian banks, ICICI ends up with one of the highest LDRs in these countries, at 90% - something which is not in practice easy to achieve given the Reserve Bank of India (RBI) reserve requirements and limitations on wholesale funding. From this, one conclusion in general is that we see limited risk from these banks to bid up deposits aggressively, to fund high growth. The exceptions remain Danamon, BRI and ICICI. Figure 81

China’s banks will have lower LDRs

LDR by bank, 2009 ICICI Bank Bank Danamon BRI SBI BoB Canara Bank India China Citic Punjab HDFC Bank Oriental Bank Bank of India Union Bank Axis Bank Indonesia Corp Bank Bank Mandiri BOC (HK) CMB China BoCom CCB ICBC BCA

(%) 0

20

40

60

80

100


India and Indonesia look attractive on credit/GDP ratio

44

Overall, Indonesia looks the best, with a credit/GDP ratio still low after five years, so limited concern of excessive buildup in misplaced credit. Meanwhile, each bank, other than Danamon, BRI and ICICI, would not see their LDRs stretched by year five at the projected growth rates. On the surface, China will appear more stretched, with credit/GDP rising to 138% by year five, although we reiterate the distortions here of government directed lending to SOEs partly due to a lack of a corporate-bond market. Their LDRs actually become lower after five years based on historical growth rates of loans, deposits and our GDP growth assumptions. India looks the most like Indonesia on credit/GDP, with still low figures after five years. [email protected]

19 April 2010

Mr & Mrs Asia

Banks

Figure 82

China and India’s LDR are likely to decline

Projected LDR (%) ICBC BOC CCB BoCom CMB China Citic SBI BoB OBC HDFC Bank ICICI Corp Bank Canara Axis Bank Punjab BoI Union Bank Bank Mandiri Danamon BRI BCA China India Indonesia

09A 51.1 63.9 55.6 60.4 63.4 75.8 79.5 78.6 72.9 74.2 98.8 67.5 76.4 71.6 75.0 72.7 71.8 65.7 88.6 82.8 48.5 61.7 76.3 71.4

10CL 50.0 62.4 54.3 59.0 61.9 74.1 78.2 77.3 71.6 73.0 97.1 66.3 75.1 70.4 73.7 71.5 70.6 69.0 93.0 86.9 50.9 60.3 75.0 74.9

11CL 48.8 61.0 53.1 57.7 60.5 72.4 76.7 75.9 70.3 71.6 95.4 65.1 73.8 69.1 72.3 70.2 69.3 72.8 98.2 91.7 53.7 58.9 73.6 79.1

12CL 47.8 59.7 52.0 56.5 59.3 70.9 75.3 74.4 69.0 70.3 93.5 63.9 72.3 67.8 70.9 68.8 68.0 77.0 103.9 97.0 56.8 57.7 72.2 83.7

13CL 46.8 58.5 50.9 55.3 58.0 69.4 73.8 73.0 67.6 68.9 91.7 62.7 70.9 66.5 69.6 67.5 66.7 81.5 109.9 102.7 60.1 56.5 70.8 88.6

14CL 46.0 57.5 50.1 54.4 57.1 68.3 72.7 71.8 66.6 67.8 90.3 61.7 69.8 65.4 68.5 66.5 65.6 86.5 116.7 109.0 63.8 55.6 69.7 94.0

Source: Company reports, CLSA Asia-Pacific Markets Figure 83

Indonesia’s credit to GDP remains very low in five years

Projected LDR and credit to GDP in five years ICBC BOC CCB BoCom CMB China Citic SBI BoB OBC HDFC Bank ICICI Corp Bank HDFC Canara Axis Bank Punjab BoI IDFC Union Bank Bank Mandiri Danamon BRI BCA China India Indonesia

LDR (%) 46 58 50 54 57 68 73 72 67 68 90 62 na 70 65 68 66 na 66 87 117 109 64 56 70 94

Credit to GDP (%) 18.1 15.6 15.4 6.0 3.8 3.2 14.3 3.9 1.8 2.8 4.8 1.3 2.2 3.5 2.2 4.2 3.7 0.5 2.5 5.6 1.8 5.4 3.3 62.3 47.8 16.1


19 April 2010

[email protected]

45

Mr & Mrs Asia

Banks

China’s state owned banks will need to raise capital

Banks in China, India and Indonesia have high ROEs at 15-22%, so that internally generated capital is good. Average dividend payouts are low for most of these banks, further supporting capital ratios over time. Where we must assume that new BIS guidelines will see banks being better capitalised, we model the implications of this over the coming five years, given high rates of growth. Assuming no capital raisings, India’s Infrastructure Development Finance Corp (IDFC) would be by far the best capitalised after five years, with equity/loans at 16%, followed by BCA at 15%. The government banks in India would be the most capital starved with equity/loan ratios averaging 6%. China’s state banks would see equity/loans decline from 11% to 9% over this period, suggesting a degree of capital-raising, but possibly less than what some are concerned about. We also note, that there is likely be some riskweighting relief in China, more than anywhere else, due to high SOE lending, further limiting the amount of new capital over this period. Figure 84

Banks in China, India and Indonesia have high ROEs

Payout ratio by bank versus average ROE by bank over the past five year (%)

Payout, 09A

5-year avg ROE

ICBC

50

16

BOC

45

13

CCB

50

18

BoCom

35

15

7

19

China Citic

25

13

SBI

20

15

BoB

20

14

OBC

10

11

HDFC Bank

18

15

ICICI

34

10

Corp Bank

20

16

HDFC

36

22

Canara

20

17

Axis Bank

20

16

Punjab

31

18

BoI

15

18

IDFC

20

15

Union Bank

20

18

Bank Mandiri

28

13

Danamon

30

17

BRI

21

26

BCA

38

24

CMB


Capital implications Indian state-owned banks need to raise capital

46

The implications for capital raising are far higher at state banks in India than any of the banks we examine in these three high growth countries. To reach 10-12% equity/loan ratios, given the rates of growth we have discussed, these banks would need to raise capital equivalent to 170-260% of current capital. Of the three state banks in China, Bank of China would need to raise the most capital at Rmb225-418bn over the period, equivalent to 50-90% of capital today. This compares with its peers at 45-80% of capital. BCA, IDFC and Bank Danamon would be the only banks to be able to return capital and still maintain a 12% equity/loan ratio. At a slightly lower target equity/loan ratio of 11%, one bank would be added to this list: ICICI.

[email protected]

19 April 2010

Mr & Mrs Asia

Banks

Figure 85

Bank Central Asia, IDFC and Danamon are best placed

Projected equity to loans (%) ICBC BOC CCB BoCom CMB China Citic SBI BoB OBC HDFC Bank ICICI Corp Bank HDFC Canara Axis Bank Punjab BoI IDFC Union Bank Bank Mandiri Danamon BRI BCA

09A 12.0 10.6 11.0 9.9 8.3 10.8 10.2 8.4 10.5 16.7 24.0 9.5 15.5 9.0 15.9 9.0 9.0 28.0 8.7 17.1 23.9 13.9 22.7

10CL 11.2 9.8 10.4 9.2 8.2 10.0 9.3 7.6 9.2 15.2 20.7 8.7 14.4 8.3 14.6 8.3 8.4 25.2 8.1 15.2 21.4 13.2 21.4

11CL 10.5 9.0 9.8 8.6 8.1 9.4 8.3 6.8 8.0 13.6 17.7 7.8 13.1 7.6 13.2 7.5 7.7 22.3 7.4 13.2 18.8 12.3 19.6

12CL 9.9 8.5 9.4 8.2 8.1 8.8 7.3 6.0 6.9 12.1 14.9 6.9 11.8 6.8 11.7 6.8 6.9 19.5 6.7 11.3 16.3 11.2 17.9

13CL 9.4 7.9 9.0 7.8 8.2 8.3 6.5 5.2 5.9 10.7 12.5 6.1 10.7 6.1 10.4 6.0 6.3 17.1 6.0 9.7 14.1 10.3 16.3

14CL 9.1 7.7 8.8 7.6 8.5 8.1 6.0 4.8 5.3 9.9 11.0 5.7 10.1 5.7 9.8 5.7 6.0 15.7 5.7 8.2 12.0 9.3 14.6


Bank of China will need to raise more capital

Capital required to meet 10%, 11% and 12% of equity to loans (local ccy in m)

Capital required to meet

Equity to loans

10%

11%

12%

10%

11%

12%

97,741

209,293

320,845

15

31

48

BOC

224,747

320,991

417,234

44

63

82

CCB

112,615

207,612

302,609

22

40

58

BoCom

88,392

125,591

162,790

48

68

89

CMB

36,502

60,109

83,716

37

61

86

China Citic

37,619

57,500

77,380

35

54

72

SBI

778,927

973,706

1,168,484

118

148

178

BoB

276,688

330,057

383,426

186

221

257

OBC

116,515

141,265

166,015

136

164

193

1,938

39,900

77,861

1

19

37

(66,101)

(385)

65,332

(13)

(0)

12

78,421

96,688

114,956

136

168

200

ICBC

HDFC Bank ICICI Corp Bank HDFC Canara Axis Bank Punjab

As % of existing capital

(3,022)

26,748

56,517

(2)

17

37

206,040

254,303

302,565

142

176

209

7,017

37,419

67,820

4

23

42

246,238

303,177

360,116

144

178

211

BoI

204,076

254,649

305,223

136

169

203

IDFC

(42,482)

(34,997)

(27,513)

(61)

(50)

(40) 217

Union Bank

147,839

182,249

216,659

148

182

Bank Mandiri

11,269,748

17,529,987

23,790,225

32

50

67

Danamon

(4,011,985)

(2,047,325)

(82,664)

(26)

(13)

(1)

4,020,191

10,074,304

16,128,417

14

36

58

(16,889,396) (13,201,706)

(9,514,016)

(61)

(48)

(34)

BRI BCA


19 April 2010

[email protected]

47

Mr & Mrs Asia

Banks

Figure 87

India’s privatesector banks are better placed than the PSUs

Equity-to-loans ratio at year five

IDFC BCA Danamon ICICI HDFC HDFC Bank Axis Bank BRI ICBC CCB CMB Mandiri China Citic BOC BoCom SBI BoI Canara Corp Bank Union Bank Punjab OBC BoB

(%) 0

2

4

6

8

10

12

14

16


Profit growth and valuations

48

We forecast ROAs to increase in China and India . . .

Not only can we gather how these fast-growing banks will see credit/GDP trends materialise over the next five years, we can too profile ROAs and therefore, profit Cagrs. In general, we assume rising ROAs in China, given improved efficiency gains, fee penetration and margins. For India, we assume continued ROA improvement, for similar reasons, but not for Housing Development Finance Corp (HDFC), which may see some ROA decline from exceptionally high levels. For Indonesia’s banks, we see more ROA decline widespread here, given their exceptionally high starting point and aggressive focus from other banks globally and in Asia to enter this market. Still their ROA remains good, at 1.6-2.3% by year five. The net results for a five year Cagr is highest for India at 30%, followed by Indonesia at 25% and China at 20%. HDFC Bank and Baroda come in highest at 32% with ICBC and China Merchants Bank (CMB) the lowest, at 19%.

. . . but Indian private banks are among the most expensive in Asia

Given current valuations, using market capitalisation, banks’ PE ratios come in considerably over this period, but few of the banks compare with the low multiples at India’s state banks. Oriental Bank, Canara and Corporation Bank come in at 1.5x PE on year five against these assumptions. India’s private banks come in the most expensive, with HDFC at 10x and HDFC Bank at 7x. Of China’s state banks, Bank of China (BOC) remains the least expensive at 4.2x, with ICBC as the most expensive at 5.3x. Indonesia’s banks are in a similar range at 4-7x, with BRI as the least expensive and Danamon the most expensive. The only caveat we would highlight if making investment decisions against this alone is that this does not take into account the high capitalraisings public-sector-undertaking (PSU) banks in India need, which are likely to mean greater PEs. This is not a feature of BCA or Danamon, where they have the least risk of raising new capital over this period.

[email protected]

19 April 2010

Mr & Mrs Asia

Banks

Figure 88

ROA to decline in Indonesia

Projected ROAs ROA

(%) ICBC BOC CCB BoCom CMB China Citic SBI BoB OBC HDFC Bank ICICI Corp Bank HDFC Canara Axis Bank Punjab BoI IDFC Union Bank Bank Mandiri Danamon BRI BCA China India Indonesia

09A 1.09 1.00 1.22 0.89 0.81 1.09 0.97 1.06 1.04 1.33 1.04 1.08 2.33 1.24 1.40 1.22 0.77 2.81 1.06 1.69 1.96 2.44 2.42 1.02 1.33 2.13

10CL 1.09 1.00 1.22 0.89 0.81 1.09 0.97 1.06 1.04 1.33 1.04 1.08 2.33 1.24 1.40 1.22 0.77 2.81 1.06 1.69 1.96 2.44 2.42 1.02 1.33 2.13

11CL 1.14 1.05 1.28 0.93 0.85 1.15 1.02 1.11 1.10 1.40 1.09 1.13 2.28 1.30 1.47 1.28 0.81 2.95 1.11 1.66 1.92 2.39 2.37 1.07 1.39 2.08

12CL 1.20 1.10 1.34 0.98 0.89 1.20 1.07 1.17 1.15 1.47 1.15 1.19 2.24 1.37 1.54 1.34 0.85 3.10 1.17 1.62 1.88 2.34 2.32 1.12 1.44 2.04

13CL 1.26 1.16 1.41 1.03 0.94 1.26 1.12 1.22 1.21 1.54 1.20 1.25 2.19 1.44 1.62 1.41 0.89 3.25 1.22 1.59 1.84 2.29 2.27 1.18 1.51 2.00

14CL 1.32 1.22 1.48 1.08 0.98 1.33 1.18 1.28 1.27 1.62 1.26 1.31 2.15 1.51 1.70 1.48 0.93 3.42 1.29 1.56 1.80 2.25 2.23 1.23 1.57 1.96


Banks in all three countries will show strong profit growth

Projected net profit based on ROA Net profit (based on ROA)

(local ccy in m) ICBC BOC CCB BoCom CMB China Citic SBI BoB OBC HDFC Bank ICICI Corp Bank HDFC Canara Axis Bank Punjab BoI IDFC Union Bank Bank Mandiri Danamon BRI BCA

09A 129,337 85,230 113,213 30,150 16,522 15,914 101,817 28,064 13,468 29,396 39,822 11,040 27,619 30,966 25,013 35,914 20,897 10,236 19,574 6,654,818 2,013,039 6,933,434 6,911,754

10CL 11CL 12CL 13CL 14CL 147,083 179,977 217,102 261,884 306,810 114,874 140,565 169,560 204,536 239,623 130,797 160,048 193,063 232,887 272,838 36,375 44,510 53,691 64,767 75,877 19,219 23,517 28,368 34,220 40,090 20,475 25,054 30,222 36,456 42,710 132,039 173,566 231,432 308,591 392,040 37,732 49,599 66,135 88,184 112,031 17,132 22,520 30,028 40,039 50,867 39,583 52,032 69,380 92,510 117,527 48,101 63,229 84,309 112,418 142,818 13,697 18,004 24,007 32,010 40,667 32,965 40,444 50,333 62,639 74,273 39,999 52,579 70,108 93,482 118,761 31,380 41,249 55,001 73,338 93,170 46,998 61,779 82,376 109,840 139,543 25,557 33,595 44,796 59,731 75,883 11,873 15,607 20,810 27,748 35,251 24,163 31,762 42,352 56,471 71,742 8,989,088 10,954,070 13,475,053 16,576,219 20,710,044 2,705,963 3,297,476 4,056,361 4,989,897 6,234,292 9,515,355 11,595,376 14,263,950 17,546,674 21,922,514 9,049,771 11,028,017 13,566,019 16,688,120 20,849,851


19 April 2010

[email protected]

49

Mr & Mrs Asia

Banks

Figure 90

Indian banks stand out with highest profit growth

Five-year net-profit Cagr HDFC Bank BoB Punjab SBI Canara OBC Axis Bank Corp Bank Union Bank BoI ICICI IDFC BRI Mandiri Danamon BCA BOC HDFC China Citic BoCom CMB CCB ICBC

(%) 16

18

20

22

24

26

28

30

32

Source: CLSA Asia-Pacific Markets Figure 91

Indian state-owned banks have low multiples

Projected PE based on ROA Market capitalisation to earnings multiple (x)

Market cap to earnings multiple (x)

ICBC BOC CCB BoCom CMB China Citic SBI BoB OBC HDFC Bank

09A 14.2 12.8 12.1 13.5 20.9 18.3 14.2 6.6 4.7 26.3

10CL 11.1 8.7 9.4 10.4 16.4 11.9 9.8 5.9 4.3 20.6

11CL 9.1 7.1 7.7 8.5 13.4 9.7 7.4 4.5 3.3 15.6

12CL 7.5 5.9 6.4 7.1 11.1 8.0 5.6 3.4 2.5 11.7

13CL 6.2 4.9 5.3 5.9 9.2 6.7 4.2 2.5 1.9 8.8

14CL 5.3 4.2 4.5 5.0 7.9 5.7 3.3 2.0 1.5 6.9

ICICI Corp Bank HDFC Canara Axis Bank Punjab BoI IDFC Union Bank Bank Mandiri Danamon BRI

24.5 5.5 27.7 5.2 16.0 8.0 9.7 19.5 6.8 14.7 18.8 13.5

20.8 4.7 22.5 4.4 14.5 6.2 7.0 17.7 5.7 10.3 15.7 9.3

15.8 3.6 18.3 3.4 11.0 4.8 5.3 13.4 4.4 8.4 12.9 7.6

11.9 2.7 14.7 2.5 8.2 3.6 4.0 10.1 3.3 6.9 10.4 6.2

8.9 2.0 11.8 1.9 6.2 2.7 3.0 7.6 2.4 5.6 8.5 5.0

7.0 1.6 10.0 1.5 4.9 2.1 2.4 5.9 1.9 4.5 6.8 4.0

BCA China India Indonesia

17.1 15.3 13.4 16.0

13.4 11.3 11.1 12.1

11.0 9.2 8.5 10.0

8.9 7.7 6.5 8.1

7.2 6.4 4.9 6.6

5.8 5.4 3.9 5.3

Source: Datastream, CLSA Asia-Pacific Markets

50

[email protected]

19 April 2010

Mr & Mrs Asia

Banks

We expect strong price appreciation even assuming static multiples

Even if we assume static PEs from 2009A over time, the price appreciation of these bank stocks, based on these assumptions, would be 227% higher in five years. This is actually low considering the historical price rise for India and Indonesia bank stocks over the past five years, as we discussed earlier. SBI shows the highest upside at 330% with HDFC as the lowest upside at 178%. China’s banks show the lowest upside on average at 183%, with India best at 252% followed by Indonesia at 209%. We point out that these estimates do not presume any PE expansion over time or over a positive cycle. This further assumes far lower credit growth in China over forecast years. Figure 92

Among Indian private banks, HDFC Bank and ICICI Bank stand out

Price appreciation¹ (%)

10CL

11CL

12CL

13CL

14CL

ICBC BOC CCB BoCom CMB China Citic SBI BoB OBC HDFC Bank ICICI Corp Bank

28 46 29 29 27 54 45 13 8 28 18 16

56 79 58 58 56 89 90 49 41 68 55 52

89 116 91 91 88 128 154 98 89 124 106 103

127 161 130 130 127 175 238 164 151 199 175 171

166 205 170 170 166 222 330 235 219 280 250 244

HDFC Canara Axis Bank Punjab BoI IDFC Union Bank Bank Mandiri Danamon BRI BCA China

23 17 10 27 38 11 19 43 20 45 28 36

51 54 45 67 81 45 56 74 46 76 56 66

88 105 93 123 142 94 109 114 80 117 92 100

134 174 158 198 223 158 178 163 121 167 137 142

178 248 228 278 310 228 253 229 176 234 196 183

India Indonesia

21 34

58 63

110 101

179 147

252 209

¹ Based on static market cap to asset multiple as 09A during years 1-5. Source: Datastream, CLSA AsiaPacific Markets Figure 93

China’s banks show the lowest upside at 183%

Average upside per year for the above banks

250

(%)

200 150 100 50 0 10CL

11CL

12CL

13CL

14CL

Note: Price appreciation based on static market cap to asset multiple as 2009A during years one to five. Source: CLSA Asia-Pacific Markets

19 April 2010

[email protected]

51

Mr & Mrs Asia

Banks

On banks market capitalisation/GDP, Indonesia appears cheap

As a further gauge to how likely these scenarios are and the potential for stock upside, we look finally at market capitalisation to GDP. Where Indonesia begins at the lowest level as at 2009A at 6.1%, China begins at the highest level as at 2009A, at 14.3%. India is in between at 9.2%. For perspective, these figures compare with the USA at 5%, the UK at 17%, Thailand at 14% and Singapore at 38%, so clearly a large variance. By year five, China would rise to 22%, India to 16% and Indonesia to 10%. The most important distortion here will be large new listings, which will likely be unique to China, at least with Agricultural Bank. The total market capitalisation we use in these calculations are for banks under our coverage, which includes 13 banks in India, six banks in China and four banks in Indonesia. One conclusion is that Indonesia continues to appear cheap when considering bank market capitalisation to GDP, and considering other factors: high Cagr and high ROA.

Figure 94

Market capitalisation to GDP GDP

(local ccy in bn) China 33,535 37,811 41,571 47,391 54,026 61,589

2009A 2010E 2011E 2012E 2013E 2014E

India 61,253 72,659 86,005 98,046 111,772 127,420

Mkt cap Indonesia 5,613,000 6,538,000 7,535,000 8,589,900 9,792,486 11,163,434

China 4,803 6,411 7,845 9,464 11,416 13,374

India 5,658 7,134 9,297 12,298 16,273 20,527

Mkt cap to GDP (%) Indonesia 344,117 465,812 567,637 698,274 858,975 1,073,189

China 14.3 17.0 18.9 20.0 21.1 21.7

India 9.2 9.8 10.8 12.5 14.6 16.1

Indonesia 6.1 7.1 7.5 8.1 8.8 9.6

Source: CEIC, Datastream Figure 95

Room for appreciation

Current bank market capitalisation to GDP HK Singapore Malaysia Australia UK Taiwan Thailand China Indo Korea India Phil USA Japan

(%) 0

10

20

30

40

50

60


Top three recommendations Growth opportunities will remain strong for the next five to 10 years

Over the next five to 10 years, while the growth opportunities remain strong, banks will have to sooner or later differentiate themselves to win customer loyalty, particularly early in a market like India. And therefore, in the longer run banks will need to evolve into financial brands with a perception of customer service levels and delivery of the same. This drives our choice of top picks for the next five to 10 years.

Effective leveraging of technology is important, as seen in India

What will also differentiate winners is the use of technology or rather the effective use of technology. In India, the effective leveraging of technology is what gives the private sector banks an edge over their public sector brethren

52

[email protected]

19 April 2010

Mr & Mrs Asia

Banks

despite their physical reach being limited. On the other hand, while PSU banks have rolled out technology platforms, implemented core banking solutions and recently embarked on brand building campaigns, their services are yet to improve significantly and they are not leveraging on the technology to give customers more. Figure 96

Technology has differentiated private banks from the PSUs

Types of saving accounts Axis

12

HDFC Bank

12

ICICI

11

BoB

9

BoI

5

SBI

5

Central Bank

4

PNB

4

Union Bank

4

0

2

4

(No.) 6

8

10

12

14

Figure 97

Private banks are significantly ahead of PSU banks . . .

Customer-service and technological positions Customer service Inherited strong IT and product strategy from parent

Foreign banks

Standardising service experience Advanced treasury Focused on customer service and product innovation

Private banks

. . . especially Tier-II PSU banks

Tier I PSU banks

Tier II PSU banks

75-100% C BS Rebranding and repositioning

Poor IT platform Legacy customer relationships

Implementation of technology


19 April 2010

[email protected]

53

Mr & Mrs Asia

Banks

Figure 98

PSU banks have been a decade behind private banks in terms of information technology Areas Areas where where PSU PSU banks banks lag lag behind behind private private banks banks

Private Private banks banks

PSU PSU banks banks

1995-early 2000s

2005

2008 to date

100% 100% computerised computerised 100% 100% CBS CBS platforms platforms

Stabilised Stabilised IT IT network, network, launch launch internet internet banking banking and and other other services services

Leverage Leverage technology technology to to improve improve customer customer service service

Limited Limited computerisation computerisation No No CBS CBS platform platform

60% 60% branches branches computerised; computerised; 11% 11% branches branches under under CBS CBS

About About 100% 100% branches branches computerised; computerised; about about 80% 80% branches under branches under CBS CBS

Segmentation Segmentation of of customers customers

Online Online trading trading

Internet Internet banking banking

Cash-management Cash-management services services

ATMs; ATMs; debt debt card card and and credit credit card card

Cross-selling Cross-selling of of products products

Phone Phone banking banking

Remittances Remittances

Note: CBS = Core banking solutions (ERP software). Source: CLSA Asia-Pacific Markets

Bank Central Asia is our best pick in the region

Where market capitalisation remains low to GDP in Indonesia and a rising middle class can mean better growth relative to our expectations based on GDP alone, it stands out as the most interesting country. Within Indonesia, BCA is our top recommendation. This is partly due to good valuations even after year five, like many banks, but also it has one of the highest levels of capital, so with more margin for error. BCA furthermore controls the market in Indonesia for transaction banking, which is unique. A seemingly strong management team also adds to BCA’s attraction, with a good balance on conservatism, growth and returns.

HDFC Bank is among our top picks given its sterling track record

We also include HDFC Bank as a top three recommendation, given its historical strong price appreciation, well above average profit growth over the coming years and its strong capital base. It can further extract more returns from its relationship with HDFC as well as its product sales from non-banking businesses, above and beyond our estimates. At 280% price appreciation over five years, it stands out as one of the best in all these countries, and where that growth rate is well below what it has seen in the past; eg, it can prove too conservative.

Bank of China makes it on to this list on attractive valuations

Bank of China is our final recommendation, given its lower valuations versus peer state banks, its above average price appreciation over five years versus peer state banks, and a far better profit growth profile. ICBC and CCB should see 19% average annual profit growth over five years, not bad in absolute terms, but the lowest of the group we have looked at here and lower than the 23% for BOC. Where its equity/loan ratio falls below peers in year five to 7.7%, we remind that this does not take into account likely lower risk weightings on SOE loans that will see risk-weighted assets fall for all three state banks. At 4.2x PE in five years, BOC is also one of cheapest in these three countries, compared with growth.

Risks An economic downturn is the biggest risk to our forecasts

54

The greatest risks to our five year projections are primarily GDP growth assumptions, which drive our loan growth and deposit growth, over the period. At the same time, we are taking a clinical view of the outlook based on growth, where, in practice, growth is often interrupted by a bad loan cycle or an [email protected]

19 April 2010

Mr & Mrs Asia

Banks

economic downturn. A more positive risk is our implicit rather than explicit assumption for a growing middle class, which could add substantially to credit demand and the overall relationship between credit growth and GDP growth. Regulatory risks

The second risk is likely from the regulatory side. As the markets grow in terms of size and penetration, regulators in different countries will look towards new regulations, which in most cases are likely to be perceived to be favouring customers and protecting customer interests. Pro-customer regulations have been implemented in developed markets, including the USA and Australia, and regulatory intervention could hurt retail fee growth in China, India and Indonesia. Figure 99

Key regulatory changes regarding retail fees Australia

Australia capped the interest rate on credit cards

India

Banks disallowed from charging ATM interchange fees to customers SEBI bans upfront load on mutual funds - makes distribution fees more transparent

USA

The Card Act 2009 caps/monitors charges and fees on credit cards


19 April 2010

[email protected]

55

56

Figure 100

Asian banks valuations Price

MCap (US$bn)

Rec

MCap/ MCap/ asset (%) deposits

21.47 85.60 30.05 203.00 102.23 70.00

26.0 3.0 7.7 55.2 27.0 185.7

BUY BUY O-PF O-PF U-PF SELL

15.3 16.3 10.1 12.0 23.6 8.1 16.3

5.03 11.13 7.65 6.57 6.51 17.33

143.0 61.1 203.3 37.8 249.5 52.3

BUY BUY BUY O-PF O-PF SELL

1,310 2,925 2,040 1,050 185 325 650 470 300 350 400 920 2,000

10.6 17.9 20.0 24.3 4.9 1.9 5.3 1.6 3.4 4.3 3.9 7.1 30.1

5,800 6,000 2,000 8,700 4,500

PE (x)

PB (x)

ROAE (%)

ROAA (%)

CAR (%)

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

19.6 19.1 12.5 17.7 30.5 13.9 20.4

14.6 18.2 21.1 16.7 15.8 31.4 16.3

11.6 14.4 15.5 15.5 14.3 16.8 20.4

10.7 13.1 14.0 12.4 12.7 11.6 17.4

1.95 2.03 1.54 2.58 3.59 1.42 13.9

1.83 1.84 1.42 1.41 3.32 1.40 12.6

1.72 1.66 1.36 2.08 2.93 1.31 2.28

14.8 11.7 7.6 12.9 24.1 5.3 2.10

16.3 13.4 9.5 12.7 24.1 8.6 1.92

16.6 13.3 9.9 14.2 24.5 11.7 14.5

1.16 0.95 0.60 0.73 1.66 0.24 15.8

1.37 1.15 0.80 0.81 1.71 0.48 16.1

1.37 1.20 0.82 0.97 1.80 0.68 1.09

16.9 15.6 13.3 16.5 15.8 13.7 1.26

15.5 16.4 13.9 15.6 13.9 14.5 1.30

14.4 16.9 12.6 15.8 14.4 14.7 15.4

11.8 9.0 8.6 14.7 15.0 13.4 12.1

13.2 9.9 9.3 16.1 16.5 14.8 13.3

17.2 9.6 8.4 14.1 22.1 21.3 15.4

14.7 7.4 6.9 11.1 18.6 18.2 12.8

12.6 6.4 5.7 8.9 16.1 15.0 10.8

2.73 1.77 1.71 1.94 4.22 3.64 2.67

2.30 1.43 1.49 1.72 3.42 2.85 2.20

2.07 1.23 1.29 1.50 3.03 2.41 1.92

16.6 19.5 21.6 14.5 20.2 18.8 18.5

16.7 20.4 22.9 16.4 20.0 18.0 19.1

17.2 20.6 24.2 17.9 20.0 17.4 19.6

1.03 1.01 1.27 1.11 1.19 0.93 1.09

1.04 1.13 1.31 1.15 1.25 0.97 1.14

1.12 1.24 1.40 1.19 1.36 1.05 1.23

11.1 12.0 11.9 11.7 12.4 9.5 11.4

12.3 13.6 11.8 10.9 13.6 11.6 12.3

12.1 12.8 11.5 10.7 13.5 11.6 12.0

BUY BUY BUY BUY BUY BUY O-PF O-PF O-PF U-PF U-PF U-PF U-PF

21.7 61.1 33.0 24.2 51.8 5.7 7.6 5.9 7.0 6.0 6.1 9.1 10.8 19.2

27.4 na 42.4 40.0 na 6.5 8.9 6.8 8.2 7.1 7.3 10.7 13.6 16.3

18.9 29.4 30.0 27.0 22.0 6.3 8.3 6.4 7.7 9.2 5.5 8.7 13.0 14.8

15.5 26.1 23.7 20.6 19.3 7.0 8.1 5.6 7.5 7.5 6.3 8.5 12.9 13.0

12.1 22.7 18.5 16.9 16.3 6.0 6.8 4.7 6.1 5.7 5.4 7.0 10.5 10.7

2.95 5.30 4.19 2.07 3.24 0.99 1.57 1.23 1.52 1.28 1.18 1.83 2.02 2.26

2.57 4.99 3.69 1.94 2.87 0.88 1.37 1.05 1.34 1.13 1.04 1.57 1.80 2.02

2.21 4.48 3.20 1.81 2.53 0.78 1.19 0.89 1.16 0.98 0.91 1.35 1.59 1.78

19.1 19.4 16.3 7.8 15.6 16.8 20.2 20.7 20.9 14.6 23.2 22.6 16.5 18.0

17.7 20.1 16.6 9.7 15.8 13.3 18.1 20.2 19.0 16.1 17.4 20.0 14.8 16.8

19.7 20.9 18.5 11.0 16.5 13.8 18.8 20.5 20.4 18.5 17.9 20.7 16.1 17.9

1.53 2.51 1.45 1.04 3.05 1.12 1.14 1.17 1.13 0.84 1.32 1.32 1.01 1.43

1.54 2.57 1.53 1.26 2.93 0.87 1.00 1.14 1.01 0.87 1.02 1.16 0.90 1.37

1.61 2.63 1.61 1.31 2.89 0.88 1.03 1.17 1.07 0.97 1.06 1.21 0.95 1.41

19.4 10.5 17.0 19.2 23.8 13.5 15.4 16.1 13.8 13.2 13.9 15.0 12.4 15.6

18.9 10.7 15.1 18.5 20.0 12.8 14.6 15.2 13.5 12.5 14.5 15.0 12.3 14.9

18.2 11.1 13.6 17.7 18.5 12.4 14.6 15.0 13.8 12.0 14.9 15.3 12.1 14.6

12.2 16.0 1.5 11.7 5.0

BUY BUY BUY O-PF U-PF

25.1 45.3 19.5 32.5 37.5 32.0

32.1 48.0 27.7 37.9 52.6 39.7

16.7 20.7 27.1 15.3 17.6 19.5

13.6 16.2 15.3 12.4 15.0 14.5

11.3 14.3 11.0 10.6 13.7 12.2

3.17 5.19 2.49 3.81 2.87 3.51

2.73 4.30 2.19 3.06 2.55 2.97

2.34 3.64 1.92 2.50 2.32 2.54

20.2 27.2 11.8 27.6 15.4 20.4

21.6 29.0 15.2 27.3 18.0 22.2

22.4 27.6 18.5 25.9 17.8 22.4

1.77 2.60 0.97 2.61 1.92 1.97

1.98 2.92 1.38 2.79 2.68 2.35

2.11 2.95 1.58 2.88 2.59 2.42

18.1 18.7 21.8 15.1 20.8 18.9

14.2 19.3 15.2 14.1 20.6 16.7

12.0 19.0 14.8 14.2 19.4 15.9

16,100 21,100 44,000 64,000 57,000 22,000 16,500 15,000

2.0 1.8 6.6 18.3 20.1 12.3 8.0 7.1

BUY BUY BUY BUY BUY BUY O-PF U-PF

6.8 6.7 4.7 7.5 8.4 4.8 8.9 5.7 6.7

12.7 12.5 8.3 13.1 14.5 7.9 17.7 20.5 13.4

8.1 11.8 23.9 34.1 20.0 13.6 10.1 12.4 16.7

7.3 7.3 7.0 9.1 8.8 7.1 5.9 7.8 7.5

6.2 6.2 6.1 6.9 7.6 6.4 8.7 6.6 6.8

1.05 1.14 0.77 1.03 1.31 1.01 1.13 1.01 1.06

0.94 1.00 0.70 0.96 1.20 0.91 1.07 0.89 0.96

0.85 0.90 0.63 0.86 1.05 0.81 0.99 0.80 0.86

13.0 10.1 3.3 3.2 6.6 7.9 12.2 8.3 8.1

13.5 14.6 10.5 10.9 14.2 13.5 18.6 12.2 13.5

14.3 15.4 10.9 13.2 14.6 13.5 11.7 12.7 13.3

0.84 0.63 0.20 0.20 0.41 0.36 0.89 0.47 0.50

0.96 0.95 0.68 0.75 1.01 0.68 1.54 0.76 0.92

1.04 1.04 0.73 0.94 1.10 0.73 0.99 0.82 0.92

14.7 14.1 15.0 14.0 15.1 14.2 14.9 11.9 14.3

14.7 14.5 15.1 14.1 16.2 13.1 15.8 11.9 14.4

14.1 14.7 16.2 14.6 17.6 12.7 15.9 12.0 14.7

5.80 15.00 8.70 11.50

4.7 15.5 16.5 13.2

BUY BUY BUY U-PF

14.7 19.3 15.8 17.4 16.8

19.2 24.5 20.3 19.5 20.9

14.5 18.3 62.5 16.9 28.0

12.0 15.0 14.6 14.8 14.1

9.7 11.8 12.4 12.4 11.6

1.61 2.47 2.13 3.86 2.52

1.47 2.24 1.90 3.35 2.24

1.32 2.02 1.74 2.84 1.98

11.6 14.2 3.1 24.5 13.3

12.8 15.2 13.8 24.1 16.5

14.4 17.5 14.6 24.7 17.8

1.08 1.26 0.24 1.22 0.95

1.27 1.36 1.13 1.24 1.25

1.46 1.57 1.22 1.33 1.39

17.3 14.3 16.1 14.7 15.6

17.2 14.4 16.3 14.5 15.6

17.2 14.2 16.1 14.7 15.5

Continued on the next page

Mr & Mrs Asia

19 April 2010

09A

Banks

[email protected]

Hong Kong (HK$) BOC (HK) 18.96 Wing Hang 79.55 BEA 29.35 StanChart 213.60 Hang Seng 109.30 HSBC 82.70 Avg (HK banks only) China (Rmb) BOC 4.37 BoCom 9.68 CCB 6.75 China Citic 6.02 ICBC 9.68 CMB 21.20 Average India (Rs)¹ Axis Bank 1,177 HDFC 2,822 HDFC Bank 1,950 ICICI Bank 965 IDFC 174 Oriental 338 Baroda 643 Corp Bank 492 Union Bank 300 BoI 367 Canara 417 Punjab 990 SBI 2,092 Average Indonesia (Rp) Mandiri 5,300 BCA 5,850 BTN 1,560 BRI 8,650 Danamon 5,300 Average Korea (won) Busan Bank 11,900 Daegu Bank 15,250 Hana Fin 34,950 Kookmin 53,600 Shinhan 47,450 Woori 17,250 KEB 13,900 IBK 14,500 Average Malaysia (RM) AMMB 5.00 CIMB 14.22 Maybank 7.50 Public Bank 12.04 Average

Target

19 April 2010

Asian banks valuations (cont’d) Price Target

Rec

MCap/ asset (%)

MCap/ deposits

09A

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

50.00 60.00 22.50 45.00

2.3 2.1 0.4 3.4

BUY BUY O-PF SELL

10.1 10.4 6.2 19.3 11.5

12.6 13.5 8.4 23.5 14.5

16.2 15.2 6.0 17.6 13.7

14.7 13.4 5.6 16.0 12.4

13.1 11.4 5.0 14.2 10.9

1.72 1.32 0.75 2.28 1.52

1.55 1.23 0.68 2.16 1.41

1.40 1.13 0.62 2.12 1.32

10.2 9.9 11.0 13.2 11.1

10.3 10.4 10.5 13.9 11.3

10.5 11.3 10.8 15.0 11.9

0.73 0.76 1.18 1.23 0.97

0.72 0.80 1.15 1.26 0.98

0.73 0.87 1.18 1.30 1.02

17.5 14.0 29.0 14.0 18.6

17.5 14.0 29.0 13.0 18.4

17.5 13.0 29.0 13.0 18.1

18.60 23.80 8.10

24.3 21.8 20.8

BUY BUY U-PF

8.3 15.8 13.9 12.7

11.4 19.6 23.9 18.3

16.8 17.0 14.9 16.2

13.0 12.5 14.3 13.3

10.6 10.9 13.5 11.6

1.34 1.81 1.70 1.62

1.30 1.68 1.70 1.56

1.18 1.61 1.61 1.47

9.0 10.4 11.0 10.1

10.2 12.5 10.7 11.1

11.7 13.6 11.2 12.1

0.79 0.97 1.02 0.93

0.99 1.29 1.06 1.11

1.14 1.42 1.11 1.22

16.7 19.6 16.5 17.6

15.5 16.0 14.6 15.4

13.9 14.4 13.5 14.0

25.20 18.50 16.50 26.00 65.00 41.00 14.00 12.00 16.59 16.00 11.00

5.4 1.6 2.5 5.1 16.4 9.9 3.2 2.9 3.6 6.5 2.2

BUY BUY BUY BUY O-PF O-PF U-PF SELL SELL SELL SELL

9.4 5.1 7.5 28.1 11.5 10.4 5.0 6.1 5.8 7.7 3.1 9.1

12.6 6.0 9.2 47.3 40.3 27.0 27.8 7.0 6.9 10.6 3.7 18.0

124.1 27.3 89.3 22.8 47.6 16.2 75.0 29.4 41.8 14.6 11.1 23.3

17.4 13.9 16.3 22.3 23.4 18.8 38.6 28.7 17.7 12.7 16.4 20.6

8.6 10.0 10.4 17.9 15.3 14.9 12.5 12.4 10.1 9.2 10.2 12.0

1.44 0.95 0.97 1.43 2.48 1.52 1.29 1.16 1.14 1.07 1.00 1.31

1.35 0.90 0.92 1.43 2.24 1.52 1.20 1.16 1.09 1.04 0.96 1.26

1.20 0.85 0.86 1.41 2.02 1.45 1.07 1.14 1.01 0.98 0.92 1.17

1.0 3.8 1.1 6.5 6.2 11.2 1.9 3.9 2.7 7.6 7.6 4.9

6.4 7.2 5.9 6.4 10.1 8.2 3.3 4.0 6.3 8.3 4.5 6.4

12.1 9.5 8.5 7.9 13.9 10.1 9.1 9.3 10.3 11.0 7.1 9.9

0.08 0.22 0.08 1.37 0.28 0.83 0.06 0.22 0.15 0.57 0.29 0.38

0.54 0.39 0.48 1.31 0.51 0.59 0.13 0.22 0.33 0.62 0.18 0.48

1.04 0.52 0.68 1.49 0.72 0.66 0.38 0.47 0.55 0.81 0.28 0.69

14.6 11.1 11.6 11.3 11.5 11.5 10.9 11.1 10.1 11.3 13.0 11.6

14.7 11.5 11.6 10.8 11.2 11.2 11.4 10.6 11.2 11.1 11.6 11.5

14.5 11.3 11.3 10.3 11.2 11.0 10.8 9.7 10.9 10.4 11.1 11.1

190.0 125.0 106.0 23.0 11.4 33.0 1.1

7.1 6.9 8.9 3.7 4.5 2.1 1.7

BUY BUY BUY O-PF O-PF U-PF SELL

12.1 14.3 21.2 13.9 8.8 14.7 9.6 14.0

15.8 20.8 28.8 20.6 11.1 19.6 12.7 19.4

11.1 14.9 13.9 18.0 12.2 16.3 27.4 14.0

9.0 11.2 12.2 12.5 10.4 14.4 26.9 11.1

7.0 8.1 9.6 9.1 8.6 11.9 13.6 8.5

1.17 1.81 2.05 1.29 1.30 1.57 1.19 1.53

1.09 1.66 1.85 1.18 1.20 1.46 1.14 1.40

1.00 1.49 1.66 1.08 1.09 1.34 1.06 1.26

11.2 12.6 15.5 7.5 11.1 9.8 4.4 11.6

12.6 15.4 15.9 9.9 12.0 10.5 4.3 13.2

14.9 19.4 18.2 12.4 13.3 11.8 8.1 15.6

1.20 1.12 1.64 0.87 0.84 0.98 0.36 1.13

1.40 1.36 1.78 1.16 0.88 1.06 0.37 1.32

1.65 1.67 2.08 1.44 0.98 1.17 0.67 1.56

15.3 15.7 16.6 16.8 16.0 12.7 14.3 16.1

15.6 15.9 16.9 16.9 16.4 12.7 13.9 16.3

15.7 16.0 16.9 16.7 16.6 12.6 13.7 16.4

550 3,400 195

77.4 49.7 31.1

U-PF U-PF SELL

3.4 2.6 1.8 2.6

5.4 3.5 3.4 4.1

28.4 15.9 14.3 19.5

25.1 21.4 16.0 20.8

15.8 10.8 10.4 12.3

0.83 0.89 0.89 0.87

0.75 0.85 0.85 0.82

0.72 0.80 0.82 0.78

3.0 5.9 6.5 5.1

3.2 4.1 5.4 4.2

4.6 7.6 8.0 6.8

0.11 0.18 0.13 0.14

0.14 0.17 0.14 0.15

0.21 0.32 0.22 0.25

11.8 na na 11.8

11.8 na na 11.8

11.8 na na 11.8

55.72 27.12 23.99 26.06

83.2 76.4 59.6 54.1

BUY BUY O-PF U-PF

13.9 13.4 12.7 8.2 12.1

23.6 23.9 20.7 16.4 21.2

18.9 18.9 19.6 22.9 20.1

15.3 14.4 15.5 14.1 14.8

14.3 13.2 13.5 12.7 13.4

3.20 2.47 2.02 1.78 2.36

2.85 2.30 1.91 1.69 2.19

2.63 2.13 1.79 1.59 2.04

16.2 16.5 9.9 6.6 12.3

18.6 16.3 12.9 10.8 14.7

18.2 16.4 14.0 11.4 15.0

0.83 0.84 0.61 0.35 0.66

0.97 0.99 0.89 0.63 0.87

1.02 1.06 1.00 0.67 0.94

10.2 10.8 13.7 11.5 11.5

11.8 11.6 14.1 11.8 12.3

12.2 12.1 14.6 11.7 12.6

19.00 34.00 55.00 3.00 47.00 24.00 25.00 25.00

187.2 39.3 33.7 132.5 183.3 168.0 23.5 52.6

O-PF O-PF O-PF U-PF U-PF U-PF SELL SELL

7.0 16.7 11.3 7.3 9.7 13.6 13.8 18.3 12.2 15.0 13.6

7.8 18.8 12.8 7.9 10.7 15.1 15.3 20.1 13.6 19.4 17.9

na na 14.8 na 20.6 18.5 29.7 28.9 22.5 17.9 18.6

14.5 14.5 17.1 na 15.3 14.7 21.2 na 16.2 13.3 14.2

8.2 11.8 12.9 17.3 10.8 9.9 13.6 11.8 12.0 10.8 11.2

0.59 1.35 1.37 0.38 1.10 1.35 1.33 2.34 1.23 2.03 1.90

0.76 1.49 0.98 0.88 1.08 1.46 1.44 1.94 1.25 1.81 1.72

0.71 1.37 0.93 0.85 1.01 1.32 1.35 1.79 1.17 1.62 1.55

(1.1) (1.6) 11.6 (6.3) 5.8 9.5 4.9 7.2 3.8 13.1 11.7

5.2 10.0 6.7 (1.4) 7.2 10.2 6.8 (3.9) 5.1 14.6 13.1

8.9 12.1 7.4 5.0 9.7 14.0 10.2 15.8 10.4 15.7 14.5

(0.10) (0.22) 0.97 (0.43) 0.46 0.86 0.50 0.69 0.34 1.04 0.89

0.53 1.22 0.65 (0.11) 0.62 0.94 0.69 (0.36) 0.52 1.22 1.06

0.96 1.38 0.86 0.43 0.91 1.38 0.99 1.41 1.04 1.32 1.18

na na na na na na na na na 15.5 14.9



PE (x)

ROAE (%)

ROAA (%)

CAR (%)

57

Mr & Mrs Asia

¹ Japanese and Indian banks - 09A, 10CL and 11CL. Source: CLSA Asia-Pacific Markets

PB (x)

Banks

[email protected]

Philippines (P) Banco de Oro 43.50 Metrobank 50.50 Rizal 21.00 BPI 46.00 Average Singapore (S$) DBS 14.94 UOB 19.94 OCBC 8.97 Average Taiwan (NT$) ChinaTrust 18.55 E.Sun 13.85 Sinopac 11.60 Yuanta Fin 20.45 Cathay Fin 54.40 Fubon Fin 39.00 Shin Kong 13.05 Chang Hwa 14.65 First Fin 18.20 Mega Fin 18.75 Taishin Fin 13.25 Average Thailand (Bt) Bangkok Bk 121.0 Kasikornbank 93.0 Siam Comm 85.0 Ayudhya 19.7 Krungthai 13.1 Siam City 32.0 Thai Military 1.3 Average Japan (¥)¹ MUFG 512 SMFG 3,285 Mizuho 190 Average Australia (A$) CBA 58.40 WBC 27.84 ANZ 25.36 NAB 27.65 Average USA (US$) BAC 18.66 NY Mellon 32.54 PNC 65.27 Citigroup 4.64 JPM 46.14 WFC 32.42 BB&T 34.05 US Bancorp 27.51 Average Asian average Overall average

MCap (US$bn)

Mr & Mrs Asia

Consumer

Aaron Fischer, CFA [email protected] (852) 26008256

Huei Suen Ng (852) 26008126

Top picks Baidu Market cap Price

BIDU US US$21,720m US$626.16

Sands China Market cap Price

1928 HK US$13,382m HK$12.90

United Spirits Market cap Price

UNSP IB US$3,800m Rs1,335.9

Unilever Indo Market cap Price

UNVR IJ US$10,343m Rp12,200

Consumer - Richer, younger and spending Over the next five years, we expect discretionary spending to increase by 18% per annum in India, 15% in China and 13% in Indonesia. Rising income, the existing low penetration rate of many consumer products and other factors such as falling savings rates and increased credit-card penetration are key drivers. We like all three markets but India is the most compelling with a greater appetite to spend when incomes increase, as measured by an R² of 78%. Also, the country has more favourable demographics given its much younger population versus other countries including China, which will allow for surging consumption of the young, while China has to save for the elderly. Across Asia and in Chindonesia, we expect greater growth in spending on discretionary items versus staples. Consumer electronics, branded clothing and footwear, video games and drinks should grow the fastest in most countries. Tourism will also be a high growth segment for China and India, but less so for Indonesia for the time being. Below we highlight stocks we like over the medium term. We have selected companies which are exposed to faster growing product categories and regions; management with a better track record and companies which typically enjoy industry leading positions with sustainable competitive advantages. These factors typically result in greater profitability and further scope for above average earnings growth and hopefully higher dividends. Despite current rich valuations for some of the names, we believe a portfolio of the below stocks will provide investors with exposure to rising Chindonesian consumption and generate superior investment performance. Figure 101

In the consumer sector, there are 28 stocks to choose from

Preferred consumer stocks Country China

Category Consumer electronics Toys & Games Tobacco Branded/Luxury goods Soft drinks Leisure, travel Gaming & Leisure Sporting goods Department stores Advertising Cosmetics & Toiletries

Stocks Gome, Skyworth, Suning Tencent, Netease Huabao Ports Design, Hengdeli, Parkson Asian Citrus Ctrip Sands China, Wynn Macau, SJM, Melco Crown Anta Parkson Baidu Hengan, Amorepacific

India

Jewellery Alcohol Tobacco Apparel FMCGs Tobacco Snack foods and drinks Consumer products

Titan Industries United Spirits ITC Pantaloon, Shoppers Stop Hindustan Unilever Gudang Garam Mayora Unilever Indonesia

Indonesia


Why China, India and Indonesia? Biggest and fastest-growing

58

Large populations and rising incomes These three countries have the largest populations in Asia and we expect their disposable incomes to grow at the fastest rates in the region. They also have the fastest-growing middle class in Asia, estimated at 11%, 19% and 15% per annum over the next five years for China, India and Indonesia. For developing countries, higher incomes are the biggest driver of consumption growth. [email protected]

19 April 2010

Mr & Mrs Asia

Consumer

Figure 102

Large population = higher growth in disposable income

Disposable income per capita versus population growth, 2009 1,400

(m)

(%)

Population (LHS) Growth in disposable income per capita growth

1,200

12 10

1,000

8

800 6 600 4

400

2

200

0

0 HK

Mal

Sg

Phil

Korea Taiwan

Thai

Indo

India

China

Source: Euromonitor, CLSA Asia-Pacific Markets Figure 103

China, Indonesia and India stand out

Population, disposable income growth versus middle-class growth Country China India Indonesia Thailand Korea Taiwan Philippines Singapore Hong Kong Malaysia

Population (m) 1,328.0 1,168.8 230 64.7 48.7 23 92.1 4.7 7.1 28.1

Growth in disposable income per capita (%) 10.4 7.6 7.4 7.4 5.7 5.7 5.1 4.9 4.2 4.2

Growth, 2009-14 (%) 11.1 18.6 14.6 8.1 0.3 0.3 11.2 1.0 0.8 5.8


Low penetration rates The penetration rates of many consumer items are very low in these countries versus other markets in Asia, particularly developed markets such as Japan, Korea, Australia, Singapore and Hong Kong. Figure 104

Penetration rates of consumer durables as a percentage of household (%) Disposable income¹ (US$) Air-conditioner Cable TV Camera Colour TV Dishwasher DVD Internet-enabled PC Microwave Mobile phone PC Refrigerator Vacuum cleaner Video camera Washing machine

China 7,019 53 49 23 97 0 40 13 29 88 31 60 28 0 71

India 4,414 2 34 5 34 1 2 5 16 18 6 18 32 0 21

Indo HK Japan Mal 5,313 77,436 64,473 19,133 7 84 85 26 1 90 62 12 15 93 85 95 87 100 99 97 4 20 25 17 4 94 72 37 2 72 66 26 23 78 97 37 45 99 93 93 15 77 92 38 25 100 99 85 33 86 98 71 0 29 38 23 28 95 99 92

Phil Sing Korea Taiwan 6,483 88,831 29,651 32,877 11 74 51 88 36 49 71 62 68 89 96 96 90 99 99 99 4 18 7 20 19 59 38 58 12 80 98 81 29 69 80 49 66 99 96 93 24 82 81 72 48 99 100 100 37 78 86 47 0 16 22 7 38 93 99 98

Thai 8,561 14 8 82 97 2 33 14 61 80 28 87 12 3 51

Asia 9,704 34 39 26 78 3 27 15 31 63 27 50 36 3 53

¹ Per household. Source: Euromonitor

19 April 2010

[email protected]

59

Mr & Mrs Asia

Consumer

Penetration remains low . . .

Figure 105

Figure 106

Refrigerator penetration

Washing-machine penetration

Taiwan Korea HK Sing Japan Thai Mal China Asia Phil Indo India

100 100 100 99 99 87 85 60 50 48 25 18

0

. . . for most items

(%)

20

40

60

80

Korea Japan Taiwan HK Sing Mal China Asia Thai Phil Indo India

100

99 99 98 95 93 92 71 53 51 38 28

(%)

21

0

20

40

60

Figure 107

Figure 108

Internet-enabled-PC penetration

Air-conditioner penetration

Taiwan Japan HK Sing China Korea Asia Mal Thai Phil Indo India

88 85 84 74 53 51 34 26 14 11 7

(%)

2

0

20

40

60

80

100

Korea Taiwan Sing HK Japan Mal Asia Thai China Phil India Indo

80

100

98 81 80 72 66 26 15 14 13 12 5

(%)

2

0

20

40

60

80

100

Source: Euromonitor

Other factors Other factors include population growth, urbanisation trends, falling savings rates, increased credit card penetration, improved social welfare such as healthcare, education, pensions and rising conspicuous consumption. These topics have been discussed in detail in our earlier reports such as Mr & Mrs Asia and China Brands Index. Savings rates and credit card penetration is highlighted below. Figure 109

Figure 110

Household savings/disposable income¹

Credit card per capita

China Singapore Hong Kong India Malaysia Korea Indonesia Thailand Australia Taiwan Japan Philippines USA

(%) 0

10

20

30

40

Japan USA HK Korea Singapore Taiwan UK Malaysia Thailand Philippine China India Indonesia 0.0

0.5

1.0

1.5

2.0

2.5

3.0

¹ 2009. Source: CEIC, CLSA Asia-Pacific Markets

Middle-class spending to grow 12% in five years As a result, we expect middle class consumption to increase by 12% in Asia ex-Japan from 2009-14. We expect to see a significantly higher rate for the three nations, with India at 18%, China at 15% and Indonesia at 13%.

60

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

Discretionary consumption is obviously more sensitive to changes in income than spending on consumer staples and therefore we expect faster growth in this area over the coming five years. Figure 111

China, India and Indonesia lead the pack

Middle-class discretionary-spending Cagr, 2009-14CL

India China Indonesia Asia ex-Japan Philippines Thailand Malaysia Taiwan Korea Singapore (%)

Hong Kong 0

5

10

15

20


As mentioned in the opening, the key driver of increased consumption is from rising incomes. The sensitivity to increases in spending as a result of rises in incomes depends on a number of factors but can be best compared by looking at different product categories and different countries. India is the most sensitive to higher incomes

Starting with product categories, we find that the penetration of microwaves, cable television and dishwashers will increase the most with increases in income. We have also analysed the sensitivity to increases in spending on consumer goods by country. India, Philippines, Indonesia and Thailand show bigger growth in consumption of these selected items when income rises. This should be no surprise as these nations have lower penetration of these items versus developed countries such as Japan, Hong Kong and Singapore. Consumers here are prone to trading up price points and spend more on luxury goods, high-end travel and invest/save more of the higher income. Figure 112

Penetration rates are largely a function of income levels

Average R² for all consumer products by country

India Philippines Indonesia Thailand China Singapore Asia Malaysia Korea Taiwan HK Japan

(%) 0

10

20

30

40

50

60

70

80

90

Source: Euromonitor

19 April 2010

[email protected]

61

Mr & Mrs Asia

Consumer

Figure 113

PCs are sensitive to income growth

Asia: Correlation between disposable income per capita vs penetration rate

Microwave PC Cable TV Dishwasher Cassette/radio Fridge Telephone Video camera Cooker Internet-enabled PC Hi-Fi Mobile phone Satellite TV Motorcycle Vacumm cleaner Air-conditioner Black/white TV Camera Passenger car DVD player Colour TV Tumble drier Shower Bicycle CD player Videotape recorder Washing machine Video game console

(%) 0

20

40

60

80

100

Note: Using linear correlation. Source: Euromonitor, CLSA Asia-Pacific Markets.

We note the penetration rate of specific items jumps when incomes reach critical inflection points. We compare incomes for Asia as well as penetration rates for each consumer item. Penetration rates are catching up . . .

Figure 114

Figure 115

Internet-enabled-PC penetration

Air-conditioner penetration

100 80

China India

Japan Indo

USA

120 100

China India

Japan Indo

USA

80

60

60 40

. . . for most consumer products

40

20

20

0

0

1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

1977 1983 1989 1995 2001 2007 2013 2019

Figure 116

Figure 117

Refrigerator penetration

Washing-machine penetration

140 120

China India

Japan Indo

USA

140

China

Japan

120

India

Indo

USA

100

100

80

80

60

60

40

40

20

20

0

0

1977 1983 1989 1995 2001 2007 2013 2019

1977 1983 1989 1995 2001 2007 2013 2019

Source: Euromonitor

62

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

Which market? We like growth markets. . .

Given the better growth profile, we prefer India, then China and then Indonesia. China and India have got a wider variety of investible stocks with decent market cap and liquidity. Taking a longer term view, we also have a preference for India as consumer spending is very dependent on demographics. Sluggish consumption in Japan for the last few years proves the point. As highlighted in the below chart, India enjoys a much younger population than China. As our strategist Russell Napier highlighted in his most recent Solid Ground report, ‘Buy chaos, sell order’: ‘China will need to mobilise more savings to support its ageing population, whereas India can focus on mobilising its savings to facilitate consumption . . . Youth is probably the key ingredient for a population moving towards a consumer society. The older generation in India and China remember the deprivations of a different age and the risks or apparent stupidity of borrowing to consume. However, the youth of both countries increasingly comes with less of such baggage. In an era of growth, debt is good or not bad, and higher living standards make debt less dangerous. Indian and Chinese households save more because they need to protect themselves from negative outcomes. Such negative outcomes are just less likely for those ‘possessing youth, innocence and a bad haircut. India has a lot more youth than China; this will be a key strength in making the transition from mercantilism and will promote higher returns for investors.’ Figure 118

. . . with favourable demographics

Percentage of population by age 0-14

15-24

25-59

60+

Japan HK Singapore China Thailand Asia Indonesia Malaysia India Philippines (%) 0

20

40

60

80

100


What products? All consumption-related

19 April 2010

Consumer expenditure is a broad category and includes housing, transport, education, medical and communications. For the purpose of this section, we focus on regular consumer items such as clothing and footwear, household products and personal care, food, tobacco and leisure spend - those items that fall into the categories which are addressed by our consumer research team’s coverage. Other spending includes housing, transport including autos, communications and education. The importance of each category varies by country. Typically the bigger categories are clothing & footwear, packaged food, consumer electronics, tobacco, drinks and then cosmetics and toiletries.

[email protected]

63

Mr & Mrs Asia

Consumer

Figure 119

Consumer expenditure by country as a percentage of total (%) Alcoholic drinks Clothing and footwear Consumer appliances Consumer electronics Consumer health Cosmetics and toiletries Hot drinks Household care Packaged food Pet products Soft drinks Tobacco Toys and games

China 7 26 6 17 2 3 1 1 15 0 5 16 1

India 15 10 7 20 2 6 2 4 19 0 2 11 1

Indo 1 na 7 na 5 5 4 3 39 0 10 26 na

HK 5 na 1 na 7 16 2 2 41 1 17 8 na

Japan 7 22 4 10 4 5 2 1 28 1 9 5 2

Mal 2 24 5 20 3 6 2 2 21 0 4 9 1

Phil 12 na 5 na 4 9 3 5 33 0 16 14 na

Sing 3 22 5 22 5 7 1 1 17 1 3 10 3

Korea 6 15 7 17 3 7 1 1 25 1 3 12 1

Thai Taiwan 19 13 na na 8 0 na na 5 13 12 16 3 2 4 2 27 36 1 3 10 15 11 na na na

USA 6 25 4 10 4 4 1 2 25 2 7 7 4

Source: Euromonitor

China Faster growth in discretionary spend

We do not actively forecast growth in every consumer product category so we lean on Euromonitor’s estimates. Across its selected categories, the intelligence provider expects a 10% Cagr for a basket of consumer items for 2009-13. This differs from our 15% Cagr in middle-class spending, as we are focused more on discretionary items whereas about two-thirds of Euromonitor’s categories are staple products. We forecast an 8% Cagr in staples and a 15% Cagr in discretionary consumer sales for 2009-13, and 1520% growth for autos and 25% for luxury items. Figure 120

Consumer staples versus discretionary Cagr, 09-13CL (%) 8 15

Consumer staples Consumer discretionary Source: Euromonitor, CLSA Asia-Pacific Markets

Luxury goods lead the way

In terms of product categories, we expect the fastest growth in luxury goods at a 25% Cagr, followed by consumer electronics at 18% - this is the secondlargest product category after clothing and footwear. Next up is toys and games at 13% and then apparel and soft drinks at 10%. We discuss a number of categories in more detail. Figure 121

Clothing and footwear is the biggest category

Consumer expenditure Tobacco 15.7%

Toys and games 1.3%

Soft drinks 4.8% Pet food and care 0.1%

Packaged food 14.5%

Household care 1.1% Hot drinks 0.7% Cosmetics and toiletries 2.6%

Alcoholic drinks 7.0%

Clothing and footwear 25%

Consumer electronics 18.3%

Consumer appliances 6.0%

Consumer health 1.7%

Source: Euromonitor

64

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

Figure 122

Driven by luxury goods

Consumer categories Category Luxury goods Consumer electronics Gaming Toys and games Clothing incl branded sports apparel Soft drinks Consumer appliances Alcoholic drinks Cosmetics and toiletries Household care Footwear Packaged food Consumer health Tobacco Pet food and pet care products Hot drinks

Cagr, 09-13CL (%) 25.0 18.3 18.0 12.9 10.2 10.3 9.3 8.2 7.8 7.1 7.0 7.0 5.6 5.2 4.8 4.3


Luxury goods and branded clothing, and footwear We expect 25% growth in luxury goods sales in China over the next five years. In some respects this is due to the low base, but the luxury goods market in China has been growing rapidly over the last few years. One estimate puts growth in luxury goods at 40% for 2009. China now accounts for between 15-20% of all luxury goods sales globally. Figure 123

Exponential demand with income

Swiss watch imports per capita versus GDP per capita Swiss-watch imports (US$/capita)

140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

Hong Kong Singapore

UAE

Spain

China

0

Thailand

Russia

10,000

Saudi Arabia

20,000

Taiwan Italy

France

30,000

Japan USA

UK Germany

40,000

50,000

GDP/capita (US$) Source: Federation of Swiss Watch Industry, CLSA Asia-Pacific Markets

More growth in luxury segment

Branded goods including price points below the traditional luxury brands such as Louis Vuitton, Hermès and Chanel will continue to see exceptional growth over the coming years. In our China Brand Index report, published last year, we highlight the increasing importance of brand image for consumers when making purchasing decision.

Ports is perceived as a foreign brand

Ports Design, the Hong Kong-listed Chinese luxury goods company would be the most direct way to play luxury goods growth in China. The chart below shows a survey of affluent Chinese consumers conducted by MasterCard (Brand Preference of the China Affluent, May 2008), which highlights Ports as the seventh most preferred luxury brand in China.

19 April 2010

[email protected]

65

Mr & Mrs Asia

Consumer

Figure 124

Quality and image determine brand decision making

Brand image is increasingly important in China

Quality & reliability Brand image/design Performance Price/value Convenience/location Innovation Customer service (% of total votes cast)

Friends' recommendation 0

5

10

15

20

25

30

Source: China Reality Research Figure 125

Foreign brands dominate aspirational fashion, so European names adopted

Most preferred fashion brands Chanel

15.3

Giorgio Armani

15.1

Gucci

11.4

Dior

8.6

Louis Vuitton

8.4

Versace

7.4

Ports

6.7

Only

6.7

Prada

5.5

Calvin Klein

(%)

5.2

0

2

4

6

8

10

12

14

16

18

Source: MasterCard Worldwide Insights, ‘Brand Preference of the China Affluent’, May 2008

We expect 20% growth in branded sportswear over the coming years. In our CRR brand survey, foreign brands such as Nike and Adidas led the way in terms of consumer preference. Nonetheless, Li Ning, Anta and Dongxiang have been growing aggressively and have huge store networks. Sportswear consumers mostly favour Adidas and Nike

Figure 126

Figure 127

Adidas and Nike the leaders

Store network for sportswear companies 8,000

361 Degrees 4% Anta 5%

(No.)

Dongxiang

Li Ning

Anta

7,000

Others 23%

Adidas 30%

6,000 5,000 4,000 3,000

Li Ning 12%

Nike 26%

2,000 1,000 0 2006

2007

2008

2009

2010

Source: China Reality Research, CLSA Asia-Pacific Markets

66

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

Deceleration of store expansion is a good sign

Anta plans to increase their store count to 7,200 by the end of 2010, representing 9% YoY growth (versus 16% in 2009), 3,408 for Dongxiang (14% versus 18% in 2009) and 7,800 for Li Ning (+2% versus 2% decline in 2009). We are positive on the deceleration of store expansion plans for both Anta and Dongxiang, as it will be more focused on organic growth with store efficiency improvement (rather than pushing more inventories into retail channels by aggressively rolling out new stores). For Anta, most of its new openings will take place in lower tier cities, which have high population density but are underpenetrated by Anta. The general apparel market remains very niche and fragmented with the top five brands only accounting for 30% of the brand points. A majority of the most popular brands are domestic names that operate in the mass market, such as Septwolves, Goldlion and Youngor, with the only foreign brand, Calvin Klein, making it into the top five brands. The best way to play growth in branded apparel is through the department store stocks.

Low inventory risk, beneficiary of mild inflation

Top pick Parkson

Department stores in China pursue a concessionaire-led business model without taking on inventory risk. As revenue is linked to gross sales, they are beneficiaries of mild inflation. We expect average-selling-price (ASP) growth to be the major driver of same-store-sales (SSS) growth in 2010, given brand owners’ cost pass-through, product-mix trade up and less discounting. The operators with the most leased store properties still have a good proportion of fixed leases (50-90%), meaning rental costs are not linked to SSS growth. Most operators have a decent degree of operating leverage, which should translate into margin expansion as SSS growth accelerates in 2010. Consumer electronics Consumer electronics is the second-largest consumer category and is also expected to be one of the fastest growing over the coming five years. All categories are expected to grow in double digit terms with better growth in in-home consumer electronics as consumers add items and trade up brands and price points. Computers are expected to grow at a slower rate given the already high penetration rate. Key beneficiaries are Gome and Skyworth, which are currently not under our coverage.

Figure 128

Consumer electronics (US$m) In-home consumer electronics Portable consumer electronics In-car consumer electronics (aftermarket) Computers Total

2009 67,782.4 49,708.0 9,362.0 31,714.6 126,852.4

2010 80,923.8 57,778.0 11,139.0 35,972.9 149,840.8

2011 98,758.5 67,415.3 12,989.2 40,486.1 179,163.0

2012 121,262.5 79,035.6 14,912.0 45,887.2 215,210.1

2013 139,000.7 92,195.0 16,887.5 51,617.1 248,083.2

Cagr, 09-13 (%) 19.7 16.7 15.9 12.9 18.3


Toys and games Toys and games are expected to show a 13% Cagr with video games leading the charge at 17%. Figure 129

Strong growth in children items given one child policy

Toys and games (US$m) Traditional toys and games Video games Total

2009

2010

2011

2012

6,529.2 2,734.7 9,263.8

7,186.5 3,235.2 10,421.7

7,979.7 3,797.5 11,777.2

8,902.1 4,413.7 13,315.9

2013 Cagr, 09-13 (%) 9,983.5 5,092.9 15,076.4

11.2 16.8 12.9


19 April 2010

[email protected]

67

Mr & Mrs Asia

Consumer

Games are booming

China’s online-games market is booming, with massively multiplayer online role-playing games (MMORPGs) growing rapidly, casual games taking off and broadband penetration accelerating. China will follow the Korean model where online dominates the gaming market. The market is still underpenetrated, especially given the lack of entertainment alternatives. Demand will be even stronger when broadband coverage reaches rural areas. Online games are a highly profitable business with ROIC of more than 200%. Figure 130

Market doubled from 2007 to 2009

Online gaming revenue 35

(Rmbbn) 29

30 25 21

20 14

15 10

8 5

5 0.2

0

2001

1

2002

3

2

2003

2004

2005

2006

2007

2008

2009

Source: Companies, CLSA Asia-Pacific Markets

Higher end/value added segments growing at a much faster pace

Cosmetics and toiletries The growth for the cosmetics and toiletries segment is 8% per annum over the next four years but we expect rapid growth in higher end segments such as premium cosmetics, men’s grooming products and baby care. There are no pure plays on cosmetics growth. One might look at Hengan in sanitary napkins and diapers or some of the cosmetics names outside China such as Unicharm, Shiseido and Amorepacific. Figure 131

Cosmetics is a highgrowth industry

Cosmetics and toiletries Cagr, 2009-13 Babycare Men's grooming products Premium cosmetics Fragrances Deodorants Skincare Sun care Colour cosmetics Cosmetics and toiletries Hair care Depilatories Oral hygiene Oral hygiene ex power toothbrush Bath and shower products

15 12 11 10 9 9 9 8 8 8 6 4 4

(%)

3

0

2

4

6

8

10

12

14

16


68

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

A mixed bag

Packaged foods and drinks For packaged foods and drinks we expect a 7-10% Cagr over the coming years. Faster segments include chilled processed foods (+13%), baby foods (+9%), fruit/vegetable juice (+13%), ready-to-drink (RTD) tea and coffee (13%) and Asian specialty drinks (+12%). Our two preferred plays in this space include Want Want China and Asia Citrus. Asian Citrus owns the largest orange plantation in China, with 10% of market share in the orange sector and 30% of citrus output. Strong demand for high quality fruit from modern retailers should drive growth. Want Want generates around 25-30% of sales from rice crackers, 45% from dairy and beverages and 25% from snacks. The company is stepping up growth in all segments, even lower margin categories. Dairy and beverages is the current focus with expected growth of 40-45% in 2010. Figure 132

More consumption of rice crackers

Want Want China - Key product categories and targeted growth % of sales 25-30 45 25

Rice crackers Beverage/Dairy Snacks

2010 growth (%) 25-30 40-45 20-25

Source: Company, CLSA Asia-Pacific Markets

Lower growth

Tobacco Tobacco consumption is one of the larger categories for a Chinese consumer, next to packaged food as well as consumer electronics. However, the adult smoking prevalence in China is expected to gradually decline going forward thanks to sluggish population growth as well as rising environmental and health concerns. Growth in the next four years is expected at 5% per annum. This compares to 7% five years ago. We expect rapid growth in the low-tar segment, which is where Huabao operates. Figure 133

Higher growth in low-tar segment

Forecast sales of cigarettes by tar level as percentage of value growth, 2008-13

Low-tar cigarettes

Mid-tar cigarettes

Cigarettes

High-tar cigarettes

(%) 0

5

10

15

20

25

30

Source: Euromonitor

Pillar industry

19 April 2010

Tourism China has announced that tourism will become a pillar industry for the country. The tourism industry requires lower capex investment, but provides high social and financial return. It is also one of the easiest ways for the government to boost domestic consumption.

[email protected]

69

Mr & Mrs Asia

Consumer

We are set for a rapid increase in travel as there is a very high correlation between travel and GDP per capita. Figure 134

Figure 135

Passenger roundtrips to GDP per capita

China’s growth in outbound travellers

10.00

45

Roundtrips per capita 0.9457

y = 8E-05x

Singapore

2

R = 0.888

New Zealand

1.00

Malaysia

Australia

35

US

30

Thailand

25

Japan

Korea

(m)

40

20 Indo, Phils, Cambodia

0.10

15

China

10

0

10,000

20,000

5

GDP per capita (US$)


0.01

30,000

40,000

0

50,000

1994

1996

1998

2000

2002

2004

2006

2008

Source: CLSA Asia-Pacific Markets, CEIC, SAO Group, Tiger Airways

Favourable government policy

China’s government has set goals for 2015, which we think are conservative:

Tourism revenue to account for 4.5% of GDP (up from 3.8% in 2008) or 12% of service revenue

Domestic tourists to expand at a 10% Cagr to 3.3bn

Inbound overnight tourists to expand at an 8% Cagr to 90m

Outbound tourists to expand at a 9% Cagr to 83m

Urban citizens to take two trips per year and travel to account for about 10% of their total annual spending

500,000 new job creation

This implies that tourism revenue should expand at about a 13% Cagr over 2009-15. Domestic revenue growth will likely be higher at about a 14% Cagr. These are easy goals as they are in line with historical tourism revenue fiveyear Cagr of 12.7% (domestic tourism revenue at a 13.9% Cagr). Figure 136

China tourism revenue 2004

2005

2006

2007

2008

15CL

Cagr, 04-08 (%)

Cagr, 09-15 (%)

15,988

18,321

21,192

25,730

30,067

60,737

15.5

10.6

4.3

4.2

4.2

4.2

3.8

4.5¹

Total

684

770

894

1,083

1,153

2,733

12.7

13.1

Foreign receipts

213

241

271

306

279

547

9.5

10.1

Domestic

471

529

623

777

875

2,187

13.9

14.0

Nominal GDP (Rmbbn) Tourism % of GDP Tourism revenue (Rmbbn)

Tourists (m) Inbound overnight Domestic Outbound travellers

42

47

50

55

53

90¹

10.0

7.8

1,102

1,212

1,394

1,610

1,712

3,300¹

14.5

9.8

29

31

35

41

46

83¹

17.8

8.8

¹ Government goals. Source: China Year Book, CLSA Asia-Pacific Markets

China’s tourism industry is still in its infancy. China has the lowest entitled annual leave in the world. In China, there are only three major holidays: May Holiday, National Holiday and Chinese New Year Holiday (about three days 70

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

each). Annual leave policy is new to China. Regulation on annual leave was only introduced in 2008 and may not have been fully adopted. Under the regulation, Chinese employees are entitled to five days of annual leave if working accumulatively for one to 10 years, 10 days after working cumulatively for 10-20 years and 15 days after working for over 20 years. Most Asian countries have a minimum of seven days annual leave requirement. Employees in France are entitled to 30 days annual leave, the highest in the world. Figure 137

Too much work, not enough play

Paid annual leave and public holidays in OECD countries (days) Austria Portugal Denmark Finland Germany Spain Italy France Belgium Ireland Norway Australia New Zealand Greece Sweden Netherlands Switzerland UK USA¹ Mexico Canada China Japan

Paid annual leave 22 22 25 25 24 22 20 30 20 20 25 20 20 20 25 20 20 20 10 12 10 0-5 10

Paid public holidays 13 13 9 9 10 12 13 1 10 9 2 7 7 6 0 0 0 0 10 6 8 11 0

Total paid holidays 35 35 34 34 34 34 33 31 30 29 27 27 27 26 25 20 20 20 20 18 18 16 10

¹ The USA does not have legal annual leave and public holidays, but in general, companies offer standard 10 days annual leave and 10 days public holidays. Source: OECD

Chinese people only take one leisure trip per year

Macau’s gaming revenue growth to average 15% over the next five years

Chinese people have taken far fewer trips per year than people in developed countries. On average, Chinese people only take one leisure trip per year, compared to up to five trips in the USA. Given the limited number of holidays, many Chinese people normally return home to visit their family during the long public holidays like Chinese New Year. The government’s goal is to encourage urban citizens to double their leisure trips by 2015. Gaming Asian gaming is a high growth segment that benefits from rising incomes and increased appetite to spend on leisure and travel. In Macau, growth in gaming revenues overtook the Las Vegas Strip in 2006 and average growth in 200209 was 28% per annum. Singapore’s first casino opened recently in February 2010 and its second is coming at the end of April this year. In other markets such as Malaysia, Philippines and Cambodia, casinos already exist. We believe spending on gaming and leisure activities should accelerate when there is a social safety net in place, especially in countries such as India and China. As of now, Macau’s gaming market is mainly supported by Chinese tourists. We expect revenue growth in Macau to average around 18% per annum for the next five years.

19 April 2010

[email protected]

71

Mr & Mrs Asia

Consumer

Figure 138

Explosive growth in recent months

Monthly gaming revenue (MOPm)

16,000

(%)

Monthly gaming revenues YoY growth (RHS)

14,000

80 70 60

12,000

50

10,000

40 30

8,000

20

6,000

10

4,000

0 (10)

2,000

(20) (30)

0 Jan 09

Mar 09

May 09

Jul 09

Sep 09

Nov 09

Jan 10


More spending on leisure when incomes rise

Figure 139

Figure 140

Domestic trips per passenger per year

Average spending per domestic trip

6

(No.)

600

5

4.7

500

4

(US$) 449 392

400 2.7

3

2.4

303

300

2.1

2

1.4

1.0

1 0

200

125

100

81

80

Korea

China

0 USA

Japan

Korea

UK

Taiwan

China

USA

Japan

UK

Taiwan

Source: Euromonitor

The ad market will benefit from China’s consumption growth

Advertising The advertising sector will be a major beneficiary of the secular growth in China’s consumption market. The nation’s adspend growth has a low correlation with GDP growth given the export-led economy, but its correlation with private consumption is close to 70%, similar to the USA. The advertising sector will be the ultimate beneficiary of growing consumer spending as corporations in various sectors compete for market share. Figure 141

Search has been the fastest-growing ad platform

China online advertising Revenue (Rmbbn)

2006

2007

2008

09CL

10CL

11CL Cagr (%) Cagr (%) 04-08 09-11CL

Display ad

4.66

7.71

12.97

13.69

17.11

21.18

66.0

17.8

Paid search

1.39

2.90

5.02

7.12

10.69

14.72

78.1

43.1

Total

6.05

10.61

17.99

20.81

27.80

35.90

68.9

25.9

23.8

YoY change (%)

Display ad

50.3

65.5

68.2

5.5

25.0

Paid search

47.9

108.6

73.1

41.9

50.1

37.7

Total

49.8

75.4

69.6

15.7

33.6

29.2

Display ad

77.0

72.7

72.1

65.8

61.5

59.0

Paid search

23.0

27.3

27.9

34.2

38.5

41.0

% of online ad


72

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

Best positioned for consumption

Figure 142

Figure 143

China’s adspend vs private consumption

USA’s adspend vs private consumption

35

(%)

Nominal GDP

16

30

Private consumption

12

25

Adspend

Nominal GDP Private consumption Adspend

(%)

8

20

4

15

0

10

(4)

5 0

(8)

1996

1998

2000

2002

2004

2006

2008

1996

1998

2000

2002

2004

2006

2008

Source: Euromonitor

Stock picks Our key stock picks

The following stocks benefit from the faster growth expected in the following product categories. Parkson is our top department-store pick. It’s nationwide and well-diversified store network leads to its relative resilience to SSS weakness in specific cities. We expect 10% SSS growth in 2010 which will translate into 28% EPS growth in 2010 followed by 25% EPS growth in both 2011 and 2012. We prefer Parkson to it’s peers due to its:

Nationwide retail network - two thirds of new openings will be in cities where the group has an existing presence, which allows for cost savings and reduces execution risk

Potential earnings accretive M&A, ie, store injections from the parent and buyout of minority stakes in operating stores

One of the highest ROEs in the sector, which justifies a higher PE

Greater liquidity in the shares and longer trading history versus its peers

Anta is our top sporting-goods pick

Our top sporting-goods pick is Anta given its high exposure to low-tier cities; better management of inventory risk in retail channels; enhanced brand equity with sponsorship deal of COC and accelerated investment in A&P; and that its valuation will converge with market leader Li Ning

Baidu is our top pick

Baidu is our top pick in the advertising space. Search advertising has been the fastest-growing advertising platform in China, growing at a 78% Cagr over the past three years. However, it is still in its infancy, accounting for 28% of total online ads, compared to over 50% in the USA and Korea. Using global benchmarks, we believe its online share could grow to 41% in China by 2011 as more advertisers become familiar with the advertising model and large corporations are transferring more budget to search. Baidu will continue to be the dominant operator in the search market. Its market share may reach 77% if Google decides to exit China.

Play China’s tourism boom through Ctrip

Ctrip is the best play for the tourism boom in China as it is the dominant online travel agent in China and has been gaining market share from traditional travel agents. The company already has a leading position in hotel reservation and air ticketing businesses. It has been actively expanding its leisure travel or “Package Tour” business which helps individual travellers to book hotels, air tickets and even tour guides for their holidays. Ctrip is also expanding into inbound and outbound travels. Recently, it acquired the Wing On Travel business. This will give Ctrip access to the Hong Kong market which is a target destination for Chinese tourists. Wing On Travel has a strong brandname and partnership across the region. They also have extensive

19 April 2010

[email protected]

73

Mr & Mrs Asia

Consumer

expertise in group tour and leisure travel which will be complementary to Ctrip. Coupled with ezTravel in Taiwan, the acquisition will also enable Ctrip to offer better service to their customers travelling around Greater China. Spending on gaming and leisure activities to accelerate

Spending on gaming and leisure activities should accelerate when there is a social safety net in place, especially in countries such as India and China. As of now, Macau’s gaming market is mainly supported by Chinese tourists. We expect revenue growth in Macau to average around 18% per annum for the next five years. Key stock picks include Sands China, Wynn Macau and SJM. Our top pick is Sands China, which has the largest footprint in Macau with the most aggressive expansion plan. In the next four years, gaming revenue is likely to grow by 98% while supply will only increase by 30%. Alongside its high operating leverage and aggressive cost-cutting, this will translate into above-average earnings growth over the next five years. Huabao is the best play on tobacco growth. The company has a leading market position in tobacco and fragrances with growth driven by the household product fragrance market and more focus on sales of cigarettes with low tar, which is expected to register stronger growth going forward. The company is also in talks with a number of M&A targets, which could be a catalyst.

Top online-game picks: Netease and Tencent

Our preferred plays are Netease and Tencent in the internet and games space. Tencent is the largest gaming operator in China. Tencent’s gaming revenue should be relatively resilient compared to its peers given their large user base. Also, they are dominant in the casual game market and do not compete directly with Shanda or Netease. Casual games remain a small segment in China, but has great growth potential. The casual game revenue contributes 60% of Korea’s online gaming industry. Netease is the third-largest gaming operator in China. The gaming business should maintain double digit growth for the next two years with World of WarCraft (WoW) as the new growth driver. The company resolved their disagreement with GAPP in February and will likely launch WoW’s second expansion pack Wrath of the Lich King (WLK) in the middle of 2010. Its advertising business is also turning around given the cyclical recovery and the restructuring of their sales force and content on its portal. Consumer electronics is the second-largest consumer category and is also expected to be one of the fastest growing over the coming five years. Key beneficiaries are Gome and Skyworth. Figure 144

Our top picks

Faster-growth categories and stock beneficiaries Category Consumer electronics Toys & games Tobacco Branded/Luxury goods Soft drinks Leisure, travel Gaming & leisure Sporting goods Department stores Advertising Cosmetics & toiletries

Stocks Gome, Skyworth, Suning Tencent, Netease Huabao Ports Design, Hengdeli, Parkson Asian Citrus Ctrip Sands China, Wynn Macau, SJM, Melco Crown Anta Parkson Baidu Hengan, Amorepacific


74

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

India Next, we focus on the world's second most populous nation after China. The large Indian middle class, also the fastest growing in Asia is a very lucrative consumer base. In addition, many large multinational firms are planning or have already set up their manufacturing base in India which would provide enormous employment opportunities and growing incomes. Figure 145

Fastest-growing middle class in Asia

Growth in the middle class over the next five years India Indonesia China Philippines Thailand Malaysia Singapore Hong Kong Taiwan (%)

Korea 0

2

4

6

8

10

12

14

16

18

20


The retail market in India is still extremely fragmented with the top-10 players accounting for only 2% of total retail sales, providing huge scope for a shift to organised retail. Pantaloon Retail leads in terms of market share of the total retail market in India. Figure 146

Very fragmented

Retail market share Company

Pantaloon Retail India

2005

2006

2007

2008

2009

0.2

0.2

0.4

0.5

0.6

Reliance Retail

-

0

0.2

0.3

0.4

Spencer's Retail

-

0.1

0.1

0.3

0.3

LG Electronics India

0.2

0.2

0.2

0.2

0.2

Titan Industries

0.1

0.1

0.1

0.2

0.2

Amway India Enterprises

0.1

0.1

0.1

0.1

0.1

Vishal Retail

-

0.1

0.1

0.1

0.1

Aditya Birla Retail

-

-

0.1

0.1

0.1

Godrej & Boyce

0

0.1

0.1

0.1

0.1

Next India Retail

0

0

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0

0.1

0.2

0.3

-

Others

99.3

98.9

98.2

97.5

97.6

Total

100

100

100

100

100

Shopper's Stop Subhiksha Trading

Source: Euromonitor

Alcohol and consumer electronics are top priority

19 April 2010

Indian consumers typically spend most of their income on consumer electronics, alcoholic drinks, packaged food and apparel/footwear. Growth in the toys and games segment is the highest at 26% driven by a larger young population. Other areas of growth are notably the consumer electronics, and clothing and footwear segment at 22% and 13%.

[email protected]

75

Mr & Mrs Asia

Consumer

Figure 147

Split differ slightly to that of China

Consumer expenditure Toys and games 1%

Tobacco 10% Soft drinks 2%

Alcoholic drinks 15%

Clothing and footwear 10%

Packaged food 18% Household care 4% Hot drinks 2% Cosmetics and toiletries 6%

Consumer electronics 22%

Consumer appliances 8%

Consumer health 2%

Source: Euromonitor Figure 148

Fun and games in India

Consumer categories Category

Cagr, 09-13 (%)

Toys and games

25.5

Consumer electronics

21.9

Clothing and footwear

13.4

Soft drinks

12.7

Consumer appliances

11.6

Pet food and pet care products

11.2

Alcoholic drinks

10.2

Packaged food

8.8

Cosmetics and toiletries

7.6

Hot drinks

7.2

Consumer health

5.4

Household care

4.4

Tobacco

3.1


Biggest and fastest-growing

Consumer electronics Similar to China, consumer electronics is the largest consumer category and is also expected to be one of the fastest growing over the coming five years (22% per annum). All segments in this category are likely to grow in double digit terms with better growth in portable consumer electronics (as opposed to China where growth is coming from in-house consumer items). Computers should grow at a higher rate given the low penetration rate for PCs. Figure 149

Consumer electronics (US$m)

2009

2010

2011

2012

In-home consumer electronics 7,768 8,548 9,488 10,729 Portable consumer electronics 10,654 13,537 17,280 22,074 In-car consumer electronics (aftermarket) 128 165 217 283 Computers 2,237 2,687 3,245 3,949 Total 18,550 22,249 26,985 33,086

2013 Cagr (%) 09-13 12,370 12.3 28,258 27.6 363 29.8 4,857 21.4 40,992 21.9

Source: Euromonitor

76

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

Youth demand

Apparel and footwear The growth in this segment, 18% per annum is driven by the demand from young people who constitute more than 50% of the population in India. The youth in India have increasingly become more economically empowered and have more disposable income than before. The luxury market however is still small and most consumption of luxury items happen when they go abroad. In terms of exposure to the apparel and footwear market, Pantaloon has 5% of market share in this segment followed by Madura Coats (4%) and Bata India (2%). Private labels account for 47% of retail sales in this category.

Quick takeup of video games

Toys and games Toys and games are expected to show a 26% Cagr with video games leading the charge at 42%, much higher than China due to lower penetration rates. Figure 150

Toys and games (US$m)

2009

2010

2011

2012

2013

Cagr (%) 09-13

862

1,034

1,246

1,512

862

20.2

Traditional toys and games Video games Total

254

359

511

728

254

41.8

1,116

1,393

1,757

2,240

1,116

25.5


Makeup to grow fastest

Cosmetics and toiletries In the cosmetics and toiletries segment overall growth is similar to China’s 8% but much of this growth is in colour cosmetics, fragrances and deodorants, as well as premium cosmetics, at 19%, 18%, 11% and 13% respectively. Figure 151

Expect more growth from cosmetics from a low base

Growth in cosmetics segment Colour cosmetics

19

Fragrances

18

Premium cosmetics

13

Deodorants

11

Skincare

9

Depilatories

9

Hair care

9

Men's grooming products

9


8

Sun care

8

Oral hygiene ex power toothbrush

6

Oral hygiene

6

Babycare

6

Bath and shower products

4

0

5

10

15

20

Source: Euromonitor

19 April 2010

[email protected]

77

Mr & Mrs Asia

Consumer

Large players dominate

Tobacco Volume sales of tobacco in India dipped slightly in 2008, due to a combination of factors. Cigarettes registered a sharp decline in volume sales, as a result of legislative factors aimed at drastically reducing consumption. Tobacco consumption in India should increase off a low base from 2008 onwards. In India, the largest player ITC‚ enjoys an 84% share of the cigarette market by value. ITC's competitors in the cigarette business include VST Industries‚ Godfrey Phillips (25%-owned by Phillip Morris) and Golden Tobacco. The four companies control 95% of the market; the rest being contraband cigarettes. Despite losing volume shares as it shut down production of its unfiltered cigarettes following the hike in excise duty, ITC continued to benefit from its wide product portfolio and strong distribution network. Figure 152

Retail sales of tobacco still rising

Retail sales of tobacco 12.0

(US$bn)

11.5 11.0 10.5 10.0 9.5 9.0 8.5 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Euromonitor

Alcoholic drinks Unlike tobacco sales, alcoholic drinks still registered 5% growth (in US-dollar terms) in 2009 even with the economic crisis and terrorist attacks in Mumbai affecting sales in early 2009. The fastest-growing segment is wine at 20% growth per annum in the next five years. Beer comes second at 12%. Figure 153

Prefer wine to spirits

Alcoholic-drinks sales Cagr, 2009-14

Wine

19.9

Beer

12.0

Spirits

9.2

RTD/high-strength premixes

7.1

(%) 0

5

10

15

20

25

Note: RTD = Ready to drink. Source: Euromonitor

78

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

Stock beneficiaries Titan Industries

With organised retailing at a nascent stage, it is difficult to choose a winner at this stage. Most companies have ambitious growth plans and new players are all set to emerge as and when regulations change, particularly those related to foreign direct investments (FDI). Profitable and sustainable models are yet to emerge. In the discretionary space, we highlight Titan Industries which is India's largest manufacturer and retailer of watches and jewellery. It has a 65% market share in the organised watch segment and an 80% share in organised jewellery‚ which is just 4% of the country's total jewellery market given the large unorganised retail market. The company should benefit from growth in incomes and a shift towards organised retail.

United Spirits

Meanwhile for exposure to growth in the alcohol market, we highlight United Spirits as our preferred pick. The firm is the largest liquor company in India with more than 50% of the market. It is part of the UB group‚ which also has interests in brewing (United Breweries) and airlines (Kingfisher Airlines). United Spirits has been at the forefront of consolidation in the domestic liquor industry and its closest competitor today is less than one-fifth its size. However, note that our India consumer analyst Mahesh Nandurkar has recently downgraded the stock to Underperform due to concerns on nearterm earnings downgrades and runup in the share price.

Hindustan Unilever

For exposure to consumer staples in India, we highlight Hindustan Unilever, India’s largest FMCG firm, as our preferred choice. We expect HUL to capture more market share as it increases ad spend. We believe that these efforts along with price cuts are likely to yield results and it is just a matter of time before volume growth bounces back and share stabilises.

Indonesia Has the largest potential for consumer goods growth in Southeast Asia

Favourable demographics driving demand for consumer products

Indonesia has the largest potential for demand growth in consumer goods among Southeast Asian markets. Basic consumption dominates as domestic consumption accounts for two-thirds of the GDP and nearly a half of household expenditure is on food. Urbanisation, a growing middle class, strengthening purchasing power and consumerism will drive growth in the next decade. Average monthly per-capita expenditure in urban areas is 80% higher than in rural areas. Figure 154

Figure 155

Number of people aged below 24

Increase in workforce, 2010-20

70 60 50

(%)

Aged 24 and under

India

135.7

China 50.1 39.1

30

36.8

34.3

30.5

18.2 12.3

8.9

20.5

Brazil

23.1

22.0

20 7.5

22.7

Indonesia

44.3

40

10

Aged 60+

14.9

Phils

12.3

USA

11.4

Japan

(7.5)

Russia

(9.3)

(m)

Europe (21.1)

0 India

Indonesia

Europe

China

USA

Japan

(50)

0

50

100

150


Per-capita consumption for categories such as skin care, liquid detergents, men’s grooming products, conditioners, biscuits, coffee, ice creams, juices and dairy products is much below regional peers. Euromonitor expects double digit growth in a lot of these categories including consumer appliances, which is expected to grow at 12% per annum.

19 April 2010

[email protected]

79

Mr & Mrs Asia

Consumer

Good brands, distribution networks and local knowledge crucial

Skincare and dairy are fast-growing segments in a developing economy

Companies are gearing for greater competition in the world’s fourth largest populated country and are expanding production capacities fast to keep up with rising demand. Companies with good brands, distribution networks and local knowledge will be the winners. Figure 156

Figure 157

Skincare market-size Cagr, 09-13CL

Dairy market-size Cagr, 09-13CL

China

15.6

Vietnam

Vietnam

15.4

Indonesia

Thailand

India

13.5

Indonesia

13.2

India

13.0

Brazil

Thailand Taiwan

(%)

3.4

0

5

9.2 6.2 6.1

Singapore

4.1

USA

9.2

Malaysia

4.4

Mexico

10.1

HK

7.2

Philippines

11.3

Philippines

7.4

South Africa

14.6

China

8.1

Malaysia

19.0 15.5

10

15

20

4.9

Korea

4.5

Japan

(%)

3.2

0

5

10

15

20


Figure 158

Large growth in appliances and tobacco

Retail market of consumer items Items

Cagr, 09-13 (%)

Consumer appliances

16.2

Tobacco

12.2

Consumer health

11.9

Soft drinks

11.0

Packaged food

9.9

Pet food and pet care products

9.6

Hot drinks

9.3


8.4

Alcoholic drinks

7.3

Household care

6.5

Source: Euromonitor

80

Plenty of smokers in Indonesia

In terms of consumption of durables, incomes are directed towards packaged foods and tobacco. Tobacco consumption should grow at 6% over the next four years. Our top pick in basic consumption is Gudang Garam. After 10 years of complacency, the company is finally turning around and the company is making sincere efforts to revamp the business. Gudang Garam is now Indonesia’s largest maker of kretek (cigarettes made with a blend of tobacco, cloves and other flavours), having overtaken HM Sampoerna last year.

Managed well

A change in the ideology of the top management is evident from a number of initiatives taken by the company. Not only is the distribution being managed in house by newly hired, very respected and experienced people from the industry, the company is also hiring brand managers, marketing planners and trainers for the first time. The company launched three mild kreteks last year and one machine made kretek. The stock is trading at 13x 10CL PE with a good 20%+ ROE and potential for higher cash returns. It used to trade at 16x PE before 1997.

[email protected]

19 April 2010

Mr & Mrs Asia

Consumer

Figure 159

Gudang Garam is a beneficiary of continued demand for tobacco

Consumption of various consumer durables, 2009 Alcoholic Drinks 1%

Consumer Appliances 7% Consumer Health 5% Cosmetics and toiletries 5%

Tobacco 27%

Hot Drinks 3%

Soft Drinks 9%

Household care 3%

Packaged food 40%

Source: Euromonitor

A snack food player

We also like Mayora, which has been manufacturing snack foods and drinks in Indonesian since 1977. It is Indonesia’s largest biscuit and candy maker with excellent franchise and a strong foothold in the traditional stores. The second generation of the founding family have joined the business after returning from education in the USA. Inorganic growth is part of a longer term strategy rather than the next two years. The company has increased production capacity for biscuits, coffee and candies. It has launched digestive biscuits to gain share in the growing healthy products market. Indonesia’s per capita consumption of biscuits at 1.1kg is much lower than Malaysia’s at 1.9kg and its per capita consumption of coffee at 0.5kg is the lowest among its peers. But the key risk is that Mayora distributes all its products sold domestically (75% of sales) through a single related party, Inbisco Niagatama, an unlisted company the Mayora family owned. Management does not plan to bring the distribution in house for now but may do so after two years. The distributor makes 6% distribution margins and bears the risks of bad debts and sales returns. At 9x 10CL PE and 20% ROE, the stock is cheap and at a significant discount to peers even though it has related party risks and is illiquid.

Still low consumption of staples such as biscuits and coffee

Figure 160

Figure 161

Per-capita consumption of biscuits

Per-capita consumption of coffee

Singapore

4.0

Hong Kong

Singapore

2.6

South Korea

1.9

Malaysia Taiwan

1.6

India

1.1

(kg/capita)

0.4

0

1

2

1.1

Malaysia

1.1

Thailand

1.2

South Korea

1.8

Indonesia

1.6

Hong Kong

1.9

China

2.1

Thailand

3

4

5

1.1

Taiwan

0.5

Indonesia

0.5

0.0

0.5

(kg/capita) 1.0

1.5

2.0

2.5

Source: Euromonitor

19 April 2010

[email protected]

81

Mr & Mrs Asia

Consumer

Wide margins and high ROEs with pricing power

We also like Unilever Indonesia which is trading at high valuations thanks to its high ROE (85%) and excellent EVA™. As purchasing power and urbanisation increases, consumption of men grooming products, conditioners, skincare, dairy and liquid detergents will grow. Globally, foods make up 54% of Unilever sales while in Indonesia, foods make up only 25% of revenue meaning that there is huge potential in the foods category. The company has major expansion plans this year and we expect 17% top line growth for the next few years.

Unilever has defended its market share and expanded margins

Unilever has defended its market share and expanded margins from 13-14% in the 1990s to 22-24% now. Unilever has a 75-year track record and incredible brands with products at multiple price points. Nearly 1.8m small stores/vendors sell Unilever products across Indonesia. A good distribution is a key strength as Indonesia is the world’s largest archipelago with more than 6,000 inhabited islands. There is a lack of efficient land, air and sea infrastructure.

Lifestyle pick

Figure 162

Figure 163

Indonesia’s urban and rural population

Regional per-capita income, 2007

200 180 160 140 120 100 80 60 40 20 0

(m)

1950

Urban

East Kalimantan

Rural

Jakarta Riau Papua Kalimantan Sumatra Java Bali

(US$)

Sulawesi 1965

1980

1995

2010F

2025F

0

2,000

4,000

6,000

8,000

Source: Population Division of the United Nations Secretariat, BPS

82

[email protected]

19 April 2010

19 April 2010

Figure 164

Valuations Company

Ccy

Price

Rec

Mkt cap (US$m)

PE (x)

Earnings growth (%)

PB (x)

EV/Ebitda (x)

09A

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

Rp

1,610

BUY

306.8

18.7

15.1

12.0

8.2

38.9

25.1

3.2

2.8

2.3

11.4

9.6

7.1

Anta Sports

HK$

13.50

BUY

4,336.5

20.3

20.2

17.0

42.2

17.4

18.7

5.0

5.1

4.3

15.8

15.4

10.8

Asian Citrus

HK$

6.60

BUY

655.5

9.0

7.5

6.4

18.0

22.4

18.0

1.4

1.2

1.1

7.0

5.8

4.9

Bajaj Hindusthan

Rs

138.8

BUY

602.9

13.0

2.8

6.1

nm

218.2

(54.1)

1.8

0.8

0.7

7.5

2.5

3.6

BCML

Rs

93.6

BUY

544.0

11.1

4.3

5.8

120.4

90.0

(25.4)

2.6

1.3

1.1

7.8

3.0

3.0

Belle

HK$

10.92

BUY

11,871.7

26.6

24.5

20.7

28.2

30.4

18.8

4.4

4.6

3.9

18.9

16.0

12.7

Changyu Wine

HK$

66.07

BUY

4,490.5

30.8

24.2

21.3

18.4

21.5

14.0

11.2

9.5

8.4

21.0

16.3

14.2

China Dongxiang

HK$

5.39

BUY

3,936.8

20.5

16.0

13.8

8.6

15.2

16.6

4.1

3.3

2.8

13.9

9.4

7.1

China Resources Ent

HK$

28.10

BUY

8,678.0

23.3

12.6

24.5

26.0

84.1

(48.1)

2.6

2.3

2.2

14.7

12.6

10.8

China Yurun Food

HK$

23.95

BUY

5,016.2

21.4

18.5

15.7

54.1

23.8

18.2

4.5

4.0

3.4

18.5

14.9

12.4

CP All

Bt

27.5

BUY

3,823.1

23.0

18.8

16.1

46.9

39.8

17.0

5.9

6.4

6.6

11.0

9.4

8.1

Foster's

A$

5.43

BUY

9,757.6

17.0

14.2

13.0

(7.7)

22.8

9.5

2.8

2.6

2.4

11.7

9.8

9.1

Gudang Garam

Rp

27,600

BUY

5,900.5

13.6

13.2

11.2

65.6

38.4

17.7

2.3

2.5

2.1

7.5

7.7

6.5

Huabao

HK$

9.89

BUY

3,974.0

20.6

20.5

17.3

20.5

18.8

18.7

7.2

6.8

5.9

16.9

15.8

12.4

JB Hi-Fi

A$

20.01

BUY

2,017.2

26.2

16.4

13.3

23.2

49.3

24.1

9.5

6.9

5.6

16.0

10.2

8.3

Kalbe Farma

Rp

2,100

BUY

2,369.7

15.0

18.7

15.9

22.6

34.9

18.0

2.8

3.6

3.0

7.6

9.7

8.0

LG H&H

won

296,500

BUY

4,715.8

32.1

21.7

17.1

19.1

57.8

27.0

7.9

6.2

4.7

23.6

20.1

17.1

Olam

S$

Orion

won

Parkson Holdings

RM

Parkson Retail

HK$

PCSC

NT$

Ramayana

Rp

SM Prime

BUY

3,930.2

25.2

19.9

15.0

29.6

40.9

32.8

3.9

3.3

2.8

13.7

10.7

8.7

BUY

1,374.9

44.8

7.7

19.6

nm

513.8

(60.6)

3.2

2.3

2.1

30.4

24.2

22.7

5.77

BUY

1,864.7

13.2

17.0

14.0

(18.5)

(9.7)

24.4

2.6

2.6

2.3

10.7

9.2

7.2

12.60

BUY

4,559.2

37.2

26.7

21.4

10.2

28.2

25.1

8.6

6.5

5.4

22.8

16.8

13.2

NT$80.0

BUY

2,636.1

17.9

15.9

13.5

23.9

20.0

17.8

4.2

4.1

3.7

11.8

10.4

9.0

980

BUY

762.2

13.5

15.8

13.3

(22.9)

41.4

19.0

1.8

2.6

2.3

5.2

7.6

6.3

P

9.80

BUY

2,919.7

19.1

16.8

15.2

2.5

17.2

10.9

2.6

2.4

2.2

11.4

10.2

9.4

SR Sugars

Rs

69.9

BUY

501.4

5.2

1.4

3.6

285.8

171.4

(61.6)

1.6

0.6

0.5

3.6

0.7

1.2

Top Glove

RM

13.50

BUY

1,278.7

15.8

15.6

13.7

40.4

45.1

14.0

3.5

4.1

3.5

9.3

9.6

8.3

Uni-President China

HK$

4.67

BUY

2,166.7

23.6

16.7

14.5

126.5

15.9

14.7

2.9

2.2

2.0

12.3

8.0

7.0

Uni-President Ent

NT$

36.7

BUY

4,342.5

20.2

15.3

14.3

104.4

24.6

6.7

2.4

2.0

1.9

50.8

43.0

40.5

Universal Robina

P

25.00

BUY

1,241.5

13.3

18.1

168.3

16.1

1.0

1.4

6.7

8.2

Want Want China

HK$

5.81

BUY

9,891.6

29.6

25.1

21.1

19.2

25.7

19.1

9.4

9.3

8.5

21.9

16.8

13.9

Woongjin Coway

won

36,900

BUY

2,465.5

21.2

17.0

15.5

0.7

25.0

10.0

4.2

4.5

4.3

8.4

7.0

6.4

Billabong

A$

11.62

O-PF

2,731.9

19.6

17.3

13.6

(16.0)

33.7

26.7

2.2

2.3

2.1

11.9

10.7

8.6

Café de Coral

HK$

18.72

O-PF

1,340.6

24.1

23.1

19.9

(1.5)

10.2

16.0

4.2

4.2

3.9

13.3

12.4

10.7

Colgate-Palmolive

Rs

714.5

O-PF

2,200.7

25.0

24.3

22.1

19.6

17.5

9.9

28.5

23.8

19.4

24.1

21.1

18.6

Dabur

Rs

178.1

O-PF

3,491.6

30.6

27.3

23.2

11.1

32.2

17.6

13.5

11.5

9.0

23.6

21.0

17.7

Dairy Farm

US$

7.16

O-PF

9,659.6

22.0

22.6

20.2

10.6

16.4

12.0

14.7

23.9

16.1

13.3

14.0

12.2

Godrej Consumer

Rs

285.1

O-PF

1,989.8

30.0

23.9

20.5

49.4

42.5

16.4

12.5

11.2

9.3

24.0

19.0

16.2

Golden Eagle Retail

HK$

16.00

O-PF

4,005.0

101.9

29.9

24.0

(59.4)

274.0

24.5

8.5

7.6

6.2

24.0

19.3

15.2

Hengan

HK$

57.10

O-PF

8,805.2

32.6

26.9

22.2

58.6

22.1

21.5

7.7

6.9

6.2

22.9

18.7

15.0

Hengdeli

HK$

3.32

O-PF

1,741.3

23.2

21.1

17.8

9.7

29.9

18.7

3.5

3.6

3.2

17.2

15.0

12.6

Hindustan Unilever

Rs

223.8

O-PF

11,055.4

29.1

22.5

20.2

(5.7)

14.6

11.7

24.7

18.6

16.6

23.6

17.9

16.0

Continued on the next page

83

Mr & Mrs Asia

2.75 292,000

Consumer

[email protected]

Ace Hardware Indo

84

Figure 165

Valuations (cont’d) Company

Ccy

Price

Rec

Mkt cap (US$m)

PE (x)

Earnings growth (%)

PB (x)

EV/Ebitda (x)

09A

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

09A

10CL

11CL

Rp

3,825

O-PF

4,013.8

19.0

17.4

15.0

77.9

23.2

15.9

3.3

3.1

2.7

9.9

9.6

8.8

ITC

Rs

271.2

O-PF

23,309.2

25.7

22.7

19.2

6.5

28.9

17.8

6.2

5.8

5.0

16.5

14.4

12.1

KT&G

won

61,700

O-PF

7,687.2

10.9

9.4

9.4

(19.2)

15.2

(1.3)

2.1

1.9

1.7

7.1

6.4

6.4

Li & Fung

HK$

39.00

O-PF

19.0

36.2

27.0

22.5

39.7

62.9

21.2

7.4

7.7

6.7

28.3

22.8

18.8

Myer

A$

3.32

O-PF

1,798.4

13.1

10.7

9.5

25.2

64.6

12.0

2.9

2.2

2.0

10.1

6.3

5.6

NWDS China

HK$

7.20

O-PF

1,564.8

21.4

18.6

14.1

9.6

16.5

32.1

2.6

2.4

2.1

10.8

8.1

5.5

Shinsegae

won

543,000

O-PF

9,193.2

19.8

14.7

13.1

(15.6)

42.3

12.5

2.3

2.0

1.8

13.0

10.6

9.6

Shopper's Stop

Rs

405.2

O-PF

320.0

990.6

37.1

26.8

nm

2,849

38.5

5.1

4.7

4.0

22.5

14.0

11.3

Tingyi

HK$

Titan Industries

Rs

Tsingtao Brewery

HK$

Unilever Indonesia

19.44

O-PF

14,024.8

36.1

29.4

23.7

47.2

24.2

24.1

9.5

8.0

6.7

17.0

14.4

11.5

1,905.7

O-PF

1,916.0

27.8

25.7

19.6

35.3

52.2

31.1

8.7

8.2

5.8

17.4

16.5

12.4

40.30

O-PF

7,017.8

40.2

29.9

25.5

82.3

27.7

17.5

6.1

5.3

4.8

20.1

16.1

13.9

Rp

12,200

O-PF

10,342.9

30.8

26.2

22.3

16.0

36.0

17.5

22.8

21.9

19.1

21.5

19.1

16.1

Wesfarmers

A$

32.37

O-PF

34,887.2

23.1

18.4

14.8

20.9

52.0

25.9

1.3

1.5

1.5

12.0

9.6

8.2

Wilmar Intl

S$

6.99

O-PF

32,110.1

15.6

19.0

15.2

22.9

(10.2)

25.1

2.7

2.6

2.3

16.0

14.5

11.5

Woolworths

A$

Amorepacific

won

BAT Malaysia

RM

China Foods

HK$

David Jones

O-PF

32,230.9

20.3

16.1

14.4

3.4

32.7

11.4

4.8

4.3

3.8

11.2

8.7

7.8

U-PF

5,046.4

31.4

20.4

17.4

17.0

40.6

17.1

4.9

3.6

3.1

18.5

12.7

11.0

45.54

U-PF

4,054.6

16.8

17.5

18.2

(13.0)

9.5

(4.0)

27.8

25.3

22.2

11.8

12.2

12.7

6.60

U-PF

2,375.3

34.2

28.0

23.3

18.1

15.8

20.3

3.5

3.2

3.1

15.9

12.8

10.8

A$

4.70

U-PF

2,191.7

19.1

13.5

12.3

3.3

29.9

9.7

3.9

3.2

3.1

11.4

8.0

7.4

Dynasty Fine Wines

HK$

2.65

U-PF

425.3

20.4

21.7

19.8

9.6

(1.0)

9.3

1.7

1.8

1.7

9.3

9.8

8.9

FEDS

NT$

NT$28.2

U-PF

1,083.6

25.2

14.4

10.8

500.1

36.4

32.8

2.1

1.4

1.1

11.8

7.4

5.5

Hana Tour Service

won

53,100

U-PF

553.7

(696.4)

32.6

26.5

(115.7)

nm

23.1

7.0

6.5

5.8

181.7

22.1

17.7

Harvey Norman

A$

3.64

U-PF

3,601.6

18.5

12.2

10.9

(5.3)

36.4

11.6

2.2

1.7

1.6

10.2

7.3

6.7

HDS

won

102,500

U-PF

2,084.8

12.1

9.5

8.8

(9.3)

20.9

8.7

1.5

1.2

1.1

9.4

7.5

6.7

Hite Brewery

won

142,000

U-PF

1,266.6

16.2

10.0

8.9

84.2

42.7

13.1

2.4

1.7

1.5

10.6

7.0

6.3

LG Electronics

won

117,500

U-PF

17,069.5

9.3

8.4

8.2

351.5

12.7

2.6

1.9

1.5

1.3

4.7

3.9

3.8

Li Ning

HK$

28.45

U-PF

3,841.8

29.0

24.0

20.3

33.2

17.4

18.1

9.9

7.9

6.3

19.0

16.0

13.1

Lotte Shopping

won

317,000

U-PF

8,264.6

15.1

11.3

10.6

(15.1)

28.1

5.9

1.1

0.9

0.8

10.0

7.7

7.1

Nestle India

Rs

2,699.3

U-PF

5,894.8

39.0

33.0

27.8

10.3

31.7

18.8

42.3

36.1

29.0

24.5

20.8

17.6

Pantaloon

Rs

409.8

U-PF

1,766.1

46.7

42.7

35.1

6.8

33.8

24.0

2.7

2.7

2.5

15.1

14.1

12.5

PCD Stores

HK$

2.63

U-PF

1,432.3

33.4

29.9

23.1

41.9

36.5

29.6

3.9

3.6

3.2

23.7

17.4

13.1

United Spirits

Rs

1,335.9

U-PF

3,800.3

47.4

36.1

28.7

52.7

46.2

25.9

4.0

3.5

3.2

18.6

17.4

15.8

China Mengniu Dairy

HK$

26.50

SELL

5,074.8

30.1

32.4

32.6

nm

(11.4)

(0.5)

7.1

5.6

5.0

16.1

16.3

15.8

Intime Dept Store

HK$

7.63

SELL

1,722.9

30.0

28.0

23.6

(2.0)

13.6

19.0

3.3

3.2

2.9

18.7

15.0

12.2

Jollibee Foods

P

58.00

SELL

1,337.1

21.7

21.2

18.9

3.7

11.8

11.9

2.9

2.6

2.1

9.1

8.2

5.1

San Miguel

P

74.50

SELL

5,265.0

20.0

20.6

15.2

1.7

10.9

27.2

1.4

1.4

1.3

9.6

10.0

8.6

Esprit

HK$

62.95

U-R

9,683.4

14.2

16.3

(18.5)

6.3

3.9

4.4

8.5

9.7

Ports Design

HK$

20.70

U-R

1,460.8

28.6

21.0

3.4

17.6

9.2

6.8

21.1

14.9


18.2

15.8

5.9

12.4

Mr & Mrs Asia

19 April 2010

28.28 815,000

Consumer

[email protected]

Indofood

Mr & Mrs Asia

Education

Nimish Joshi [email protected] (91) 2266505054

Top pick Megastudy Market cap Price

072870 KQ US$1,101m 193,400 won

Education - Top priority at all times We expect the education sector to benefit from a young and aspirational population in Asia, particularly China and India. Our Mr & Mrs Asia studies in 2007 and 2009 highlighted how education remains one of the most important items in family budget, in good and bad times. As we wrote in the 2007 report: ‘Mr & Mrs Asia place particular emphasis on their offspring. Practically all want their children to achieve a tertiary education and expectations on academic achievement are high. A high proportion of household budgets also go toward education.’

India - A US$40bn market India’s education sector will reap the dividend of favourable demographics over the next decade or two. By 2020, about 470m of the local population should be in the 5-24 years age group. Most stakeholders recognise the need to put a majority of these young people through formal/vocational education. Importantly, the government realises its inability to educate such a large set and therein lies the opportunity for the private sector. Figure 166

A target market of 470m Indians for education/ training providers

India demographics, 2020 80+ 75+ 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4

Male

Female

(m) 80

60

40

20

0

20

40

60

80


Public education system has failed

India’s education statistics Public education system has failed

361m children should be in school Drop-out rates Grades 1-4 - 16% (25m) Grades 5-8 - 43% (39m) Grades 9-12 - 68% (78m) 219m children are in school

Private schools have disproportionate enrolments 90m children in 75,000 private schools

129m children in 950,000 public schools

40% of children attend 7% of India's schools At least 15,000 schools charge >Rs1,250pm

Source: India’s Department of Education, media reports, NGO studies, CLSA Asia-Pacific Markets

19 April 2010

[email protected]

85

Mr & Mrs Asia

Education

Figure 168

Opportunity for the private sector - Segments within India’s education system

Schooling

Market Cagr (to 2012)

K-12 schools

US$20bn 13-14%

Core education segment, w ith high propensity to spend among middle class

Regulatory ambiguity continues to hinder unfettered grow th

Tutoring

US$5bn 15-16%

High usage of external tuition among urban middle class

Un-regulated market; scattered by locality

Books

US$2.0bn 11%

Grow ing in sync with enrolment grow th of schools

Grow th hindered by reuse of books

Stationery

US$1.3bn 14%

Shift in spending to more expensive options driving grow th in urban areas

Rural spend needs to provide the grow th booster - play on income grow th

Preschool

US$1bn 35%

11% of urban children in preschools, rising

Likely to remain an urban phenomenon

Educational CD-ROMs

US$120m 30%

Increasing use in urban middle/ upper middle class households

ASP decline likely as competition increases

Multimedia in schools

US$30m 75-80%

Installed base has passed critical mass - adoption to accelerate

Fee structure in schools w ill need to uptrend to expand target market long term

Private professional colleges

US$7bn 16-17%

Career focus - engineering, medicine, MBA preferred

Regulations clearer than for K-12 but fee structure is partly regulated

Test preparation

US$1.7bn 19-21%

Career focus - engineering, medicine, MBA preferred

Few national chains, but very large number of regional players

Vocational training

US$1.4bn 22%

Employability in focus as services such as banking, airlines, retail grow

Scalability may remain an issue

Child skill enhancement

US$800m 30%

High adoption in middle/upper middle class in urban areas

Scalability may remain an issue

IT training

US$225m 20-30%

Indian IT industry reaching limit on engineer hiring, given supply constraints

Constant competition from graduate courses in IT, w hich are preferred by some employers

Teacher training E-learning Finishing school

US$70m 60-70%

Emerging segments, high growth

Scalability challenges may remain for the next five years

Professional courses

Skill development

Opportunities with the government ICT @ schools

US$90m 70%

Bid pipeline improving as more public schools open up to ICT

L1 bidding process keeps margins lower, high debtor days

Other areas in PPP

Unknown

Policy shift apparent towards PPP

Very few scale success stories as of now


86

[email protected]

19 April 2010

Education

Mr & Mrs Asia

India’s education failure is well documented . . .

India’s education and training sector offers private institutions an estimated US$40bn market, with a potential 16% five-year Cagr. With 142m of the 361m school-age children not attending classes, the system’s shortcomings are well documented. However, the opportunities for organised private-sector involvement do not enjoy such recognition. Turning education into a profitable, high-growth business is a long-term investment theme. Corporate initiatives are beginning to address the needs of India’s youth by tapping into the propensity of the middle class to spend more on education.

. . . but commercial opportunities are less well recognised

Education is a substantial market when compared with the US$24bn that the government spends each year on defence, which includes revenue and capital expenditure. Further, the private-sector segment is nearly as big as the combined annual budget for power, roads, airports, ports and telecoms (based on the country’s FY07-12 Five-Year Plan). Private spend on education is also nearly five times the annual Union Budgetary outlay for the segment. Overall, education accounts for just 7% of India’s privateconsumption expenditure.

Huge growth potential for those on the bus

In our view, the time for stronger private-sector participation in education has come, and large publicly listed companies will emerge. The biggest listed entity (Educomp) in the space has less than US$220m of revenue from the Indian market in FY10CL. The largest part of the pie is in the K-12 segment and its adjacent markets (tutoring, preschools), and private professionalcourse colleges (engineering, medical and business). A slew of other areas, such as test preparation, preschools and vocational training, are each worth US$1-2bn.

A US$40bn market

We estimate the Kindergarten to Grade 12 (K-12) segment at US$20bn, private professional colleges at US$7bn and tutoring at US$5bn. These are the largest segments of the total private education market that we estimate to be worth some US$40bn. Other meaningful and fast-growing areas include vocational training at US$1.4bn, test preparation at US$1.7bn and preschools at US$1bn. Our proprietary work indicates a growing shift towards private schooling. India’s 75,000 private schools account for 7% of total institutions, but enrol 40% of the country’s 219 million students – even as some 142 million children are not in the school system.

Diversity promises consolidation

The combined market capitalisation of listed education companies in India is only about US$2.5bn, on 2009 revenue of US$500m. We see consolidation ahead, as national chains emerge. Test prep and tutoring appear most segmented, being spread thinly between small regional players; while areas such as e-learning, teacher training and online tutoring are nascent. K-12 and private professional colleges are the most scalable segments on offer.

Regulatory clarity can catalyse growth

The liberalisation debate will intensify as India’s policy planners struggle with a failed public system amid continued resistance to the commercialisation of education. Court judgements have talked of a ‘reasonable surplus’ for schools and higher-education establishments, without clarifying the scale of profits that constitute the surplus. In the absence of centralised or regionally consistent regulation, profit is likely to come from the provision of services such as land leases, intellectual property and school management. Nonetheless, recent policy actions indicate a more liberal and welcoming environment ahead for private participation.

19 April 2010

[email protected]

87

Mr & Mrs Asia

Education

Encouraging steps by the Indian government recently

India’s Human Resource Development Minister, Kapil Sibal, is taking multiple reformist measures. The parliament passed The Right of Children to Free and Compulsory Education Bill in 2009, which envisages free and compulsory education to children in the 6-14 age group. The overall focus on quality of education, be it through more qualified teachers, higher teacher-to-student ratios, improved infrastructure and higher capital commitment by the central government is likely to spur greater opportunities for private players in the public-private-partnership (PPP) domain. Similarly, the Union Cabinet has approved The Foreign Educational Institution (Regulation of Entry and Operation) Bill, which will facilitate the entry of foreign universities in India.

China: Rapid growth ahead Demographics and urbanisation are two key drivers

Favourable demographics and rapid urbanisation are the two key growth drivers of China’s education and training industry. The country has a formal urbanisation policy and target, which restricts free movement of the workforce from rural to urban areas. The urbanisation process picked up in the 1980s and on average about 1% of its population moves to urban cities every year. However, China’s population pyramid suggests it should start growing old by 2025 and its dependency ratio should turn adverse. This is due to Beijing’s one-child policy, which has been in place since the 1980s, and a fall in fertility rates. Currently, there are 420m in the 5-24 age group. However, this could go down to 350m if the one-child policy persists, which could limit the growth potential of education providers in the longer term.

One-child policy could impact demographics for another decade

Figure 169

Figure 170

Demographic profile of China 2005

Demographic profile of China 2020

80+ 75+ 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 (80) (60) (40) (20)

Male

Female

(m) 0

20

40

60

80

80+ 75+ 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 (80) (60) (40) (20)

Male

Female

(m) 0

20

40

60

80


Large and fastgrowing market

88

China’s education market is large and fast-growing. Per International Data Corporation (IDC), in 2008, China's education market totalled Rmb1,613bn, including Rmb1,052bn of public spending on education, of 65.2% of total. Private spending on education totalled Rmb560.78bn, or 34.8% of total. According to World Bank statistics, China has the world’s second-highest number of student enrolment (including primary, secondary and higher education) of 216m in 2006, approximating India’s 244m. With a strong emphasis on developing the nation’s higher education, the total number of post-secondary student enrolments in China increased sixfold between 1997 and 2007, from 3.2m to 19m, or a 19% annual growth rate.

[email protected]

19 April 2010

Mr & Mrs Asia

Education

We expect the industry to continue to expand in China, driven by several macro factors, including rising middle-class population, positive government policies and growing demand for higher education. As part of its latest five-year development plan (2006-10), the country intends to increase its education expenditure considerably from the 2.2% in 2005 to 4% of GDP by 2010 and further improve the enrolment ratios at all levels. China’s education reform has had five dominant tendencies:

Five key aspects of education reform

From central regulation to local autonomy

From elite to mass education

From specialisation to breadth

From public to private

From national to international

China’s economic growth has intensified competition in the labour market. The drive of Chinese people to upgrade their knowledge and skills has created significant demand in the training sector, especially in the areas of language, soft skills and IT training. About 6m fresh graduates enter the workforce every year, creating tremendous demand for such training. Limited highquality education resources and imbalance in their distribution allow afterschool tutoring to emerge as a new area of spend in the private domain.

Big markets - after-school tutoring and employability enhancement

Figure 171

China’s educational structure Typical age 29 3 2 PhD PhD 1 Doctorate degree entrance exam

TV TV and and radio radio university/spareuniversity/sparetime time university/ university/ self-taught self-taught exam exam adult adult education education

3 2 1

Workforce

26

Master’s Master’s

Workforce

23

Master’s entrance examination

Workforce Bachelor 4 3 2 1

University/ University/ institute institute

Diploma

Bachelor/diploma 4 3 2 1

Vocational Vocational university university

2 1

Specialised Specialised college college

19

National entrance examination

Workforce High-school diploma 3 2 1

Senior Senior middle middle school school

Certificate of Graduation/diploma 3 2 1

Specialised Specialised secondary secondary school school

Certificate of graduation/diploma 3 2 1

Vocational Vocational secondary secondary school school

Junior Junior middle middle school school

6 5 4 3 2 1

Primary Primary

Compulsory education

Workforce 3 2 1

16

13

7

Source: Finnish National Board of Education report

19 April 2010

[email protected]

89

Education

Mr & Mrs Asia

Highly saturated education market in China

While consulting firm JLJ values the market for traditional English language training at US$2.2bn, it is highly saturated, with more than 50,000 service providers. In contrast, IDC expects the children’s education sector to grow rapidly and exceed US$18bn by 2013, as parents find it increasingly important to supplement their children’s compulsory education.

Tier-2 cities provide a good opportunity

JLJ writes: ‘Unlike the saturated markets found in Tier-1 cities, where intense competition already exists, opportunities for growth are still found in Tier-2 cities. The education and training market in Tier-2 cities is still relatively new and fragmented, generally dominated by small domestic service providers with no apparent market leaders in many of the sectors. Consequently, first mover advantages can still be enjoyed if the services provided are able to meet the needs of the Chinese customers. Figure 172

Fragmentation in Tier-2 cities

China’s regional markets for education and training

Source: JLJ

Regional governments are encouraging select type of training

English language training sector in Tier-2 cities has potential for foreign investment. This is primarily due to a lack of good English language speakers in Tier-2 cities, which has led companies to offer premium salaries to hire such candidates; the financial rewards of language training can be significant in Tier-2 cities, driving demand for related courses by reputed service providers. In addition, sector-based development encouraged by local governments to develop local economies, creates niche markets within the education and training services industry, eg, IT training. For example, the IT industry in Nanjing is rapidly growing due to the increasing popularity of business process outsourcing (BPO) and is expected to reach a market value of US$8bn by 2010; 10,000 new workers were employed in Nanjing’s BPO industry in the first quarter of 2009.’

Overcapacity, IPR protection and regulatory clarity remain key issues

According to JLJ, overcapacity in certain segments remains a key worry, especially in the children education sector, where competition continues to intensify even as companies expand rapidly despite falling birth rates. Protection of intellectual property rights remains another issue. In the education and training industry, businesses are categorised into core and non-core education services, where institutions issuing degrees fall under the

90

[email protected]

19 April 2010

Mr & Mrs Asia

Education

“core” category and those that do not issue degrees fall under the ”non-core” category. Providers of core education services are heavily regulated and require long approval processes. Figure 173

More than 90% of IT companies provide training

Chinese IT companies that are providing training for employees

100

(%)

92.7

90.8

90 80

68.3

70 60

61.3

50 40 30 20 10

14.8

0 Entry-level

Operations

Language

Management skill

Others

Source: China Sourcing, CLSA Asia-Pacific Markets

Stock picks Megastudy remains our top pick

Our preferred education pick in Asia is Korea’s Megastudy. Already a leading player at home, the company has formed a joint venture to tap the Chinese market. Initially, the 40% owned entity will develop partnerships with elite high schools in Shanghai, Guangzhou, Wuhan, Chongqing and Chengdu and source online content from lectures at these schools. Due to language differences, Megastudy may set up different online sites by province. Given that China is 20 times Korea’s population, and that Megastudy seems to have formulated a viable strategy to enter this market, we are bullish on its prospects here. We currently rate the three Indian companies in our education coverage (Educomp, NIIT and Everonn) Underperform. While Educomp’s service portfolio is well diversified and it has leadership position in multiple segments, we are uncomfortable with its accounting policies. NIIT’s execution ability remains dubious and Everonn lacks depth in segments in which it operates.

Case studies: Government measures to nurture talent Founded in December 2008, Hangzhou Institution of Service Engineering (HISE) aims at developing practice-oriented talent. It focuses on cultivating students’ foreign-language abilities (listening, speaking, reading and writing). It also provides training to help students develop vocational traits and simulates and enterprise environment for them to gain experience on real posts. There is a “three-three” system for the constitution of teachers, namely a third of the teachers are overseas returnees and foreign teachers, a third part-time teachers from enterprises and a third high-level professional teachers.

In March 2009, in order to solve the talent shortage in the software-outsourcing industry, Xi’an municipal

19 April 2010

[email protected]

government decided the administrative committee of Xi’an Hi-tech Industry Development Zone and Xi’an University of Arts and Science should join hands in establishing Xi’an Software Outsourcing College. Attached to the college are Xi’an Software Outsourcing Talent Training Base and Software Outsourcing Talent Practice Base, which shoulder the tasks of academic education, skill training, internship training, high-end talent cultivation and focus on the cultivation of project managers, software-technology engineers, basic outsourcing operators, etc. The college is planning an initial output of 10,000 students every year and a longer-term scale of 15,000 to 20,000 students annually.

91

Mr & Mrs Asia

Education

Interesting companies in this space in China are New Oriental, China Distance Education, ChinaEdu Corp, ChinaCast Education and ATA. However, we do not formally cover any of these stocks. Figure 174

Valuations Company

Code

Educomp

EDSL IS

Megastudy

072870 KQ

NIIT

NIIT IS

Price (local ccy)

EPS Cagr (%) FY10-12

FY11

FY12

FY11

FY12

FY11

FY12

PE (x)

EV/Ebitda (x)

PB (x)

743.8

23.4

19.4

16.2

9.7

7.9

4.1

3.3

193,400

14.5

13.5

11.9

8.5

7.0

3.4

2.8

68.0

20.9

12.6

11.4

13.7

11.1

1.9

1.7


92

[email protected]

19 April 2010

Mr & Mrs Asia

Property

Property - Room to grow

Unitech Market cap Price Vista Land Market cap Price

SMRA IJ US$629m Rp860 UT IB US$4,160m Rs78.1 VLL PM US$384m P2.02

45 40 35 30 25 20 15 10 2008

Summarecon Market cap Price

50

2006

1813 HK US$2,155m HK$5.79

(%)

55

2004

KWG Market cap Price

60

2002

012630 KS US$2,162m 31,300 won

Hong Kong: Home ownership

2000

Hyundai Dev Market cap Price

Figure 175

1998

HDIL IB US$2,348m Rs305.1

1996

HDIL Market cap Price

1994

FLI PM US$556m P1.04

1992

Filinvest Market cap Price

The first striking similarity between Hong Kong in the 1970s and today’s Chinese and Indian property market is the strong underlying housing demand, which is underpinned by a low homeownership ratio (ie, strong aspiration for housing), low leverage (ie, room to gear up) and high income growth (ie, appetite for leverage, as future burden is expected to ease with growth in income). Hong Kong’s homeownership ratio back in the late-1960s and early-1970s hovered around the 20-30% range.

1990

1109 HK US$10,419m HK$16.32

1988

CR Land Market cap Price

Home ownership, a key driver of demand

1986

BSDE IJ US$874m Rp690

1984

Bumi Serpong Market cap Price

1982

ELTY IJ US$553m Rp250

1980

Bakrieland Market cap Price

1978

Top picks

On the back of high income growth, rapid urbanisation, an emerging middle class and access to mortgages, China, India and Indonesia are the most attractive property markets in Asia, and countries like Korea and Philippines are less so. While trying to forecast how these markets will grow, we believe it is worthwhile to see the growth of the property market in Hong Kong. We believe that over the next ten years, these markets, particularly China, will grow the same way as Hong Kong did in the late 1960s and early 1970s. China, India and Indonesia are characterised by strong underlying demand for housing, low household leverage, high income growth and growing penetration of mortgages.

1976


1961

Nicole Wong

Source: Hong Kong Annual Digest of Statistics (1986, 1992), Euromonitor

And, the standard of living was poor too: in 1971, some 42% of Hong Kong’s population still remained in shared living spaces being contained within a room/cubicle. Figure 176

Poor living conditions boosted aspiration for housing

Hong Kong: Distribution of domestic households by types of accommodation Types of accommodation House/stone structure Whole self-contained flat/tenement floor Room/cubicle Bed space Veranda, etc Roof-shack Temporary structure and derelict boat Other land Total

1961 Number 57,419 75,958 313,912 57,841 21,368 12,283 114,259 13,597 666,637

1971 % 8.6 11.4 47.1 8.7 3.2 1.9 17.1 2.0 100.0

Number 68,037 327,767 356,317 14,099 17,161 4,982 27,507 30,800 846,670

% 8.0 38.7 42.1 1.7 2.0 0.6 3.3 3.6 100.0

Source: Hong Kong Census (1961, 1971)

19 April 2010

[email protected]

93

Mr & Mrs Asia

Property

In China, low “effective” home ownership will continue to drive demand

Demand set to be unleashed in Tier-2 cities . . .

. . . even as demand in Tier-1 cities remains strong

Tier-2 cities’ ownership ratio is below 25%

The low home-ownership ratio, combined with poor living conditions, created strong aspirations among the population for better housing, underpinning the first wave of demand for housing in the late 1960s and early 1970s, as soon as mortgages became more accessible. Looking at China today, we observe a very similar pattern: a low “effective” home-ownership ratio (ie, ownership of private homes after 1999, when personal mortgages became available) of 3050% for Tier-1 cities (8% of national population), and less than 25% for second-tier cities (92% of national population), suggesting the need for first homes or upgrades remains strong. Figure 177

Figure 178

Beijing

Shanghai 36% households bought since 1999

46% households bought since 1999

Figure 179

Figure 180

Guangzhou

Tianjin 34% households bought since 1999


Figure 181

Figure 182

Hangzhou

Wuhan 46% households bought since 1999


Source: CEIC

Estimated house ownership maybe high . . .

94

Our estimated home-ownership rate is 60.7% as of 2001. The government estimated unmet housing demand at about 25m units at the start of the 11th plan period in April 2007. While home ownership appears to be quite high, what the figures do not reveal is the poor quality of a large part of the housing stock and therefore, the aspirational need to upgrade. Only 33% of urban houses had more than two rooms as of 2001. Moreover, 20% of urban homes and 60% of rural homes in India are not permanent structures. Also, as Indian families increasingly move away from joint families to nuclear families, demand for housing will continue to keep increasing.

[email protected]

19 April 2010

Mr & Mrs Asia

Property

. . . but unmet demand is also very high

Figure 183

Figure 184

India: Quality of urban housing, 2007

India: Quality of urban housing, 2007 Temporary 4%

No exclusive room 2%

More than two rooms 33%

Semipermanent 16%

One room 35%

Permanent 80%

Two rooms 30% Total 59m urban households

Source: India’s Planning Commission, CLSA Asia-Pacific Markets

In Indonesia, there is no available data on historical trends for home ownership. However, the increasing income per capita has made housing more affordable, especially with the rising middle-income segment. The number of households has grown to 61.5m as of the end of 2008. Figure 185

No available data on home-ownership trends in Indonesia

Indonesia: Growth of households

62

(m)

62

61

61

60

60

59

59

58 57

57 56

56 55 54 53 2003

2004

2005

2006

2007

2008

Source: Euromonitor

Can households increase leverage? Underleveraged households in Hong Kong in the 1960s

While leverage data for Hong Kong from the 1970s is not available, it is reasonable to assume that the same was quite low. Until the late-1960s, mortgages were difficult to get and available for a maximum duration of just three years. Even basic banking services were hard to access; until the late1960s one required a referee to open an account.

Increase in demand from middle classes drove first innovation in mortgages

Then in the late 1960s and early 1970s, seeing an increase in housing demand from among the middle-income classes, Wayfoong Finance and Hang Seng Bank, two major banks in Hong Kong, started offering mortgages of seven years. Prior to these mortgages were typically just for three years.

Leverage in the Chinese property market is heading down, not up

China and India are now at a similar stage. In China, the loan/deposit ratio stands at just 67.1%, while personal mortgages became available only in 1999. By 2008, China’s total outstanding mortgage loans as a ratio of the total value of primary units sold (defined by the aggregation of values of primary properties transacted between 1997-08 and so does not include the increase in the market values of these properties) was 28%, down from 53% of 2003. The low leverage clearly leaves room for households to gear up, and for pentup demand to be unleashed.

19 April 2010

[email protected]

95

Mr & Mrs Asia

Property

Figure 186

This suggests a cashrich property market

China: Outstanding mortgage loans/property value sold 60

(%)

50 40 30 20 10 0 1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Indian mortgage market started developing in the 1990s . . .

The mortgage industry in India was nascent till the middle of the 1990s when, led by housing finance companies like HDFC, a mortgage market was created and longer duration mortgages (seven years plus) were made available. Even now, the mortgage to GDP ratio is well below international levels at just 7% of GDP. Loan/value (LTV) ratios have increased though the maximum available LTV is 85% with the average value being less than 70% (68% for HDFC). The government has also introduced interest subvention schemes for “affordable housing” categories, ie, loan values of less than Rs1m to boost demand. Figure 187

. . . but mortgage penetration remains one of the lowest in India

Mortgages as a percentage of GDP Denmark

93

UK

86

USA

80

Germany

48

HK

41

Taiwan

39

Singapore

32

Malaysia

29

Korea

26

Thailand

17

China

12

India

(%)

7

0

20

40

60

80

100

Source: European Mortgage Federation, Asian Development Bank, HDFC

Mortgages to GDP is only 2.2%

96

In Indonesia, property-related credit has grown by a Cagr of 31% over the past seven years. Mortgages were just becoming available in the early 2000s since the end of the first Asian financial crisis. Nonetheless, mortgage-to-GDP is only a mere 2.2%, showing how unleveraged the property market is. The latest survey by Bank Indonesia also reveals that 71% of buyers use mortgage financing.

[email protected]

19 April 2010

Mr & Mrs Asia

Property

Some 71% of homebuyers use mortgage

Figure 188

Figure 189

Indonesia: Home-purchase method

Indonesia: Property-related credit

Hard cash 9%

30

(US$bn)

Instalments 20%

Construction & real estate Mortgage

25 20 15 10

Mortgage 71%

5 0 2003

2004

2005

2006

2007

2008

2009

Source: Bank Indonesia

Income growth to propel property demand Fast income growth in China . . .

A third similarity we find is the rapid income growth today in China. This boosts demand for housing by increasing appetite for leverage, since the future burden of debt is expected to ease as incomes grow. Figure 190

Hong Kong and China: Income growth Hong Kong (by household) 1958-1967 1971-1976 1976-1981 1981-1986 1986-1991 1991-1996

Cagr (%)

7.8 15.0 18.3 10.8 14.9 10.4

China (per cap urban population) 1992-96¹ 1996-01 2001-06 2006-08

Cagr (%)

32.3 8.2 12.0 15.7

¹ 1991 income data not available. Source: CLSA Asia-Pacific Markets

. . . and India

In India, while growth has not been as spectacular like in China or Hong Kong, it has picked up to near 10% per annum now from 6% levels in 198100. In 2009, income growth has been moderate due to the global financial crisis and the resultant slowdown, but in 2010 average income growth is expected to be in double digits. Indonesia’s income growth (dollarised) has grown by a Cagr of 14% in the past 10 years, making houses more affordable to many more people. Figure 191

Indonesia, meanwhile, has seen accelerating income growth

Indonesia: Per-capita income growth 2,500

(US$)

2,000

1,500

1,000

500

0 1995

1997

1999

2001

2003

2005

2007

2009

Source: IMF, BPS Indonesia

19 April 2010

[email protected]

97

Mr & Mrs Asia

Property

Figure 192

India: Income growth per-capita PPP Cagr (%)

1981-86

6.6

1986-91

6.8

1991-96

6.2

1996-01

5.4

2001-06

8.8

2006-08

9.4


The truth about affordability Are homes in China unaffordable?

Absolute PE may seem high, but a mostly flattish trend is less worrying

Investors are sometimes bothered by the seemingly unaffordable or unreasonable property prices in some emerging markets. For example, in China, the home price to income ratio stands at some 12-16x average annual income - considered to be very high. Figure 193

Figure 194

Beijing home price-income ratio

Shanghai home price-income ratio

20

(x)

16

(x)

14

16

12 10

12

8 8

6 4

4

2

0

0 2001 2002 2003 2004 2005 2006 2007 2008

2001 2002 2003 2004 2005 2006 2007 2008

Figure 195

Figure 196

Shenzhen home price-income ratio

Guangzhou home price-income ratio

18 16 14 12 10 8 6 4 2 0

(x)

16

(x)

14 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008

2001 2002 2003 2004 2005 2006 2007 2008

Source: CEIC, Sofun

Affordability is not a big concern in India

98

The affordability measure in India looks less of a concern. In India affordability of houses is measured by matching the buyer and the seller. The market addressed by the listed developers is usually of a standard two bedroom house in the city suburbs where the average cost of such a house is Rs3.5-4.0m currently. The buyer here is an employee working for a services firm (say tech industry) with an annual post tax household income of about Rs0.7-0.75m. This puts the value of a house as 5x annual salary - affordable. The affordability chart below tracks the monthly mortgage payment that an average household (five-year IT-industry experience, married) has to make as a percentage of their post tax monthly salary. The house purchased here is assumed to be a standard 1,000sf two-bedroom apartment in an IT city/large city suburb (Bangalore, Gurgaon, Chennai, etc).

[email protected]

19 April 2010

Mr & Mrs Asia

Property

Figure 197

India: Monthly mortgage payments/post tax household income

(%) 49

50

43

37

40

26

25

FY04

30

FY03

31

35

35

20 10 FY09

FY08

FY07

FY06

FY05

FY02

0 FY99

Income growth in FY11: 10% + 6% from incometax slab readjustment

57

45

43

FY01

Mortgage rate in FY11: 9% versus 8.25% current

60

60

FY11CL

61

FY10CL

70 Property price increase in FY11 - 7%

FY00

Key assumptions:


Affordability not a big concern in Indonesia

For Indonesia, again the affordability metrics look to be not too intimidating. Houses in the suburbs of Jakarta have just a 7.1x price-to-income ratio. This is further helped by the fact that domestic consumption in Indonesia has high growth potential. The number of middle-class households in Indonesia is likely to increase by nearly 50% by 2012. The proportion of middle and upper-middle-class households will increase from 29% now to 41% by 2012. Note that a middle-class household is defined as having income of Rp2.253.25m per month. No wonder property developers are mostly targeting this growing upper-middle-class segment. This, coupled with swift urbanisation, has been a strong driver to growth. Also, Indonesia has a young population, where 44% are below 24 years old.

The truth about affordability

Hong Kong started out with average home prices at a whopping 19x annual income in 1972, when the homeownership ratio was just 18%. The problem here is in both the mismatch and the distortion of numbers - two factors that investors would watch out for in analysing an immature and fast-growing property market. Figure 198

Hong Kong: Home price/median household income ratio

20 18 16 14 12 10 8 6 4 2 0

(x)

1972 1977 1979 Dec 81 Jun 82 Dec 82 Jun 83 Dec 83 Jun 84 Dec 84 Jun 85 Dec 85 Jun 86 Dec 86 Jun 87 Dec 87 Jun 88 Dec 88 Jun 89 Dec 89 Jun 90 Dec 90 Jun 91 Dec 91 Jun 92 Dec 92 Jun 93 Dec 93 Jun 94 Dec 94 Jun 95 Dec 95 Jun 96 Dec 96 Jun 97 Dec 97

Hong Kong had a high home price/income ratio in 1972-82

Source: CEIC data, CLSA Asia-Pacific Markets

Only a small portion of the population is effective participants

19 April 2010

First, in such markets, only a small proportion of the population are effective participants. In the early-1970s, with a home ownership ratio at just 18% (1972), only the top 20-25% earners in Hong Kong were eligible to become

[email protected]

99

Mr & Mrs Asia

Property

homeowners. Extrapolating this across the broad population in the 1970s would produce a picture of stretched prices and insufficient demand. However, with hindsight, we see that property prices trended upwards in every year except one (in 1974 following the October 1973 Oil Crisis) throughout the 1970s. The home price-to-income (ie, the ratio of the average home price to average annual income) ratio only becomes relevant in the 1980s as the home ownership ratio grew (to 30-40%), and close to half of the population became homeowners. Investors pondering the Chinese housing affordability issue should carefully consider this point. Figure 199

Prices may have seemed stretched, but they continued to rise

Hong Kong: Property prices for class-B (medium size) units

9,000

(HK$/sf)

HK Island

Kowloon

New Territories

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1965

1969

1973

1977

1981

1985

1989

1993

1997

Source: CEIC data, CLSA Asia-Pacific Markets

Home price to income will always look higher in emerging markets

Another issue to consider is the potential understatement of middle-class incomes, with this group providing the backbone of housing demand. The middle class typically accounts for a small portion of the population so the average income statistics in an emerging market are likely to reflect the bulk of the lower-income bracket. This is also the case in present day China, and is illustrated in 2007 statistics released by the Shanghai Labour Insurance Bureau, which offer a more detailed analysis of incomes by profession. While the official per-capita income for Shanghai was Rmb2,175 per month in 2007, a secretary in Shanghai, for example, makes Rmb4,309, 98% above the stated average per-capita income for Shanghai, while a Western-style chef would earn 172% more, and a life insurance consultant 283% more. Figure 200

Average income does not tell the whole story

Shanghai: Income by profession, 2007 Job category Quoted avg per-cap income (per govt statistics) Junior accountant Sales Human resources assistant Secretary IT - project manager Bank clearance staff Mid level government officials

Monthly (Rmb) 2,175 3,172 3,210 3,390 4,309 7,343 5,572 5,119

Above avg (%) 46 48 56 98 238 156 135

Source: Shanghai Labour Insurance Bureau

Rising income drives up home/PE ratio

100

In fact, the home price-to-income ratio tends to lead income growth during periods of economic expansion. Except for 1981-86 (when Hong Kong was troubled by the confidence crisis with prices collapsing between 1982 and 84) home price growth has always outstripped income growth. [email protected]

19 April 2010

Mr & Mrs Asia

Property

Figure 201

Hong Kong: Income versus home-price growth Cagr (%) 1971-76 1976-81 1981-86 1986-91 1991-96

Income 15.0 18.3 10.8 14.9 10.4

Average home price 16.0 22.5 (3.3) 29.3 14.1


Hong Kong is unique

In some ways, Hong Kong was probably a unique market. First, the government’s high-land-price policy, which was strengthened further with the 50-hectare land supply cap following the 1984 Sino-British Joint Declaration, restricted land supply and intensified the appeal of property as a wealth store. Second, the US-dollar peg in place since 1983 meant the Hong Kong government could not use interest rates as a macro tool to control speculation (the negative real interest rates for much of the early-1990s was a consequence of this lack of control). Third, as a small and open market, Hong Kong is significantly influenced by inflows and outflows of liquidity.

Even without special factors, home prices tend to outstrip income growth

However, two factors are common to most other countries also - confidence in income growth, and a growing fear of purchasing-power erosion. A typical home buyer is generally more comfortable with making a purchase after experiencing a number of years of high income growth, as they will extrapolate their future income expectations based on previous growth rates. At the same time, buyers also feel the pain of eroded purchasing power in the housing market if they have not yet purchased, but house prices have grown faster than their incomes (which usually will be the case as home prices are driven by buyers in the upper-income bracket whose incomes tend to grow faster than average). This tends to motivate purchases while still affordable.

Growth momentum is more important for a fast-expanding market

So, rather than trying to decide whether a certain home price-income multiple is comfortable or excessive, a better way to assess demand in a fast-growing market like Hong Kong in the 1970s or China today would be to look at momentum in the economy and incomes, which drive growth of the most relevant group, the high-middle-income class. Figure 202

Expanding middle class is a key variable to watch

Hong Kong: Growth in population and households (%) 1976-81 1982-86 1987-91 1992-96

Number of households 4.6 3.5 1.7 3.1

Population 2.8 1.3 0.8 2.3


Stock picks Ability to build, makes CR Land our top pick in China . . .

. . . and its ability to sell

19 April 2010

China Resources Land (CR Land) has just shown its capability to build, with a 50% YoY growth in residential completion in FY08 (including commercial properties completed the growth would be 157%) versus 12% of China Overseas Land & Investment (Coli)and 19% of Vanke. The company has also shown its capability to sell, posting a 42% YoY growth in contracted sales in the challenging FY08 versus Coli’s 22% and Vanke’s 9%. Strong performance continued into 1H09, with CR Land posting a contracted sale YoY growth of more than five times, versus Coli’s 46% and Vanke’s 27%.

[email protected]

101

Property

Mr & Mrs Asia

Quality assets

We see CR Land’s landbank quality as matching peers Coli and Vanke, being equally diversified geographically but with more exposure towards higher growth second-tier cities. By region, CR Land is more geared towards the higher growth region of western China. The landbank is also one of a proven quality. Despite the scale, 72% of the landbank by GFA has been tested with phase one already launched.

Not just rental properties, but prime retail rental properties

The scale of completion which is equivalent to Coli in 2004 or Vanke in 2001 is on a low base that promises a prolonged period of high growth before scale slows CR Land. One competitive advantage CR Land has over its larger peers is the rental portfolio it owns and with the help of its parent’s land injections is able to avoid a long investment period which locks up capital. It has a prime portfolio, with Shenzhen Mixc shopping mall its crown jewel. Retail is the best kind of rental property in China in our view given strong consumption growth, and accounts for 70% by GFA of the completed rental portfolio.

KWG is our next pick

KWG’s two new project launches in Guangzhou and continued sales of four past relaunches in Guangzhou, Beijing and Suzhou will continue to support sales momentum. The witnessed brand recognition has translated into rising selling prices, hence margin expansion.

The seventh success

The successful launch of Chengdu Cosmos, KWG’s seventh out of eight new project launches outside Guangzhou, is proving its execution ability outside its home turf. Meanwhile, the new launches of Summit and International Creative Valley and five developments in Guangzhou, Beijing and Suzhou will continue to drive sales momentum.

Accelerating momentum

Momentum accelerated in the past two months with contracted sales increasing by another 36% or Rmb1.6bn, higher than the monthly average of Rmb700m in July-August, Rmb600m in 2Q09 and Rmb400m in 1Q09, fuelled by both volume and ASP growth. This translates into a total of Rmb6bn in the first ten months, which is equivalent to three times the contracted sales in FY08. Together with the Rmb1.2bn unbooked sales carried forward from FY08, we estimate Rmb2.6bn of it is expected to be booked in 2009, we estimate 55% of FY10CL development bookings are secured.

Margin expansion

Selling prices of non-Guangzhou projects have seen 20-76% increases since initial launches, now fetching premium over the neighbouring projects. While better market sentiments have helped, we believe this also signals increasing recognition of the KWG brand, which will translate into margin expansion.

India top picks: Unitech and HDIL

We rate India’s Unitech as a key long-term pick in the property sector. The company is probably the most diversified real estate player in the country. At 312m sf, it enjoys a landbank that can last it a decade. The company is predominantly residential, with two-thirds of the NAV accruing from residential development. While 2008 was a tough year for Unitech, the company has now deleveraged from a gearing of 2.1x to 0.5x in 12 months. Execution has improved with workers count up 6x over the past 12 months. Our FY11CL NAV of Rs126 per share leaves plenty of room for the stock to play catchup. Housing Development & Infrastructure (HDIL) is a Mumbai centric player with 95% of its NAV coming from the city. Mumbai is the most attractive property market in India with a land constrained, island like geography, raising barriers

102

[email protected]

19 April 2010

Mr & Mrs Asia

Property

to entry. Land is expensive, but HDIL’s edge as the largest slum redeveloper makes it source land cheaply for its projects. The company is probably the best in execution and has demonstrated a strong appetite for large projects by successfully undertaking rehabilitation of 80,000 slum dwellers at Mumbai’s airport in the heart of the city. Additionally, the company has a 125m sf landbank in Mumbai’s outskirts, whose monetisation has just begun. Our NAV of Rs511/share leaves enough room for upside. Indonesia: Summarecon, Bakrieland and Bumi Serpong

Our top picks in the Indonesian property sector are Summarecon, Bakrieland and Bumi Serpong. All are trading at 39-60% discounts to their NAVs.

Figure 203

Valuations Company

Code

Price (local ccy)

Target (local ccy)

Mkt cap (US$m)

Rec

PE (x)

PB (x)

10CL

11CL

10CL

11CL

Current NAV Price disc to (local ccy) NAV (%)

China CR Land

1109 HK

16.32

24.5

10,419

BUY

17.4

13.6

2.1

2.0

24.0

(32.0)

KWG

1813 HK

5.79

8.6

2,155

BUY

11.4

7.9

1.5

1.3

10.8

(46.3)

NWC Land

917 HK

2.88

3.6

2,085

BUY

7.8

8.1

0.6

0.5

6

(52.0)

Yanlord Land

YLLG SP

1.95

2.3

2,712

BUY

10.3

8.0

1.2

1.0

3.1

(37.1)

China Vanke

200002 CH

8.88

10.1

14,580

BUY

12.4

11.2

2.1

1.6

na

na

Beijing Capital

2868 HK

2.91

3.1

780

O-PF

8.3

7.1

1.1

1.0

5.43

(46.4)

Shimao Property

813 HK

13.98

15.7

6,356

O-PF

10.0

8.1

1.8

1.4

17.4

(19.7)

Coli

688 HK

16.66

17.5

17,432

U-PF

16.3

13.6

2.5

2.3

15.9

4.8

Agile Property

3383 HK

9.98

11.7

4,572

U-PF

11.4

10.6

1.3

1.5

13

(23.2)

Guangzhou R&F

2777 HK

13.52

12.0

5,406

U-PF

11.1

8.9

2.0

1.9

20

(32.4)

Shanghai Forte

2337 HK

2.38

2.2

772

U-PF

8.6

7.5

0.8

0.7

4.4

(45.9)

Rest of Asia Unitech

UT IB

Sobha

SOBHA IB

78.10

101.0

4,160

BUY

26.6

19.7

1.8

1.6

126

(38.0)

307.10

309.0

675

BUY

25.5

20.2

1.7

1.6

386

Filinvest

(20.4)

FLI PM

1.04

1.4

556

BUY

10.8

9.3

0.6

0.6

2.9

(64.1)

Vista Land

VLL PM

2.02

3.5

384

BUY

6.3

5.0

0.5

0.4

7.2

(71.7)

Summarecon

SMRA IJ

860

1,000.0

629

BUY

27.4

21.5

3.0

2.7

1,335

(35.6)

Bakrieland

ELTY IJ

250

410.0

553

BUY

32.5

28.3

0.9

0.9

570

(56.1)

Bumi Serpong

BSDE IJ

690

1,000.0

874

BUY

23.9

20.1

3.1

2.7

1,495

(53.8)

HDIL

HDIL IB

305.05

408.0

2,348

O-PF

15.4

13.1

1.5

1.4

511

(40.3)

HDC

012630 KS

31,300

45,000.0

2,162

O-PF

10.2

4.6

0.9

0.8

45,000

(30.4)

DLF

DLFU IB

333.75

340.0

12,718

U-PF

29.2

23.2

2.3

2.2

340

(1.8)


19 April 2010

[email protected]

103

Mr & Mrs Asia

Technology

Bhavtosh Vajpayee, CFA [email protected] (852) 26008388

Vaibhav Dhasmana (852) 26008270

Top picks Acer Market cap Price

2353 TT US$7,771m NT$91.2

Canon Market cap Price

7751 JP US$61,146m ¥4,275

Lenovo Market cap Price

992 HK US$6,956m HK$5.67

MediaTek Market cap Price

2454 TT US$19,004m NT$550.0

Samsung Elec Market cap Price

005930 KS US$126,760m 830,000 won

Technology - Decade of the consumer The rise of technology demand from the consumer in Asia is a well known trend. We shall focus on what is driving this and how long it can last. Successive milestones in affordability and penetration - reached first by the urban Chinese consumer, and now by the rural Chinese resident, will be further boosted as India approaches a meaningful scale in tech demand by the middle of this decade. The years between 2010 and 2020 should therefore further boost the share of consumer demand in overall tech, a secular trend that will overlay with cycles in business spending. We see this theme in three parts:

Rising affordability has two drivers. Multiple years of pricing drops in tech products has combined with increased income levels to drive large jumps in affordability ratios (income/average selling price). These ratios suggest there are many more years of growth to come. For example, rural China is reaching affordability levels seen in urban China in 2004-05, and if history is a guide, rural China is set to become a new demand driver for tech, even as urban China enters a major replacement cycle (eg, higher spec handsets, gradual 3G adoption and CRT-to-LCD conversion).

Penetration of key tech products is rising in China and India, but will remain low relative to global comparisons even by 2014. India, which appears 10-12 years behind China in most penetration measures, could actually drive the next leg of growth. In effect, if 2010-15 promise to be years of China’s consumption boom, India could follow over 2015-20.

The above trends confluence to one result. Consumer demand will gain share over enterprise spending through the next decade. While enterprise spend is still the dominant part of tech, and we expect a cyclical revival here over 2010-11 (as argued in our March 2010 Phoenix rising report), there is no doubt that companies geared towards the consumer will make better long-term investments, especially when “long term” implies three years or more.

Rising affordability as incomes grow and ASPs fall ASPs have fallen sharply through this decade, especially since 2004, when annual declines have been as much as 12% for notebook PCs and handsets, and over 20% for LCD TVs. When combined with rising incomes, this makes an interesting case for affordability increases for the Asian consumer. Figure 204

Average selling prices

600

(US$)

2004

(US$)

2009

2,500

-23% Cagr

500

-8% Cagr

2,000 -12% Cagr

400 300 Technology products have become cheaper

200

1,500

-13% Cagr

1,000 -15% Cagr

500

100 0

0 Feature phone

Game console

iPod

LCD TV (RHS)

Notebook PC (RHS)

Source: Gartner, DisplaySearch, CLSA Asia-Pacific Markets

104

[email protected]

19 April 2010

Mr & Mrs Asia

Technology

Overlaying growth trends

Aside from rising affordability, we also expect overlaying trends of growth as more and more Asian consumers become buyers of tech devices. For example, rural China is approaching affordability levels now that can be compared to urban China in 2005. This implies a tipping point is at hand where rural China demand can boom, even as urban China is in the thick of a replacement cycle - especially in televisions and handsets. These trends, in our view, will make China the single largest market for tech products by 2013, when China should account for 28% of the world’s LCD TV and smartphone annual shipments, and at least 21% of PCs shipped. By 2012, rural China would reach the current levels of affordability as urban China especially for PCs and LCD TVs. This implies that the current penetration cycle in rural China should convert to a replacement cycle by 2013-14, driving the next leg of demand. Figure 205

Rural China is approaching urban China affordability of 2005

Per-capita income to average selling price Affordability ratio (x)

Urban China 2005

Rural China 2009

2.0 8.9 0.8 5.8

1.9 9.4 2.2 6.4

PC total Handset LCD TV CRT TV Source: CLSA Asia-Pacific Markets

Increasing affordability in rural China will drive tech-product penetration

Figure 206

Figure 207

Affordability in rural China

Penetration of tech products

16

(%)

2005

09CL

60

12CL

14

09CL

12CL

40

10 8

30

6

20

4

10

2 0

0 PC total

Handset

LCD TV

CRT TV

Figure 208

(%)

Mobile phone

PC

LCD TV

Figure 209

High affordability in urban China . . . 40

2007

50

12

High affordability in urban China speeds up productreplacement cycle

(%)

2005

09CL

. . .is catalysing a replacement cycle 100

12CL

35

2007

(%)

09CL

12CL

80

30 25

60

20 40

15 10

20

5 0

0 PC total

Handset

LCD TV

Mobile phone

CRT TV

PC

LCD TV

Source: Gartner, DisplaySearch, CLSA Asia-Pacific Markets Figure 210

We expect China to be the world’s No.1 tech market by 2013

China consumption - Cagr and as a share of global demand (%) Handset LCD TV PC Smartphone

Consumption Cagr, 2008-13 China 7 32 20 41

Global 5 10 10 36

China as % of global demand 2008 19 13 14 15

13CL 23 28 21 28

Source: World Bank, IMP World Economic Outlook Database, CLSA Asia-Pacific Markets

19 April 2010

[email protected]

105

Mr & Mrs Asia

Technology

India’s is likely to catch up with China by the middle of this decade

India’s booster kicks in by 2015 On current metrics, India’s affordability ratios for technology devices look abysmal compared to China. This is well known, but India’s likely catch up with China by the middle of this decade is the more interesting prospect. By 2014, India will approach affordability levels seen in China in 2007-08. In effect, just as the China demand approaches maturity levels, India should kick in. Figure 211

India trails China on affordability . . .

Affordability ratios, 2009 50

China

(x)

India

45 40 35 30 25 20 15 10 5 0 Feature phone

Game console

iPod

LCD TV

Notebook PC

Desktop PC

Figure 212

. . . India 2014 = China 2008

Notebook-PC affordability

16

China notebook afforability

14

India notebook affordability

12 10 8 6 4 2 0 1998

2000

2002

2004

2006

2008

2010

2012

2014


Expect Asia ASPs to move to a discount to the USA

106

This cycle of penetration and replacement has implications for relative ASPs as well. Between 2004 and 2008, Asia ASPs for handsets have been on an average higher than the USA, catering as they did to the urban, uppermiddle class consumer. The affluence of “early adopters” in the consumption cycle has provided a useful ASP benefit to device manufacturers, but this will need to change. As the consumption trend becomes more broad-based, with rural consumers also joining in, and the market matures, we expect Asia ASPs to move to a discount to the USA. Figure 215 shows how this could play out for handsets.

[email protected]

19 April 2010

Mr & Mrs Asia

Technology

Figure 213

Year 2014 should be a tipping point for India on handsets too

Handset affordability 90

China handset afforability

80

India handset affordability

70 60 50 40 30 20 10 0 1998

2000

2002

2004

2006

2008

2010

2012

2014

Figure 214

Consumption a 10-year cycle

Overlaying drivers of technology consumption

Urban India penetration

Rural China replacement

Rural China penetration

Urban China replacement

2010

2015

2020


Shifting

Price differentials between Asia and the USA ASPs - Asia vs USA (%)

2004 2005 2006 2007 2008 2009 2010 2011 2012

2013

Basic phones

(6)

(20)

(15)

(3)

(3)

(15)

(14)

(17)

(20)

Enhanced phones

52

40

38

48

41

31

22

13

6

(1)

Smart phones - Entry-level

18

14

11

17

10

7

1

(6)

(12)

(17)

Smart phones - Feature Total

(23)

2

5

17

18

9

3

(1)

(4)

(9)

(13)

14

11

17

21

14

7

3

(3)

(8)

(12)

Source: Gartner

By mid-decade, China will still lag in penetration China and India will continue to trail their BRIC peers

19 April 2010

Despite rapid growth, both China and India will continue to trail their BRIC peers, Brazil and Russia, on penetration indices till the middle of the decade. This boosts our case that the consumption trend emerging in Asia is likely to last well beyond a few years, and we consider the entire decade ahead as a likely prospect for growth and penetration gains.

[email protected]

107

Mr & Mrs Asia

Technology

Figure 216

Year 2014 is not the end of growth for PC demand in China or India

PCs per 1,000 population (units) Australia Brazil China Hong Kong India Japan Korea Middle East/Africa Russia Taiwan USA World average

2005 650 117 67 389 18 521 367 15 122 473 582 123

2010 907 253 151 587 38 633 470 30 253 539 850 196

2014 1,095 411 258 855 62 705 510 52 309 559 1,177 274

2005 655 191 97 537 29 619 635 15 76 827 679 210

2010 1,047 448 218 895 65 735 715 39 211 905 1,081 361

2014 1,410 765 367 1,495 116 817 674 94 283 887 1,652 550

2005 54 81 45 21 112 6 65 78 72 71 75 29

2010 123 88 98 42 149 34 87 95 112 79 95 57

2013 129 89 121 56 161 46 92 100 117 83 103 66

Figure 217

Home PC penetration could be a decadelong growth story

Home PCs per 1,000 households (units) Australia Brazil China Hong Kong India Japan Korea Middle East/Africa Russia Taiwan USA World average Source: Gartner Figure 218

Handset penetration and replacement are both multiyear trends

Handset penetration (%) Argentina Australia Brazil China Hong Kong India Japan Korea Russia Taiwan USA World Source: CLSA Asia-Pacific Markets

Shifting priorities for technology investing Asia-Pacific ex-Japan is already 28% of global consumer tech spend

108

Global IT spend’s centre of gravity will shift as the Asian consumer rises. While business spending is still the dominant part of global IT spend, its share has receded each year this decade. Driven by consumption, Asia-Pacific exJapan is already 28% of global consumer tech spend, by value, larger than North America and Western Europe.

[email protected]

19 April 2010

Mr & Mrs Asia

Technology

Asia Pacific already makes up 28% of global consumer tech demand

Figure 219

Figure 220

Enterprise IT spending, 2009

Consumer IT spending, 2009

Mid East/Africa 4%

Mid East/Africa 14%

Japan 12% Asia Pac 10%

Japan 4%

N America 37%

LatAm 5%

West Europe 16%

Asia Pac 28%

West Europe 29%

East Europe 3%

N America 17%

East Europe 9%

LatAm 12%


This consumption wave has meant significant market share losses for the West, with Asia-Pacific having been the biggest gainer over 1999-09. The next decade should further accelerate this process. Figure 221

Enterprises still large in PCs, but receding rapidly

Enterprise share of notebook shipments is falling; consumer share has risen 80

(%)

75 70 65 Enterprise share falling; consumer share has risen

60 55

Desktops (enterprise share)

50

Notebooks (enterprise share)

45

Enterprise share overall

40 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: CLSA Asia-Pacific Markets, Gartner Figure 222

Enterprise share of handsets declines as AsiaPacific consumption rises

Business share of handsets 2009

17.4

2008

18.0

2007

18.6

2006

20.1

2005

21.4

2004

22.8

2003

24.1

2002

25.1

2001

26.1

2000

27.1

1999

28.1

1998

29.1

10

12

14

16

18

20

22

24

26

28

30

(%) 32

Source: Strategy Analytics

19 April 2010

[email protected]

109

Mr & Mrs Asia

Technology

Figure 223

Asia Pacific is gaining share, driven by consumer spend

IT-spending share, 1999-09 (ppts)

Total

Hardware

Software

Services

Telecoms

North America

(2.0)

(5.7)

(2.3)

(0.5)

(2.0)

0.8

0.8

0.3

0.8

1.1

(4.1)

(2.1)

(3.8)

(2.0)

(5.6)

Eastern Europe Western Europe Asia Pacific

2.3

4.7

2.5

0.3

3.1

(0.4)

(1.4)

2.7

0.8

(1.1)

Middle East and Africa

2.1

0.5

0.3

0.7

3.0

Latin America

1.3

3.2

0.3

(0.1)

1.4

Japan

Source: Gartner, CLSA Asia-Pacific Markets

Business spend is a cycle; consumer spend is secular We expect business capex on technology to stage a revival from 2H2010, as argued in our recent Phoenix Rising report. Even as this becomes the primary catalyst for technology stocks in 2010-11, it is worth noting that business capex is a cycle. Years of underinvestment should drive a renewed hardware refresh within enterprises. Yet, business spending on technology is not a secular theme - its expected two year up-cycle pales before the consumption story, which may last up to 10 years, as discussed above. Investors should overweight consumer spending plays

This implies that investors should overweight consumer spending plays for longer term investing horizons. Over a 12-18 month period, the business capex upturn may crowd out consumption plays in tech, but there is no doubt that consumption plays should outperform when the time horizon extends beyond three years. A sample of Asian tech stocks with meaningful revenue exposure to consumer demand is presented in Figure 224. Figure 224

Prefer OEMs and market-share dominators

Consumer spending revenue exposure for select stocks

Lenovo Fujitsu Canon Catcher Alpha Networks Hon Hai Acer Realtek

These include Acer, Samsung, Lenovo, MediaTek, Canon

Asustek D-Link Compal Quanta Wistron Kyocera Foxconn Tech (%)

Richtek 20

30

40

50

60

70

80

90


110

[email protected]

19 April 2010

Mr & Mrs Asia

Technology

Stock picks Acer

Acer has gained 14ppts of market share in notebooks over 2004-09, and remains the most competitive ASP player in the space. About 70% of Acer’s revenues are exposed to consumer spend. Figure 225

Attractive pricing drove impressive market-share gains over 2004-09

Acer’s market-share gains in notebooks, 2004-09 16

(ppts)

14

14 12 10

9

8

6

6

5

4 2 0 (2)

(1)

(4) (6)

(5)

Dell

HP

Acer

Fujitsu

Toshiba

Asus

Source: Company, CLSA Asia-Pacific Markets

Lenovo

Lenovo is mostly known for enterprise PCs and notebooks. However, about 30% of its revenues come from consumer demand and this is rising, thanks to the growth of China PC consumption. Lenovo takes a 25% share in China’s PC shipments, a share that has mostly stayed steady despite rising competition. (HP is No.2 at 15%, Dell is next at 7%). Figure 226

Has remained in a narrow band for years

Lenovo’s China market share 32

(%)

30 28 26 24 22 20 1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09


Canon

19 April 2010

Canon is the pre-eminent global camera brand. It also operates in the imaging (copiers, printers) business, which has a consumer component. About half of Canon’s revenues are thus exposed to consumer demand.

[email protected]

111

Mr & Mrs Asia

Technology

Figure 227

Camera demand has boomed in China in 2009, and is starting a multiyear penetration cycle

Global DSLR camera sales and regional market shares Others 2% Japan 11% Asia ex-Japan 35%

Europe 32%

USA 20%

Note: DSLR = Digital single-lens reflex. Source: CLSA Asia-Pacific Markets

Samsung Electronics

Samsung Electronics has been a steady share gainer in both handsets and LCD TVs. Between 2004-09, Samsung has nearly doubled its handset market share and raised its LCD TV share by 8ppts. We expect Samsung’s combination of innovation, broad product portfolio and mid-range ASPs to continue to drive share gains. Figure 228

Close to doubling since 2004

Samsung's handset market share (%)

2004

2005

2006

2007

2008

Nokia

31

32

35

39

40

38

Samsung

11

13

11

14

17

20

6

7

6

7

9

10

LG Sony Ericsson

2009

6

6

7

9

8

5

14

18

22

14

9

5

RIM

0

0

0

1

2

3

HTC

0

0

0

1

1

1

Apple

0

0

0

0

1

2

33

24

18

14

14

16

Motorola

Others


Also a gainer from shifting LCD TV shares

Change in LCD-TV market share, 2004-09 Vizio

15

Toshiba

5

Sony

5

Sharp

(20)

Samsung

8

Philips

(14)

LGE

2

Funai (25)

(ppts)

9

(20)

(15)

(10)

(5)

0

5

10

15

20


112

[email protected]

19 April 2010

Mr & Mrs Asia

Technology

MediaTek is geared to China consumption with its handset semicon product range that has revolutionised the handset market. MediaTek powered handsets are also grabbing share in other emerging markets, such as India, even as its launch of 3G solutions promises to drive further profitable growth. Deals with Microsoft and Qualcomm bode well for its smartphone solution.

MediaTek

Figure 230

MediaTek's market share in its product segments

MediaTek to benefit from handset penetration and commoditisation in Asia

(%)

2004

2005

2006

2007

2008

09CL

10CL

11CL

In Chinese handsets

4

28

51

66

69

75

76

69

In China

3

20

28

39

42

50

48

43

In emerging markets (ex-CN)

0

1

3

8

13

23

33

36

In global handset shipment

0

3

6

12

17

26

31

31

Source: Company, CLSA Asia-Pacific Markets Figure 231

China handset market

On the rise

2004

2005

2006

2007

2008

09CL

10CL

11CL

China market size

81

112

170

241

293

360

433

482

YoY (%)

27

38

52

42

21

23

21

11

Branded handsets in China

68

90

131

160

180

228

276

318

YoY (%)

16

32

45

22

13

26

21

15

Whitebox handsets in China

13

22

38

81

113

132

158

164

148

71

78

113

38

17

20

4

16

19

23

34

38

37

36

34

YoY (%) As % of total China market

Source: Gartner, Strategy Analytics, CLSA Asia-Pacific Markets Figure 232

Valuations Company

Code

Price (local ccy)

Performance (%)

PE (x)

PB (x)

ROE (%)

EV/Op Ebitda (x)

FCF yield (%)

1M

3M

1Y

10CL

11CL

10CL

11CL

10CL

11CL

10CL

11CL

10CL

11CL

Acer

2353 TT

91.2

(6.0)

(6.9)

54.3

14.6

11.9

2.4

2.1

16.8

18.7

8.8

7.4

0.5

4.7

Canon

7751 JP

4,275

5.7

8.2

34.4

27.5

19.6

2.1

2.0

7.6

10.3

7.3

6.0

2.7

4.6

Lenovo

992 HK

5.67

4.4

2.0 189.3

16.9

0.0

4.0

0.0

25.0

0.0

7.3

-

1.7

-

MediaTek

2454 TT

550

2.2

(1.4)

78.3

13.5

11.4

5.1

4.5

40.3

42.0

10.9

9.0

7.2

8.6

830,000

6.7

2.6

37.6

7.5

8.2

1.5

1.3

22.2

17.3

3.5

3.4

6.2

7.3

Samsung Elec 005930 KS


19 April 2010

[email protected]

113

Telecoms

Elinor Leung, CFA [email protected] (852) 26008632

Timothy Chan, CFA (852) 26008631

Top picks Bharti Airtel Market cap Price China Mobile Market cap Price

BHARTI IS US$26,498m Rs308.20 941 HK US$202,950m HK$78.60

Mr & Mrs Asia

Telecoms - Getting crowded China, India and Indonesia are the remaining mobile markets with growth in Asia. But the sector has already enjoyed the demographic dividend as telephony penetration has dramatically deepened in the past decade, helped by declining costs and an increasing number of operators. Competition is further intensifying in India and China given the launch of new networks, but incumbent operators China Mobile and Bharti are still likely to emerge as the winners longer term. China Mobile has an aggressive data strategy and will be the first to migrate to 4G. Bharti is best positioned for 3G given its strong balance sheet and leadership in 2G. 3G licensing in India is likely to lead to consolidation. In Indonesia, Telkom is likely to perform the best at least in the short term given easing competition and smaller operators facing capex constraints.

It’s all about China, India and Indonesia India, China and Indonesia are the remaining countries with mobile growth in Asia. However, even these countries are entering middle age with mobile penetration of 43% for India, 56% for China and 70% for Indonesia. Future growth will likely be driven by rural expansion. India and China may continue to add 9-10m new subs per month until maturity, implying an 11% subs Cagr for China and a 17% Cagr for India. Indonesia is expected to add ~1.2m new subs per month with total subs growing at a 13% Cagr for the next five years. Mobile penetration may reach 127% for Indonesia, 100% for China and 65% for India by 2014.

When a country reaches 40% mobile penetration, it exits hypergrowth stage

A few years ago, we created an Asian mobile-growth curve by comparing mobile penetration against incremental mobile penetration across Asian countries. The curve has successfully predicted different growth phases of the mobile market. Historically when a country reaches ~40% mobile penetration, it exits the hypergrowth phase and mobile penetration will then increase at a steady 6-8% per year until maturity.

Growth is stabilising in China, as it is in India

This is fitting well with what is happening in China. China’s mobile market reached 56% penetration by the end of 2009 and has entered a steady growth phase. While there is still plenty of growth before the market becomes mature, the force of secular growth will not be as strong because operators have to reach deeper into the rural market for growth, while facing stronger competition on 3G. China is no longer adding record new subscribers every month as in the last five years. Growth is stabilising with ~9m new subscribers per month.

Rural markets will drive growth in India . . .

With a 43% mobile penetration, India is also stepping down to a more stable growth phase. This is particularly relevant in India as urban markets that led the mobile boom, has reached 75% penetration and there are four phones out of five members per household, which is high even adjusting for dual SIM cards. While rural markets in India are vast with 70% of the 1.1bn population, the rural penetration is already 1.2-1.5 mobile phones per household. Affordability may be a concern on rural growth in India, but pricing is commoditised. India operators are sharing towers and outsourcing operations to lower cost.

. . . and in Indonesia

Indonesia’s mobile penetration is higher at about 70% by the end of 2009 (unique user penetration of about 50%). Growth has also entered a steady growth phase. Major growth is likely to come from rural areas outside Java.

114

[email protected]

19 April 2010

Mr & Mrs Asia

Telecoms

Figure 233

Asian mobile growth peaks at 40% penetration

Annual change in mobile penetration

Annual change in mobile penetration (%)

18 16 14

Stable growth phase

India at 43%

12

China at 56%

Hypergrowth phase

10 8 6 4 2 0 (2) 0

40

60

80

Figure 235

Mobile penetration

Mobile subscribers

China

800

60

India

700

50

Indonesia

600

(%)

China

(m)

India

Indonesia

500 400

30

300

20

200

10

100

0

0

2004

2005

2006

2007

2008

2009

2004

2005

2006

2007

2008

Figure 236

Figure 237

China’s mobile subs net adds

India’s mobile subs net adds

12

20

(m)

10

2009

(m)

15

8 6

10

4

5

2

Sep 09

Mar 09

Mar 08

Mar 07

Sep 07

Mar 06

Sep 06

Mar 05

Sep 05

Mar 04

Mar 09

Sep 09

Mar 08

Sep 08

Mar 07

Sep 07

Mar 06

Sep 06

Mar 05

Sep 05

Mar 04

0

Sep 04

0

Sep 08

70

40

Competition will intensify with 3G rollout

100 120 Mobile penetration (%)

Figure 234

Sep 04

Robust growth in mobile penetration in the past few years

20


China - China Mobile is a long-term winner China and India still have the best long-term growth

This will be a difficult year for China and India’s telecoms sector given intense competition. However, China and India will still outperform for the long term given relatively low mobile penetration. China Mobile and Bharti will likely emerge as stronger operators when competition stabilises.

China: 3G price war has just started . . .

In China, China Telecom and Unicom launched their new CDMA and WCDMA service respectively in 2009. Given the empty network and limited window of opportunity, China Telecom relaunched their CDMA service with a big bang

19 April 2010

[email protected]

115

Mr & Mrs Asia

Telecoms

marketing campaign and aggressive handset subsidies. Unicom has a small balance sheet and is cautious about large scale handset subsidies, but has been competitive on pricing. Their single tariff 3G packages have eliminated all domestic long distance and roaming fees. China Mobile’s new subs market share fell to 48% in December 2009, compared to 92% a year before. . . . and will weigh on near-term profitability

China’s 3G war has just started and a price war will be negative for everyone. Both China Mobile and Unicom will be more aggressive in ramping up their 3G user base in 2010 with better coverage and handset supply. The market share shift has eased MIIT’s concern over China Mobile’s dominance. China Mobile may start retaliating once its new subs market share falls below 50%. The worsening competition and 3G start-up costs will weigh on profitability this year.

China Mobile’s data strategy is impressive

However, China Mobile remains a preferred play for the long term. China Mobile will likely remain the dominant mobile operator in China with over 65% market share despite new competition. The company will be the first to launch 4G as all their TD base stations are 4G ready and can be migrated to 4G through software upgrades. They will launch a 4G trial network in Shanghai Expo this year. Their data strategy is also impressive. The company launched “Mobile Market” last year which is an open platform for people to write data applications, similar to “Apple store”. China Mobile plans to offer a wide range of data services from music downloads to eMoney and eReader. It may take some time to fully rollout the data services and educate users. However, the increasing popularity of smartphone may accelerate the adoption of the data services. This should help generate new revenue and boost Arpu for the company.

Figure 238

China’s mobile subscriber net add and net add market share Feb 09 Mar 09

Apr 09 May 09

Jun 09

Jul 09 Aug 09 Sep 09

Oct 09 Nov 09 Dec 09

Jan 10

Feb 10

Net adds (m) China Mobile (GSM/TD)

6.75

6.49

5.83

5.12

5.02

4.55

5.26

5.43

5.10

4.58

4.24

5.12

5.52

Unicom (GSM/WCDMA)

1.64

1.85

1.14

0.68

0.21

0.68

0.81

0.94

1.32¹

1.41

1.56

1.66

1.21

China Telecom (CDMA)

1.70

2.21

1.87

2.20

2.37

2.45

2.08

2.97

3.14

3.07

3.10

3.05

3.01

Total net adds

10.1

10.6

8.84

8.00

8.25

7.68

8.15

9.34

9.56

9.06

8.90

9.83

9.73

China Mobile (GSM/TD)

66.9

61.5

65.9

64.0

60.8

59.2

64.6

58.2

53.3

50.6

47.6

52.1

56.7

Unicom (GSM/WCDMA)

16.3

17.5

12.9

8.5

10.4

8.9

9.9

10.0

13.8

15.5

17.5

16.9

12.4


16.8

21.0

21.2

27.5

28.7

31.9

25.5

31.8

32.8

33.9

34.8

31.0

30.9

Total

100

100

100

100

100

100

100

100

100

100

100

100

100

Market share (%)

¹ Excluding 0.5m 3G trial customers that the company added between May and September. Source: Companies, CLSA Asia-Pacific Markets Figure 239

China’s mobile subscriber and market share Feb 09 Mar 09

Apr 09 May 09

Jun 09

Jul 09 Aug 09 Sep 09

Oct 09 Nov 09 Dec 09

Jan 10

Feb 10

Subscribers (m) China Mobile (GSM/TD)

471

477

483

488

493

498

503

508

513

518

522

527

533

Unicom (GSM/WCDMA)

136

138

139

140

140

141

142

143

145

146

148

149

150


31

33

35

37

39

42

44

47

50

53

56

59

62

637

648

657

665

673

681

689

698

708

717

726

736

746

China Mobile (GSM/TD)

73.9

73.7

73.6

73.5

73.3

73.1

73.0

72.8

72.5

72.2

71.9

71.7

71.5

Unicom (GSM/WCDMA)

21.3

21.3

21.1

21.0

20.9

20.7

20.6

20.5

20.4

20.4

20.3

20.3

20.2


4.8

5.1

5.3

5.6

5.8

6.2

6.4

6.7

7.1

7.4

7.7

8.0

8.3

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Total subs Market share (%)

Total


116

[email protected]

19 April 2010

Mr & Mrs Asia

Telecoms

Strong balance sheet puts China Mobile ahead of the pack

China Mobile recently announced that it is in talks with Shanghai Pudong Bank and it could acquire a 20% stake of the bank for Rmb40bn. The acquisition may put pressure on the near term share price as investors would prefer to pay out the cash as dividends. However, we believe this is a positive strategic move and will help accelerate the development of its mobile payment/banking in China. China Mobile has been working on mobile payment for several years, but has made little progress. Banks, in general, are unwilling to partner with telcos to provide payment or banking services as the mobile service may compete head-on with their existing business. It is difficult for its peers to compete on the same ground given their weaker balance sheets. Once on 4G, China Mobile will be back on an equal playing field. Figure 240

China Mobile leads by a margin

China’s mobile revenue (Rmbbn)

2004

2005

2006

2007

2008

9M09

204

243

295

357

412

327

China Unicom (GSM)

48

52

59

63

65

52

China Unicom (CDMA)

24

28

27

28

22

0

0

0

0

0

5

21

276

323

382

447

505

400

China Mobile (GSM)

74

75

77

80

82

82

China Unicom (GSM)

17

16

16

14

13

13

China Unicom (CDMA)

9

9

7

6

4

0


0

0

0

0

1

5

100

100

100

100

100

100

China Mobile (GSM)

China Telecom (CDMA) Total Market share (%)

Total


India - Bharti to emerge stronger India: Hyper-competition unlikely to end soon

India’s competition has also worsened with Reliance and Tata launching their new GSM service. Pricing is the easiest strategy for small operators to gain market share. Tata’s new “per second” billing and Reliance’s “Simply Reliance” promotions have driven up subs growth, but undermined profitability. Most telcos recorded over 20% QoQ core earning decline in 2QFY10. Bharti has been the best performing operator as they have been cautious and selective in responding to competition, but still experienced 7.8% QoQ earning decline in 2QFY10. The hyper-competition may not end soon especially with upcoming 3G licensing and new capacity.

We like Bharti’s execution capabilities and strong balance sheet

However, Bharti will likely emerge the strongest operator when competition stabilises given its strong execution and balance sheet. 3G licensing may also accelerate industry consolidation. Risk is their global expansion which is unlikely to be cheap and may generate little synergies.

Subscriber growth remains robust

Bharti has continued to grow subs at a robust 38.8% YoY to 118.9m and maintain stable revenue in 3QFY10 despite intense competition with steep tariff cuts and per second billing offers. Management is determined to maintain its focus on revenue market share, which has increased 1ppt in the past 12 months and is 11ppts ahead of its own subscriber market share. Besides a growing presence in the non-mobile business, Bharti’s key competitors also trail significantly in network, distribution, servicing and value-added-service offerings.

19 April 2010

[email protected]

117

Mr & Mrs Asia

Telecoms

Figure 241

Figure 242

India: Mobile market share, Feb 2010

India: Leading operators net adds

Others 9%

6

(m)

5

Idea (incl Spice) 11%

Bharti 23%

Tata 11%

Bharti

RCom

BSNL

Voda

Tata

Idea

4 3 2

Reliance 18%

1

Feb 10

Dec 09

Oct 09

Aug 09

Jun 09

Apr 09

Feb 09

Dec 08

Apr 08

Oct 08

0

Voda 17%

BSNL 11%

Aug 08

Bharti still dominant

Bharti is best positioned for 3G given its strong balance sheet (0.05x debt to equity) and leadership in 2G. Bharti has the highest mobile value added services (MVAS) share at 11% of Arpu among India telcos. MVAS growth has been held back by 2G spectrum crunch and delay in 3G. However, 3G auctions will be in FY10. Bharti will benefit from late-mover advantages and its 3G rollouts will ride on much of the 2G physical infrastructure, including towers. Mobile number portability (MNP) is now delayed to March 2010 and will likely see even further delays.

Jun 08

Bharti is the 3G play in India


Pressure on Arpu and margin is temporary Arpu is declining in China and India . . .

New competition has accelerated Arpu decline in China and India. China Mobile and Bharti’s Arpu fell 9% YoY to US$11 and 29% YoY to US$5, in 3Q09. Revenue per minute fell to a new low of US$0.2 in China and US$0.1 in India. The lower average Arpu in India is likely due to affordability. Also, subscriber number is inflated due to subscriptions to life-time prepaid cards.

. . . and margins are under pressure

Ebitda margin has also been under pressure given slowing revenue growth and higher marketing expenses, but remains high at 51% for China Mobile and 40% for Bharti. India telcos have been burdened with high regulatory fees (licensing and spectrum fees) which could amount to 20-30% of revenue, compared to 3-4% for China telcos. Excluding regulatory fees, Bharti has one of the highest Ebitda margins in the region. Figure 243

Figure 244

Monthly Arpu

Revenue per min

16

(US$)

14

China Mobile Telkom

Bharti

0.040

12

0.030

10

0.025

8

0.020

6

0.015

China Mobile

Bharti

0.010

4 2Q06

(US$/min)

0.035

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09


118

[email protected]

19 April 2010

Telecoms

Mr & Mrs Asia

ROE remain high and will be trending up Peak capex is behind us in China

China Mobile and Bharti’s ROE remain high at about 25% despite Arpu and margin pressure this year. ROE should trend up in the next five years as the companies maintain mid to high single-digit growth. Rising data usage will help support Arpu. Also, capex peaked in 2009 and started declining. China Mobile’s capex may decline by about 10% this year as 2G capex may drop by half given slowing user growth. 3G capex will start coming down in 2011. Bharti’s total capex may jump by 77% in FY2011 due to 3G rollout, but will start declining in FY2012. Bharti’s mobile network has covered 84% of the population but 2G capex is on a decline with an 11% reduction in FY2010 and another 30% reduction in FY2011-12.

Late mover advantages on 3G? While 2G voice is being commoditised, there are few takers for 3G services

China and India are behind the world’s 3G adoption curve. However, 3G has seen little success in the world with high investment and low demand. Although China and India are benefitting from the improved economies of scale on 3G, it is unlikely 3G are value-adding. The way ahead for the telecoms industry is data and data applications as voice is being commoditised very quickly. 3G is likely to be the future, but China and India are still pretty much voice-driven markets. Both countries are still developing economies and affordability remains a concern. High capex investments on 3G would likely accelerate commoditisation of 2G voice but is unlikely to lift up overall Arpu by a large margin. The telecoms sector is an upfront capital intensive business with high fixed costs and low variable costs. The risk is that once a network has been built, the incentive is to fill the capacity at whatever cost since capex has been made. 3G price wars are not unforeseeable. Although India’s 3G auction can alleviate the problem of spectrum crunch, competition is likely to get worse.

Regulatory risks - Not major Asymmetrical regulation unlikely on China Mobile

There had been talks on asymmetrical regulations to be imposed on the dominant player China Mobile post restructuring, but these were deemed unnecessary as the market share shift occurred faster than expected. China Mobile has been ceding mobile net adds market share to China Telecom resulting in more balanced competition. At present, China Mobile’s net adds market share has dropped to about 50% from about 80%. The regulator’s focus has now been moving to 3G development from curtailing China Mobile’s dominance. In China, mobile-number portability (MNP) is still under pilot studies and is unlikely to be commercially rolled out in 2010.

In India, MNP likely to be delayed

In India, MNP which was targeted to be implemented in Metro and A-circles by December 2009 has been delayed again to 1Q10 and is to be implemented in one go across all 22 circles. Considering that several operators are not yet ready with infrastructure for MNP implementation there could be even further delays.

Internet is the next big thing In China, internet is entering the hyper-growth phase

19 April 2010

While the mobile market is entering middle age, China’s internet has just entered a hyper-growth phase. Internet users have tripled over the past three years to 384m and China has become the largest market in the world, but penetration remains low at 27%. We expect internet users to double again in the next three years given falling equipment and PC prices. Broadband has become the key growth driver for telcos, which have been boosting their broadband capex by about 30% per year. China Mobile had reportedly offered to invest Rmb100bn on broadband if the government allows it to enter the

[email protected]

119

Mr & Mrs Asia

Telecoms

fixed broadband market. Mobile broadband could also surprise on the upside in China given low fixed-line penetration. PC pricing has been falling fast especially with the increasing popularity of netbooks and smartphones. Baidu and Tencent are our top picks

We believe there is a broadband boom in China and internet companies will be the biggest beneficiaries as they ride telcos’ infrastructure investment. Online advertising and gaming are already proven online business models. Internet operation is generally near-monopoly given network effect. Many enjoy near-100% ROIC. Our top picks for the sector are Baidu and Tencent.

A landmark year for Baidu

This will be a landmark year for Baidu with economic recovery, launch of Phoenix Nest and Google’s exit from China. Google has rerouted all traffic to its Hong Kong website where there is no censorship. This places Google back to its position four years ago when it operated offshore and its market share was only 15%. Its effort to circumvent Chinese laws has enraged Beijing and there will be consequences. Baidu will be the immediate and largest beneficiary. Valuation still looks reasonable at 1.2x 11CL PE/growth. Figure 245

Internet user growth is a secular locomotive

China internet user growth 700

(m)

Internet users

(%)

Penetration (RHS)

642

600

556

500

470

400

47

35

298

300

50

41

384

60

40 30

29 210

200 100 23

34 3

0

5

111

94

80

59

16

10

10

8

7

6

20

22

137

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 10F

11F

12F

Source: CNNIC, CLSA Asia-Pacific Markets Figure 246

In China, Indonesia and India internet penetration still has a long way to go

Internet users as a share of population 90

(%)

China

India

Indonesia

Japan

USA

80 70 60 50 40 30 20 10 2012F

2011F

2010F

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

0

Source: Economist Intelligence Unit, CLSA Asia-Pacific Markets

120

[email protected]

19 April 2010

Mr & Mrs Asia

Telecoms

Figure 247

Household-internet penetration is yet to take off

Internet subscription household penetration (%)

80

China India

70

Indonesia

60

Japan

50

USA

40 30 20 10 2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

0


Tencent’s recent correction is a buying opportunity

Tencent’s shares have faced pressure due to concerns over slowing gaming revenue growth. Gaming risk is valid, but Tencent is not a pure gaming operator. The company’s business model will likely be more resilient given its large user base, dominance in SNS and the casual game market and diversified revenue. Tencent’s 4Q09 results have proven the sustainability of its business model. Despite slower gaming revenue, its online community business posted phenomenal growth in 4Q09 given a rapid growing user base. Increasing SNS applications and games have encouraged users to spend more time on the platform. We believe the recent correction provides a buying opportunity. The stock is trading at 1.2x 11CL PE/G (26x 11CL PE against a three year EPS Cagr of 22%). Our earnings forecast is likely to be conservative as we assume little growth from new games. Apart from China, broadband has also become a new growth driver for other emerging markets. However, fixed-line penetration in other emerging markets is relatively low and it is likely to take a longer time for the internet markets such as India and Indonesia to be built up. Figure 248

Fixed-line is on a structural decline

Fixed-line population penetration (%)

80

China

India

Indonesia

Japan

USA

70 60 50 40 30 20 10 2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

0


19 April 2010

[email protected]

121

Mr & Mrs Asia

Telecoms

Figure 249

Asian telcos valuations Integrated

Rec

Ccy

Price

10CL

11CL

10CL

11CL

10CL

11CL

10CL

China Telecom

BUY

HK$

4.00

18.7

14.9

4.1

3.6

9.9

11.5

2.1

2.2

Chunghwa Telecom

BUY

NT$

61.50

12.7

12.9

5.4

5.6

10.0

9.6

10.4

10.3

KT

O-PF

won

46,550

8.1

7.4

3.1

2.8

12.2

13.3

6.2

6.8

PLDT

O-PF

P

2,535

10.5

9.6

6.1

5.9

7.7

8.2

8.5

9.0

SingTel

O-PF

S$

3.18

12.6

12.0

8.9

7.9

5.6

6.7

4.1

4.4

Telkom

O-PF

Rp

8,050

12.4

11.6

4.3

4.0

6.5

7.7

4.1

5.3

China Unicom

U-PF

HK$

9.18

28.9

22.8

4.5

4.1

(5.1)

0.4

2.0

2.0

MTNL

U-PF

Rs

74.35

na

na

20.5

na (101.7)

48.1

1.3

1.3

PCCW

U-PF

HK$

2.30

11.9

11.2

6.1

5.7

8.4

8.8

3.5

3.5

Rs

288.05

68.1

53.9

8.6

8.0

0.2

1.1

0.9

0.9

RM

3.49

20.3

20.3

5.2

4.9

0.4

3.9

5.8

5.8

17.2

14.8

5.6

5.0

4.1

6.4

3.5

4.5

Tata Communications U-PF Telekom Malaysia

SELL

Weighted average

PE (x)

EV/Ebitda (x)

FCF/EV (%)

Yield (%) 11CL

Wireless

LG Telecom

BUY

won

7,800

8.1

7.0

2.2

1.7

11.8

20.2

4.5

4.5

Maxis

BUY

RM

5.29

14.3

12.8

8.3

7.8

8.2

8.8

9.1

10.2

SK Telecom

BUY

won

174,000

7.8

6.6

2.3

2.0

18.3

22.9

6.6

6.9

Bharti Airtel

O-PF

Rs

308.20

11.8

10.6

6.6

5.6

0.1

6.6

0.0

0.0

Reliance Comm

O-PF

Rs

176.50

8.1

7.7

6.3

5.7

(9.6)

1.5

0.0

0.0

StarHub

O-PF

S$

2.33

15.1

13.3

7.7

7.0

6.0

8.2

8.6

8.6

Taiwan Mobile

O-PF

NT$

60.50

11.2

11.1

7.5

7.4

7.4

7.6

8.0

8.1

China Mobile

U-PF

HK$

78.60

11.9

11.4

5.0

4.5

5.5

8.6

3.6

3.8

Digi

U-PF

RM

22.52

16.0

15.4

7.5

6.9

4.5

5.6

8.3

9.0

Far EasTone

U-PF

NT$

38.10

13.9

13.7

4.5

4.3

10.8

12.2

6.5

6.6

Globe Telecom

U-PF

P

985

10.5

10.0

4.2

4.0

8.0

9.0

8.1

8.6

Idea Cellular

U-PF

Rs

67.85

23.1

22.2

7.9

7.2

(2.5)

(0.6)

0.0

0.0

Indosat

U-PF

Rp

6,000

21.2

17.4

5.2

4.7

2.4

3.8

1.9

2.3

MobileOne

U-PF

S$

2.10

13.1

11.9

6.8

6.2

7.9

10.6

6.1

6.7

Axiata

SELL

RM

3.77

18.0

16.0

7.0

6.4

2.6

3.9

0.0

0.0

Weighted average

12.2

11.6

5.4

4.8

5.1

8.3

3.6

3.7

Weighted average (overall)

14.1

12.8

5.5

4.9

4.7

7.6

3.6

4.0


122

[email protected]

19 April 2010

Mr & Mrs Asia

Transport

Transport - On the move

Robert Bruce [email protected] (852) 26008522

Top picks AirAsia Market cap Price

AIRA MK US$1,144m RM1.33

Air China Market cap Price

753 HK US$21,003m HK$8.06

Cathay Pacific Market cap Price

293 HK US$8,448m HK$16.66

Travel within Asia is set to outgrow other regions, with the increasing affluence of Asians and the gradual move to more leisure time. We expect airline-passenger trips in 17 countries to increase from 416m in 2007 to 737m by 2014, or an annual growth rate of 8.5%. China will lead the surge: by 2015, the country will become the world’s largest source of outbound departures at 95m, representing a 3x increase over 10 years. A majority of the travel aspirations remain within the domestic market but regional countries will also benefit over the medium term as consumers become more adventurous. Air China is an obvious play for exposure to growing international travel by mainlanders. Figure 250

Figure 251

China: Domestic air travellers

China: International air travellers

250

(m)

18 16 14 12 10 8 6 4 2 0

200 150

Jet Airways Market cap Price

JETIN IB US$1,039m Rs531.2

Qantas Market cap Price

QAN AU US$6,138m A$2.93

100 50 0

Singapore Airlines SIA SP Market cap US$13,254m Price S$15.46

In 2009, intra-Asia Pacific air travel was the largest aviation market globally

1987 1990 1993 1996 1999 2002 2005 2008

(m)

1987 1990 1993 1996 1999 2002 2005 2008


Travel within the Asian region set to outperform other regions, with the increasing affluence and gradual move to more leisure time. Recently, the International Air Transport Association (IATA) confirmed that in 2009 intraAsia-Pacific travel had surpassed the number of passengers in North America as the world’s largest aviation market. Asia-Pacific’s passengers numbered 647m compared to 638m who flew within North America (including domestic markets). By 2013, IATA forecasts that an additional 217m passengers are expected to take to the skies within Asia Pacific. For 2010 IATA is forecasting 12% passenger growth in Asia versus 6.2% in North America and 4.2% in Europe, thus even though the slowdown in Asia was less severe the rebound is still expected to be stronger. Figure 252

China market to accelerate its dominance

Asia: Passenger growth, 2007-14 Country

GDP/capita Passengers (US$) 2007 (No.) Australia 56,847 34,760,500 Bangladesh 696 2,020,000 Brunei 41,980 522,000 Cambodia 974 1,337,000 China 5,548 106,580,000 Hong Kong 33,404 23,891,500 India 1,361 36,856,000 Indonesia 3,037 29,600,000 Japan 36,794 74,446,500 Lao PDR 1,013 154,500 Malaysia 7,375 16,296,000 New Zealand 37,426 8,135,500 Philippines 2,009 10,178,000 Singapore 42,657 17,513,500 Korea 20,300 25,696,000 Thailand 5,173 23,256,000 Vietnam 1,256 4,448,800 Total 415,691,800

Passengers 2007-14CL Per-capita trips Per-capita trips 14CL (No.) Cagr (%) 2007 (No.) 14CL (No.) 54,296,160 6.6 1.65 2.34 3,927,861 10.0 0.01 0.02 754,419 5.4 1.34 1.85 1,728,391 3.7 0.09 0.11 327,853,430 17.4 0.08 0.24 26,381,850 1.4 3.46 3.64 67,018,556 8.9 0.03 0.06 46,419,176 6.6 0.13 0.19 89,264,379 2.6 0.58 0.71 357,801 12.7 0.03 0.05 18,211,282 1.6 0.61 0.63 10,369,803 3.5 1.92 2.27 13,328,043 3.9 0.12 0.14 19,961,656 1.9 3.82 4.14 23,011,296 (1.6) 0.53 0.46 28,983,673 3.2 0.36 0.44 6,693,069 6.0 0.05 0.07 737,423,176 8.5 0.13 0.21

Source: IATA, country statistics and airport authorities, CLSA Asia-Pacific Markets

19 April 2010

[email protected]

123

Mr & Mrs Asia

Transport

China - A growing dragon A 14.2% Cagr over the last ten years in China . . .

The Chinese aviation market has grown at 14.2% per annum over the last 10 years to a market of 115m passenger round trips in 2009. The domestic market has been the strongest growth driver at a 14.7% Cagr compared to the international market at 8.8%, while the Hong Kong/Macau routes are mature with just 3.2% growth. The domestic market dominates a majority of trips accounting for 94% of passenger trips and 80% of passenger traffic, measured by revenue passenger kilometres (RPK).

. . . as the propensity to travel grows

The development of the Chinese propensity to travel both domestically and internationally is growing. China Reality Research’s recent study indicates that with the recovery in consumer confidence travel becomes one of the most aspirational discretionary-spending goals. In October 2008, when confidence sank, 26% of respondents had plans to travel. This compares to 49% in April 2009 and then 36% in 2010, with 15% planning on a reduction in travel while 49% plan to do a similar amount of travel this year. Travel remains the highest growth category ahead of children’s extracurriculum classes (30%) and home appliances and electronics which have declined from a peak of 36% in November 2009 to 21% of respondents in February 2010 looking to expand their purchases. A majority of the travel aspirations remain within the domestic market but regional markets will also benefit over the medium term as consumers’ become more confident and adventurous. Figure 253

Travel an aspirational goal in China

What do you plan to buy in the next six months? Travel Children's extra-curriculum

Feb 10

Home appliance & electronics

Nov 09 Jul 09

Car

Apr 09

Property

Jan 09 Oct 08

Other

(% of total respondents)

No big purchases planned

0

10

20

30

40

50

Figure 254

Fascinate exploring their own country first

If you plan to travel in the next six months, where do you plan to go?

Europe 2%

USA 1%

Other 1%

Not sure yet 8%

Elsewhere in Asia & Australia 4%

Same or nearby provinces 35%

HK, Macau or Taiwan 6% Elsewhere in mainland China 43%

Source: CRR

124

[email protected]

19 April 2010

Mr & Mrs Asia

Transport

Indonesia - Domestic-led growth The fourth-largest airtravel market in Asia

The Indonesian air travel market is the fourth-largest in Asia with an estimated 38m passengers travelling in 2009. The market is led by the domestic market which accounts for 81% of passenger trips or 4.4x the size of the international market with 35m domestic passengers taking a round trip in 2009 compared to 7.9m international passengers. Figure 255

Wealth and international hub status drive traffic

Airline passenger round trips, 2007 Passenger round trips

GDP per capita (US$)

Per-capita trips

China

106,580,000

2,560

0.08

Japan

74,446,500

34,318

0.58

India

36,856,000

939

0.03

Australia

34,760,500

43,199

1.66

Indonesia

29,600,000

1,921

0.13

Korea

25,696,000

21,655

0.53

Hong Kong

23,891,500

29,854

3.46

Thailand

23,256,000

3,742

0.36

Singapore

17,513,500

36,383

3.82

Malaysia

16,296,000

6,956

0.61

Philippines

10,178,000

1,626

0.12

New Zealand

8,135,500

30,431

1.92

Vietnam

4,448,800

835

0.05

Bangladesh

2,020,000

463

0.01

Cambodia

1,337,000

648

0.09

Brunei

522,000

31,901

1.34

Lao

154,500

674

0.03

Source: IATA, country statistics and airport authorities

Indonesian outbound exceeding volatile tourist visits

The domestic market has enjoyed a 15% Cagr over the past 11 years, maintaining growth in every year with the exception of 2000. In contrast the international market for trips in Indonesia has only grown at a Cagr of 6.7%, which has been held back by international tourist visits to Indonesia growing at just a 2.5% Cagr since 2000, with significant declines in 2003 and 2005-06 following the Bali Bombings that specifically targeted foreign tourists. Figure 256

Domestic market has seen a 15% Cagr

Indonesia: Domestic passenger market growth 40

(m)

Domestic passengers

YoY growth (RHS)

(%)

35

50 40

30 30

25 20

20

15

10

10 0

5 0

(10) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Statistical Bureau of Indonesia

19 April 2010

[email protected]

125

Mr & Mrs Asia

Figure 258

Indonesia: International passengers

Indonesia: Tourist arrivals 7

Tourists (LHS)

(m)

(%) 30 25 20 15 10 5 0 (5) (10) (15)

YoY growth

6 5 4 3 2 1

2008

2007

2006

2005

2004

2003

0

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1998

16 14 12 10 8 6 4 2 0 (2)

2002

(%)

YoY growth (RHS)

2001

International passengers

(m)

2000

9 8 7 6 5 4 3 2 1 0

1999

International passenger growth of 6.7%

Figure 257

2009

Transport


India - An elephant on the move The fastest growing market in Asia

The Indian domestic aviation market had been growing at a 26% Cagr over the previous five years to March 2009, and was the major growth driver compared to the international market at a still respectable 14.8%. While the Indian domestic travel industry shrank in 2009 as domestic capacity was reduced by 16% HoH in 1H09 following the slowdown in growth and the fall out from the impact of the terrorist Mumbai attacks, there is now an expectation of strong growth returning with 2H09 adding 3% HoH. Figure 259

A 26% five-year Cagr

India: Airline passengers 45

(m)

Domestic

International

40 35 30 25 20 15 10 5 FY94

FY96

FY98

FY00

FY02

FY04

FY06

FY08

Source: Government statistics

126

Domestic growth was stimulated by the entry of LCCs

One of the reasons for the growth in the domestic market was due to the entry of new carriers, both full service and low-cost carriers (LCC). For example India’s second largest carrier, Kingfisher, only commenced operations five years ago and already has 22% market share. While LCC’s, such as Indigo, Spicejet and GoAir, have all emerged in recent years to grow the aviation market and now account for 33% market share.

India has one of the highest penetration rates of LCCs

In fact, Indian LCC’s have one of the highest penetration rates globally with the South Asian region having an estimated 46% of seat capacity of the total market, which is significantly higher than the global average of 21.7% and even surpasses the EU at 36.1% penetration, despite the LCC market having been established for only 20 years. This growth in India has been obtained despite the traditional elements for LCC not being present: lack of secondary airport alternatives, no dedicated budget terminals and an inability to have [email protected]

19 April 2010

Mr & Mrs Asia

Transport

significantly different pay scales for pilots. However, with the industry being so young, the companies have been able to assess the various legacy models that have been operating globally and with a low cost workforce generally adopted the LCC model that has leaders showing success and higher growth such as Ryanair, Easyjet and Southwest. Figure 260

New players and LCCs have eroded Air India’s market share

India: Airlines’ market share 30

(%)

25

25.2 22.2

20

18.0 15.3

15

12.2

10 5.4

5 1.8

0 Jet

Kingfisher

Air India

Indigo

SpiceJet

GoAir

Paramount

Source: DGCA, CLSA Asia-Pacific Markets Figure 261

LCCs have the highest penetration in South Asia

LCC capacity (seats) penetration South Asia Lower S America SW Pacific EU Central America Western Europe Europe SE Asia North America Central/S America Southern Africa Global Asia Pacific Africa East Europe (ex Russia) Middle East Eastern Africa NE Asia Caribbean North Africa Central/W Africa Upper S America Central Asia

(%) 0

10

20

30

40

50

Source: Centre for Asia Pacific Aviation

India’s air travel market is the third-largest in Asia

19 April 2010

India’s air-travel market is the third-largest in Asia with an estimated 35.5m passenger round trips taken in FY09. The domestic market now accounts for 56% of passenger trips. Market penetration is only 3.2% of round trip per capita in India, which is the third-lowest in the region. Based on our forecasts of GDP per capita rising from US$939 in 2007 to US$1,361, as well as the population expanding by a 0.5% Cagr, we expect the number of passenger round trips to grow to 67m by 2014, an 8.9% Cagr.

[email protected]

127

Mr & Mrs Asia

Transport

Infrastructural bottlenecks plague India’s growth

The growth of the Indian market is supported by policies for the removal of infrastructure bottlenecks that could restrict capacity growth:

The Airports Authority of India (AAI) has planned investment of US$3.1bn over the next five years;

100% tax exemption for airport projects for a period of 10 years; Government plans to develop 300 unused airstrips should help create the number of low cost terminals that are utilised in the LCC model. Lowering of sales tax rates on ATF will help the growth of the market

In addition, the operating costs of airlines should benefit from the government guideline to remove expatriate pilots by July 2011, 4% lower fuel excise tax and the limitation on airport fees at AAI after rate hikes in 2009. However, employing expat pilots was the industry’s response to a lack of availability of pilots in the domestic market. Figure 262

Singapore and Hong Kong show the benefit of hub creation

Asian passenger trips by penetration rate, 2007 Country

Singapore Hong Kong New Zealand Australia Brunei Malaysia Japan Korea Thailand Indonesia Philippines Cambodia China Vietnam India Lao PDR Bangladesh USA

Passenger round trips 17,513,500 23,891,500 8,135,500 34,760,500 522,000 16,296,000 74,446,500 25,696,000 23,256,000 29,600,000 10,178,000 1,337,000 106,580,000 4,448,800 36,856,000 154,500 2,020,000 384,700,000

Per-capita GDP (in current US$) 36,383 29,854 30,431 43,199 31,901 6,956 34,318 21,655 3,742 1,921 1,626 648 2,560 835 939 674 463 46,630

Per-capita passenger round trips 3.82 3.46 1.92 1.66 1.34 0.61 0.58 0.53 0.36 0.13 0.12 0.09 0.08 0.05 0.03 0.03 0.01 1.66

Source: IATA, country statistics and airport authorities, CLSA Asia-Pacific Markets

Civil aviation and per-capita wealth

128

Double-digit growth possible till per-capita GDP reaches US$4,500

A review of US aviation history suggests that double digit growth in per head passenger traffic is possible up to a US$4,500 GDP/capita. US passenger traffic per capita expanded from 0.22 in 1954 to 0.81 in 1968 at a 10% Cagr. After per capita GDP reached US$4,500, growth in flight frequency per head began to slow to low single digit per annum, reaching around 2.2 trips per passenger by the middle of the 1990s.

India is entering the hyper growth phase

Growth in the civil-aviation industry does not correlate with the macro economy in a straight-line fashion (see Figure 264). In 2007, there were 416m passenger round trips, domestic and international, from 17 countries in the Asia-Pacific region, equating to 0.13 per person. Singapore and Hong Kong have the highest penetration rates, where the development of regional hubs has meant that passenger throughput with fifth-freedom traffic (an airline can carry revenue traffic between foreign countries as a part of services connecting its home market) is more important than other end of destinations, such as Australia and New Zealand, where a strong domestic network offsets the lack of hub. [email protected]

19 April 2010

Mr & Mrs Asia

Transport

Figure 263

USA showed strong growth as GDP rose to US$25,000

US passenger traffic and per-capita GDP 3.5

(x)

Px traffic per capita

70,000

(US$)

GDP per capita (RHS)

3.0

60,000

2.5

50,000

2.0

40,000

1.5

30,000 10% Cagr till 1970

1.0 0.5

20,000

Stagnant since 90's

Tailing off to single digit p.a. growth

10,000 0

0.0 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 Source: CEIC, CLSA Asia-Pacific Markets Figure 264

India still at a nascent development stage

Per-capita air travel versus GDP, 2007 10.00

Per-capita round-trip air travel

y = 7E-05x0.9716 R2 = 0.8855

Singapore

HK New Zealand

1.00

Brunei

Malaysia Thailand

Australia

USA

Japan Korea


0.10

China



0.01 0

10,000

20,000

30,000

40,000

50,000

Source: SAP data from Tiger Airways prospectus, CLSA Asia-Pacific Markets

Air travel growth strongly correlated to per-capita GDP

Explosive growth on the front end of the curve. Developing countries experience exponential growth in air travel as per capita wealth picks up - per capita passenger traffic for relatively wealthier Asean economies like Malaysia and Thailand are as much as 3-6x higher than regional peers such as China and Indonesia. This is meaningfully higher than the per capita wealth differential of 1.5-2x. Figure 265

Per-capita passenger air travel in emerging Asia, 2007 Country

Passenger round trips

Per-capita GDP (in current US$)

Per capita passenger round trips

China

106,580,000

2,560

0.08

India

36,856,000

939

0.03

Indonesia

29,600,000

1,921

0.10

Malaysia

16,296,000

6,956

0.61

Thailand

23,256,000

3,742

0.36

Note: Data as of 2007. Source: SAP data from Tiger Airways Prospectus, CLSA Asia-Pacific Markets

19 April 2010

[email protected]

129

Mr & Mrs Asia

Transport

Growth drivers are the wealth effect, geography and infrastructure

The wealth effect appears less relevant at the other end of the curve, as we note the major differences in air- traffic frequency among developed AsiaPacific economies like New Zealand, Australia, Korea and Japan (GDP per capita US$20,000-40,000). With the gradual disappearance of the “low-base” income factor, other drivers such as infrastructure and geography (eg, Australia’s land mass versus Japan supported by a high speed rail system) begin to take a more significant role. Figure 266

Per-capita passenger air travel in developed Asia, 2007 Country

Passenger round trips 34,760,500 74,446,500 8,135,500 25,696,000

Australia Japan New Zealand Korea

Per-capita GDP (in current US$) 43,199 34,318 30,431 21,655

Per capita passenger round trips 1.52 0.58 1.92 0.53

Note: Data as of 2007. Source: SAP data from Tiger Airways Prospectus, CLSA Asia-Pacific Markets

China’s growth likely to remain strong . . .

. . . for the next five years at least

India’s hyper growth phase is likely to start around 2014

Given this diminishing wealth impact, we prefer aviation plays in earlier-stage economies. Air China, China Eastern and China Southern control close to 79% of the Chinese market following a number of consolidation moves, and are direct exposures to the more frequent Chinese flyer. While we have harboured concerns over the high debt and material balance sheet uncertainties on the latter two, the recent capital injections have shown that they remain well supported by the government, meaning financial stress is less of a concern. AirAsia is well exposed to the growing Asean market, especially to Indonesia. An extrapolation of the above would suggest that as China’s per-capita GDP rises from US$2,560 to US$5,548 over 2007-14, with an appreciating currency, per-capita passenger traffic should move from 0.08 to 0.24 round trips per head, resulting in the Chinese market growing at an astonishing 17.4% per annum to 327m passenger trips. Asia’s third-largest market India is likely to cement this position and potentially close in on Japan’s No.2 position with a growth rate of 8.9% to 67m passenger flights. India’s GDP should rise by 5.5% per annum to US$1,361 by 2014, with trips per capita increasing from a low 0.03 to 0.06. In Indonesia, with GDP per capita increasing to US$3,037 at a 6.8% Cagr, flight penetration will deepen from 0.13 to 0.19 per capita, with the total number of passenger trips increasing by a 6.6% Cagr to 46.4m. Figure 267

China offers 17% growth

Per-capita air travel versus GDP, 2014 10.00

Per-capita round-trip air travel HK

Singapore

y = 6E-05x0.9863 R2 = 0.8807

New Zealand

1.00

Brunei

Malaysia Thailand

Korea

Australia

Japan


0.10

China



0.01 0

10,000

20,000

30,000

40,000

50,000


130

[email protected]

19 April 2010

Mr & Mrs Asia

Transport

Intra-Asia demand versus global demand impact Keeping costs down necessary to benefit from the growth

In the region, companies with cost advantages will be better positioned to tap the growth of the new middle class. Singapore Airlines has the benefit of lowcost capital, with cheap funding in Singapore to finance a regular upgrade of its fleet, while enjoying a competitive advantage over ailing national airlines in the region. The low-cost carrier AirAsia has the right business model to capitalise on the desire to travel for the budget-conscious new middle class in the region.

Asean open skies to drive additional leisure traffic

On top of the growing affluence the Asian markets are also expected to benefit from the continuing liberalisation of flights within the region. Last year has seen either the partial or full liberalisation of aviation markets for international flights from other Asean nations in Indonesia, Malaysia, India, China, Vietnam, Philippines and Cambodia. Further liberalisation will occur in 2015.

European open skies added significantly more competition

The market where open skies has seen to have been successful is in Europe, with the formation of a single aviation market. There was a significant difference to Asean with this agreement not coming about as a result of countries negotiating an open skies agreement, rather it was imposed on them by a central authority as a result of the treaty they signed when joining the European Community. Open skies have generally worked well overall in Europe. There has not been excessive instability although there has been a moderate degree of restructuring. The benefits being significantly more competition, especially from the low cost carriers which now have 36% market share.

Air Asia, Jetstar and Tiger set to benefit

Thus, the LCCs in Asia are set to benefit with the likes of AirAsia, Jetstar Asia and Tiger Airways having already benefitted from the recent liberalisation of flights between the short haul major routes of Jakarta, Singapore and Kuala Lumper. In this situation, the losers have tended to be the legacy carriers like Singapore Airlines and Malaysia Airlines who have previously operated in a protected market, where the LCCs lacked sufficient landing slots to offer attractive frequency. Figure 268

Asean is leading the way with open skies

Asia’s aviation-market liberalisation 2004

2009

2015

Australia Brunei Cambodia China Hong Kong India Indonesia Laos Macau Malaysia Philippines Sri Lanka Thailand Vietnam Unrestricted

Unrestricted access to capital cities and some secondary points

Limited access to capital cities, limited access to secondary points

No access


19 April 2010

[email protected]

131

Transport

Mr & Mrs Asia

Strengthening currencies will boost travel Some 95m outbound tourists by 2015

China consumers’ rising disposable income combined with increased leisure time has already resulted in a large growth in outbound tourist numbers. We had already estimated that by 2015, China would become the world’s largest source of outbound departures at 95m, up from 29m in 2004, and rising to 120m in 2020. While the financial crisis has temporarily halted the growth, a renminbi at equilibrium would appreciably accelerate this process. Appreciating currencies in other markets, namely India, would spur a similar outbound tourism boom. The preferred plays on the appreciating currency are Air China with the largest outbound proportion of passengers compared to the other two major carriers that are more domestic focussed and also it has 77% of its debt in US dollars creating a direct translation gain on appreciation.

Air China is China’s major international carrier

Air China has the largest proportion of international traffic of the three major mainland carriers. It announced it would inject fresh capital into Shenzhen Airlines, lifting its stake from 26% to a controlling 51%. Compared to its 2005 bid, the deal appears attractively priced. We view this development positively as consolidation should result in less aggressive fare discounting and improved load factors from more efficient capacity scheduling.

Cathay Pacific’s Asian network provides a conduit for China access.

Cathay Pacific is also well positioned to benefit from the growing outbound market and business international traffic accessing China through Hong Kong. Cathay Pacific has two direct exposures, firstly its Dragonair business with a fleet of 29 aircraft focusing on regional short haul routes particularly Chinese cities, and secondly a 17% stake in Air China. We believe Cathay Pacific and other regional airlines are benefitting from the removal of substantial supply capacity in airlines and shipping has tightened up supply and provides a base for recovery in 2010. This has already lifted higher utilisation rates and now with a mild demand improvement, the higher loads are leading to less discounting. Airlines need three demand drivers to be profitable: leisure traffic in economy, bellyhold cargo and premium passengers. Some 30% of Cathay’s revenue comes from airfreight and 40% of passenger revenue from the premium cabins. Thus, the decline in freight and business traffic hurt them disproportionately more than other carriers. In 2009 they only had one leg driving them, and now we believe they are moving back to all three legs.

SIA has a premium position in long haul

Singapore Airlines has seen its market share in Singapore decline from the growth in LCCs but still maintains a strong market share in the premium business market and a very strong network in Southeast Asia connecting to long-haul routes. Thus, while LCCs have taken share in the regional shorthaul routes they maintain a clear competitive advantage in premium and feeding into long-haul routes. In addition, SIA holds a 33% shareholding in Tiger which partially hedges SIA against the encroaching LCC carriers. In India, despite the competitive nature of the market, Jet Airways is well positioned to benefit from the strong growth with its differentiated international product. Its budget airline, Jet Lite, has also turned profitable after capacity rationalisation. However, a weak balance sheet remains a concern.

Capacity cut in downturn results in high utilisation as demand rebounds

132

The carriers have reduced capacity over 2009 by 7% on average as they decreased utilisation of aircraft, disposed of older aircraft and parked excess aircraft. This has pushed load factors to significantly higher levels with many carriers reporting more than 80% seat utilisation in 4Q09. However, with the airlines still having the ability to work the assets harder and significant capacity coming from 2013 with the delayed 787 aircraft from Boeing, we see there being ample capacity to cater for the expected growth.

[email protected]

19 April 2010

Mr & Mrs Asia

Transport

Figure 269

Passenger capacity has dropped 6-8%

Passenger capacity 70

(bn)

ASK (LHS)

(%)

ASK growth

8

68

6

66

4

64

2

62

0

60

(2)

58

(4)

56

(6)

54

(8) (10)

52 Jan 06

Jul 06

Jan 07

Jul 07

Jan 08

Jul 08

Jan 09

Jul 09

Figure 270

Load factors bouncing back

Asian passenger load factors 85

(%)

(ppts)

Passenger load factor Load-factor change (RHS)

6 4

80

2 75

0 (2)

70

(4) 65

(6)

60 Jan 07

(8) Jul 07

Jan 08

Jul 08

Jan 09

Jul 09

Source: AAPA data, CLSA Asia-Pacific Markets

Other businesses catering to tourists will also benefit

In the consumer sector, those with businesses in near markets with a close geographic proximity to China, namely: Hong Kong, Korea, Japan and increasingly Taiwan, will be beneficiaries of increasing mainland customers. The key standouts are Lifestyle in HK, the owner of the largest departmentstore operation in the city; its counterpart in Taiwan, Far East Department Stores; HK cosmetics retailer, Sa Sa, which already has the largest reliance on mainlanders for its Hong Kong sales at one third. Other beneficiaries will be China-based online travel agency, Ctrip and regional hotel chains such as Shangri-La, Mandarin Oriental, Regal and Hongkong & Shanghai Hotels. The Middle East, namely Dubai, as well as Singapore, Thailand and Malaysia could expect to benefit from a surge in Indian outbound travellers. Just as a boom in outbound tourism could be expected from Asian currency equilibrium, a similar pattern would be likely for domestic tourism in Asia’s largest markets. Key beneficiaries here would be domestic hotel chains such as Indian Hotels, Hotel Leela and ITC in India.

19 April 2010

[email protected]

133

Mr & Mrs Asia

Transport

Competing high-speed transport From an infrastructure perspective, emerging Asia’s sizable land mass and relative underpenetration make railway and tollroad exposures interesting particularly on a per capita basis. Southeast Asia has lower rail penetration

Figure 271

Figure 272

Railway coverage per km²

Railway coverage per capita

USA UK Japan Korea Taiwan China India Indonesia Malaysia Thailand Philippines


(m/km²) 0

20

40

60

80

(m/capita) 0

0.2

0.4

0.6

0.8


Korea has more mature highway development

Figure 273

Figure 274

Highway coverage per km²

Highway coverage per capita



(m/km²) 0

10

20

30

(m/capita) 0

40

0.1

0.2

0.3

Source: CIA World Fact Book, CLSA Asia-Pacific Markets

China rail builders are all seen as expensive

While China South Locomotive, China Railway Group and China Railway Construction are all longer term exposures to China’s infrastructure buildout, our railway analyst Manop Sangiambut expects near-term new rail construction order growth to be negative due to a record high 2009. We are fundamentally bearish on China Railway Group and China Railway Construction, but find value in the latter. While China South Locomotive is in the growth “sweet spot” of rolling stocks, its valuation is stretched.

Figure 275

Regional infrastructure spending Infra spending (US$m) China Hong Kong India Indonesia Korea

YoY (%)

FY08CL

FY09CL

FY10CL

FY11CL

FY09CL

FY10CL

214,965

355,361

396,162

430,067

65.3

5,880

6,128

6,995

6,781

4.2

50,009

46,252

61,691

80,000

4,467

4,742

5,738

% of GDP FY11CL

FY08CL

FY09CL

FY10CL

FY11CL

11.5

8.6

4.9

7.5

7.4

6.7

14.1

(3.1)

2.7

2.9

3.0

2.6

(7.5)

33.4

29.7

4.1

3.8

4.2

4.2

6,077

6.2

21.0

5.9

0.9

0.9

0.8

0.8

15,057

18,590

29,697

25,160

23.5

59.7

(15.3)

1.6

2.3

2.6

1.8

Malaysia

5,723

6,276

8,257

8,291

9.7

31.6

0.4

2.6

3.4

3.9

3.4

Philippines

5,406

5,749

6,883

6,706

6.4

19.7

(2.6)

3.2

3.6

3.9

3.4

Singapore

3,906

4,620

5,302

5,203

18.3

14.8

(1.9)

2.1

2.7

2.6

2.2

Taiwan

15,011

16,920

17,959

16,953

12.7

6.1

(5.6)

3.8

4.6

4.5

3.8

Thailand

12,679

13,190

15,770

15,544

4.0

19.6

(1.4)

4.6

5.1

5.4

4.7

333,106

477,829

554,455

600,783

43.4

16.0

8.4

3.9

5.5

5.4

4.9

Total


134

[email protected]

19 April 2010

Mr & Mrs Asia

Transport

Figure 276

Regional transport and infrastructure valuations Price (local ccy)

Target (local ccy)

Air China

8.06

AirAsia

1.33

PE (x)

PB (x)

EV/Ebitda (x)

ROE (%)

10CL

11CL

10CL

11CL

10CL

11CL

10CL

11CL

8.24

12.6

10.8

2.4

2.0

8.5

7.9

20.7

19.5

1.70

6.3

5.4

1.1

0.9

7.6

7.0

19.7

18.9

16.66

19.60

10.2

10.3

1.4

1.2

5.8

5.7

14.3

12.7

531.20

700.00

14.6

4.5

4.7

2.3

8.0

5.6

37.9

68.1

2.96

4.50

26.3

8.1

1.1

1.0

4.2

2.4

4.4

13.4

15.46

18.44

12.5

11.2

1.4

1.3

4.9

4.5

11.6

12.3

China South Loco

5.95

4.60

29.0

22.3

3.3

3.0

14.4

11.8

11.9

14.0

Hankyu Hanshin

430

500

15.3

14.6

1.1

1.1

11.8

11.5

7.4

7.5

749,000

733,500

16.3

13.0

1.3

1.3

8.2

7.7

8.5

10.0

Rail

Cathay Pacific Jet Airways India Qantas Airways Singapore Airlines Rail

JR Central JR East

6,600

7,050

13.0

11.4

1.3

1.2

7.0

6.5

10.8

11.3

JR West

345,000

356,640

17.5

14.2

1.1

1.0

8.1

6.6

6.0

7.3

Kintetsu

293

190

52.1

49.3

2.8

2.8

20.6

20.5

5.4

5.7

29.20

33.00

23.8

21.8

1.5

1.4

18.5

17.0

6.4

6.7

MTRC Odakyu Elec Rail

781

550

61.0

48.8

2.7

2.6

14.9

14.3

4.5

5.5

SMRT

2.13

2.22

16.6

14.4

3.8

3.5

9.3

8.3

23.7

25.2

Tokyu

402

330

18.8

13.4

1.3

1.2

11.2

10.1

6.8

9.0

ComfortDelGro

1.56

1.87

13.1

11.5

1.8

1.7

5.9

5.4

14.2

15.2

Hopewell Highway

5.30

5.78

15.2

13.2

1.9

1.9

10.2

9.0

12.4

14.2

283.05

325.00

19.1

15.4

3.9

3.0

9.0

8.1

22.5

21.9

1,950

2,520

14.3

12.4

1.7

1.5

9.1

9.3

12.6

13.1

10.70

4.62

0

53.5

2.1

2.1

26.6

13.7

(2.6)

3.9

0.64

0.80

37.7

27.7

0.8

0.9

7.4

7.0

2.0

3.1

25

30

18.8

15.8

2.2

2.0

7.0

6.3

12.2

13.2

Roads

IRB Infra Jasa Marga Shipping & logistics

China Cosco FSL Trust ICTSI Kawasaki KK

378

497

30.0

11.0

1.0

0.9

10.8

7.4

3.2

8.5

8.03

9.60

12.8

10.6

1.3

1.2

6.9

5.9

10.4

12.0

Mitsui OSK Lines

685

747

13.7

11.0

1.2

1.1

7.5

6.7

9.2

10.5

Nippon Yusen

377

456

41.1

14.7

1.0

0.9

7.6

5.9

2.4

6.5

MISC

Pacific Basin Precious Shipping

6.38

8.00

15.1

17.0

1.1

1.0

7.8

8.0

7.2

6.1

18.30

17.00

8.3

6.4

1.1

1.0

7.0

5.9

13.7

16.2

23

22

7.9

5.6

0.6

0.6

4.0

3.2

7.7

10.1

Thoresen Thai Shipbuilding

Cosco Singapore

1.65

1.65

20.8

16.1

3.1

2.8

7.3

5.4

15.8

18.6

19,950

13,000

5.4

6.8

1.2

1.0

2.7

2.9

23.9

16.0

Hyundai Heavy

237,000

210,000

6.5

8.9

1.2

1.1

3.8

4.5

20.4

13.0

Hyundai Mipo

152,000

100,000

7.2

9.4

1.0

0.9

(0.4)

(1.2)

14.9

10.4

25,300

20,000

7.5

9.2

1.5

1.4

11.7

12.2

22.5

15.6

1.33

1.44

11.7

11.3

3.0

2.5

9.0

9.4

28.7

23.9

Ezion

0.8

1.2

10.2

7.4

2.5

1.9

10.4

6.9

27.3

28.8

Ezra

2.4

3.0

14.7

12.5

1.7

1.5

17.2

12.3

13.5

12.9

Keppel

9.4

9.8

14.0

15.3

2.3

2.2

8.6

9.4

17.2

14.7

SembCorp Marine

4.3

4.3

11.3

15.1

3.8

3.4

6.2

8.6

36.7

23.7

30.1

34.5

14.9

13.9

1.5

1.5

27.8

22.7

10.6

10.9

DSME

Samsung Heavy Yangzijiang Offshore

Diversified Infra

Cheung Kong Infra


19 April 2010

[email protected]

135

Mr & Mrs Asia

Appendices

Appendix 1: Penetration versus disposable income Internet-enabled PC

PC

Ownership of internet-enabled PC (% of household)

120 100 80

Taiwan

40

40

Malaysia

0

5,000

10,000

15,000

20,000

25,000

30,000

DVD player Ownership of DVD player (% of household)

80

2

R = 0.8183

70

Taiwan

60 China

Malaysia

Japan

0

5,000

Malaysia

Taiwan

Japan HK

Singapore

China

Thailand

40

Philippines Indonesia India



0 10,000

R = 0.7998

15,000

20,000

25,000

0

30,000

5,000

10,000

15,000

20,000

25,000

30,000

Refrigerator

Malaysia

y = 20.925Ln(x) - 110.78 2

Korea

R = 0.5642 Taiwan Singapore

Thailand

80

30,000

60

Korea

Ownership of camera (% of household)

100

25,000

2

80

Camera 120

20,000

y = 21.656Ln(x) - 113.66

100

Singapore

Indonesia India

0

15,000

Korea

Philippines

10

10,000

120

Thailand

20

5,000

Ownership of washing machine (% of household)

140

HK

y = 19.807Ln(x) - 127.73

30

0

Washing machine

90

40


India

0

India

50

Indonesia

10


Indonesia

Malaysia

Thailand Philippines

20

0

100

China

30

Thailand China

(20)

2

R = 0.9472

50

Philippines

20

y = 23.818Ln(x) - 153.98

60

Japan

HK

Singapore

Taiwan

70

HK

Singapore

Korea

80

2

R = 0.8037

60

Japan

90

y = 25.516Ln(x) - 175.48

Korea

Ownership of PC (% of household)

100

HK Japan

Ownership of refrigerator (% of household)

140

y = 21.546Ln(x) - 109.42

120 100

2

Korea Thailand

R = 0.7631 Taiwan

Malaysia

HK

Japan

Singapore

80

Philippines

60

China

60 40

Philippines

40 China Indonesia

20


India

0 0

5,000

Indonesia India

20

10,000

15,000

20,000

25,000

30,000


0 0

5,000

10,000

15,000

20,000

25,000

30,000

Source: Euromonitor

136

[email protected]

19 April 2010

Mr & Mrs Asia

Appendices

Vacuum cleaner

Air-conditioner

Ownership of vacuum cleaner (% of household)

120

90

100 Korea

R2 = 0.7139

Malaysia

HK

China

30

Malaysia


0

Thailand Philippines Indonesia India

10 0

5,000

10,000

15,000

Korea

40

Taiwan

20

0

HK

60

Indonesia China Thailand

Japan

2

R = 0.8195

Singapore

50 Philippines

y = 24.167Ln(x) - 161.44

Taiwan

80 70

Singapore

India

40

Japan

y = 19.279Ln(x) - 109.42

80 60

Ownership of air-conditioner (% of household)

100

20,000

25,000

30,000

0

5,000

Disposable income per capita (US$) 10,000

15,000

20,000

25,000

30,000

Cable TV Ownership of cable TV (% of household)

100 90

y = 0.002x + 23.74

80

2

70

Korea

60

Taiwan

50

Japan Singapore

Philippines India

30 10

R = 0.5138

China

40 20

HK

Thailand

Malaysia


Indonesia

0 0

5,000

10,000

15,000

20,000

25,000

30,000

Source: Euromonitor

19 April 2010

[email protected]

137

Mr & Mrs Asia

Appendices

Appendix 2: Consumer expenditure China, 2009

India, 2009 Misc 3%

Hotels 4%

Education 6%

Education 3%

Leisure 3%

Communications 3%

Transport 4%

Alcohol/tobacco 3%

Healthcare 9%

Alcohol/tobacco 3% Clothing & footwear 4%

Housing 12%

Hong Kong, 2009 Misc 2%

Hotels 6%

Clothing & footwear 9%

Education 2%

F&B 42%

Transport 4%

Alcohol/tobacco 1%

F&B 12%

Misc 15%

Hotels 8%

Communications 2%

Housing 20%

Leisure 13%

Healthcare 3% Household goods 7%

Transport 15%

Household goods 4%

Indonesia, 2009 Education 7% Leisure 2%

F&B 36%

Healthcare 4%


Housing 11%

Household goods 5%

Misc 11%

Leisure 2%

F&B 32%

Communications 11%

Hotels 3%

Housing 16%

Communications 2% Transport 6%

Alcohol/tobacco 5%


Japan, 2009

Household goods 7%

Healthcare 5%

Malaysia, 2009

Hotels 8%

Misc 11%

Education 2% Leisure 12% Communications 4%

Alcohol/tobacco 3%

F&B 14%

Education 2%

Clothing & footwear 3% Housing 25%

Hotels 10%

Misc 8%

F&B 14%


Leisure 5% Housing 21%


Transport 10% Healthcare 4%

Alcohol/tobacco 1%

Household goods 4%

Household goods 5% Healthcare 3%

Source: Euromonitor

138

[email protected]

19 April 2010

Mr & Mrs Asia

Appendices

Philippines, 2009

Education 5%

Singapore, 2009 Alcohol/tobacco 2%

Hotels 6% Misc 9%

Leisure 1% Communications 1%

Misc 13%

Hotels 8% F&B 36%


Education 3%

Housing 16%

Transport 8%

Leisure 12%

Healthcare 3%

Alcohol/tobacco 2% Clothing & footwear 2%

Housing 22%

Household goods 5%

Korea, 2009

Household goods 6% Transport 18%

Communications 3%

Healthcare 8%

Taiwan, 2009

Hotels 7% Education 6%

Clothing & footwear 4% Housing 18%

Leisure 7%

Hotels 5%

Alcohol/tobacco 3%

F&B 15%

Misc 14%

Misc 8%

Education 7%

F&B 23%

Leisure 5%

Household goods 4%

Transport 11%

Housing 18%


Healthcare 10% Household goods 6%

Healthcare 5%

Thailand, 2009

Alcohol/ tobacco 2%


Communications 6%

USA, 2009

Hotels 7%

Alcohol/tobacco 2%

Misc 10%

Education 1%

Hotels 6%

F&B 24%

Leisure 7%

Misc 14%

Education 2%

Communications 2%

F&B 8%

Alcohol/tobacco 5%

Transport 19%

Healthcare 6%

Clothing & footwear 7% Housing 7% Household goods 5%

F&B 7%


Housing 19% Leisure 9%


Healthcare 19%

Household goods 5%

Source: Euromonitor

19 April 2010

[email protected]

139

Mr & Mrs Asia

Appendices

Appendix 3: Disposable income-penetration correlation China

Hong Kong

Broadband-enabled PC Passenger car Internet-enabled PC Videotape recorder Shower Dishwasher Tumble drier Vacuum cleaner PC Cooker Microwave Cable TV Fridge Cassette/radio Washing machine Air-conditioner Hi-Fi Camera Video camera Black/white TV Motorcycle DVD player Mobile phone Freezer Video game console Telephone Colour TV Bicycle

(%)

CD player

0

20

40

60

80

Passenger car Cooker Cassette/radio Hi-Fi Camera Videotape recorder Bicycle Washing machine Vacuum cleaner Dishwasher Video game console Fridge Cable TV Tumble drier Freezer Air-conditioner PC Shower Broadband-enabled PC Microwave Black/white TV Colour TV Internet-enabled PC Mobile phone DVD player Telephone Satellite TV Motorcycle Video camera CD player

0

100

India

(%) 10

20

30

40

50

60

70

80

90

Indonesia

PC Internet-enabled PC Air-conditioner DVD player Broadband-enabled PC Mobile phone Dishwasher Hi-Fi Freezer Passenger car Camera Telephone Shower Microwave Colour TV Motorcycle Cassette/radio Washing machine Cooker Video game console Vacuum cleaner Fridge Satellite TV Tumble drier Cable TV Video camera Bicycle Videotape recorder Black/white TV CD player

(%) 0

20

40

60

80

DVD player Cable TV Dishwasher PC Passenger car Vacuum cleaner Camera Air-conditioner Shower Tumble drier Mobile phone Telephone Microwave Internet-enabled PC Freezer Fridge Cooker Hi-Fi Broadband-enabled PC Washing machine Bicycle Black/white TV Video camera Cassette/radio Motorcycle Colour TV CD player Video game console Satellite TV Videotape recorder

100

(%)

0

20

40

60

80

100

Note: Linear correlation. Source: Euromonitor

140

[email protected]

19 April 2010

Mr & Mrs Asia

Appendices

Philippines

Japan

Air-conditioner Internet-enabled PC Dishwasher DVD player Camera Fridge Vacuum cleaner Shower PC Broadband-enabled PC Cassette/radio Cooker Microwave Tumble drier Satellite TV Freezer Washing machine Mobile phone Video game console Passenger car Cable TV Black/white TV Hi-Fi Colour TV Video camera Motorcycle CD player Videotape recorder Bicycle Telephone

(%) 0

20

40

60

80

CD player PC Telephone Mobile phone Motorcycle Freezer Passenger car Cable TV Internet-enabled PC Black/white TV Bicycle Shower Cooker Broadband-enabled PC Video camera Microwave Air-conditioner Dishwasher Tumble drier Satellite TV DVD player Videotape recorder Hi-Fi Video game console Vacuum cleaner Washing machine Fridge Cassette/radio Camera Colour TV

100

Malaysia

(%)

0

10

20

30

40

50

60

70

Singapore

Internet-enabled PC Broadband-enabled PC Videotape recorder PC Cooker DVD player Camera Video game console Vacuum cleaner Cassette/radio Air-conditioner Dishwasher Freezer Microwave Satellite TV Video camera Fridge Hi-Fi Cable TV Passenger car Washing machine Mobile phone Motorcycle Telephone Tumble drier Shower Colour TV Black/white TV Bicycle CD player

Camera Video camera Cooker Vacuum cleaner Microwave Dishwasher Bicycle Video game console Freezer Tumble drier Broadband-enabled PC PC Fridge Hi-Fi Cable TV DVD player Cassette/radio Internet-enabled PC Air-conditioner Mobile phone Motorcycle Telephone Shower Black/white TV Colour TV Videotape recorder

(%)

Washing machine CD player

(%)

Passenger car

0

20

40

60

80

100

0

20

40

60

80

100


19 April 2010

[email protected]

141

Mr & Mrs Asia

Appendices

Korea

Taiwan

Motorcycle Camera Cooker DVD player Hi-Fi Telephone Dishwasher Freezer Air-conditioner Vacuum cleaner Video game console Satellite TV Fridge Microwave CD player Tumble drier Mobile phone Broadband-enabled PC PC Cassette/radio Colour TV Passenger car Internet-enabled PC Bicycle Black/white TV Washing machine Cable TV Video camera Shower Videotape recorder

(%) 0

20

40

60

80

Tumble drier Cooker Vacuum cleaner PC Camera Hi-Fi Shower Bicycle Dishwasher Microwave Motorcycle Freezer Washing machine Broadband-enabled PC Passenger car Internet-enabled PC Fridge Videotape recorder Air-conditioner CD player Black/white TV Mobile phone DVD player Cassette/radio Satellite TV Cable TV Video camera Colour TV Video game console Telephone

100

Thailand

(%) 0

20

40

60

80

100

Asia

Videotape recorder Dishwasher Shower Internet-enabled PC Camera Vacuum cleaner Cassette/radio Broadband-enabled PC PC Video game console Passenger car Hi-Fi Satellite TV Cable TV Washing machine Video camera Motorcycle Cooker DVD player Air-conditioner Freezer Tumble drier Mobile phone Microwave Fridge CD player Black/white TV Telephone Colour TV Bicycle

Microwave PC Cable TV Dishwasher Cassette/radio Fridge Telephone Video camera Cooker Internet-enabled PC Hi-Fi Mobile phone Satellite TV Motorcycle Vacuum cleaner Air-conditioner Black/white TV Camera Passenger car DVD player Colour TV Tumble drier Shower Bicycle CD player Videotape recorder

(%)

Washing machine

(%)

Video game console

0

20

40

60

80

100

0

20

40

60

80

100


142

[email protected]

19 April 2010

Mr & Mrs Asia

Appendices

Appendix 4: Penetration of consumer goods Microwave

Vacuum cleaner

100

China

100

90

India

90

80

Indo

80

70

Japan

70

USA

60

60

50

50

40

40

30

30

20

20

10

10

0

India Indo Japan USA

0

1977

1984

1991

1998

2005

2012

2019

DVD player

1977

1984

China

100

90

India

90

80

Indo

80

70

Japan

70

USA

60

1998

2005

2012

2019

China India

50

50

40

40

Japan

30

30

USA

20

20

10

10

0 1994

1991

Camera

100

60

China

Indo

0 1998

2002

2006

2010

2014

2018

1977

1985

1993

2001

2009

2017

Colour TV 100 90 80 70 60 50

China India Indo

40

Japan

30

USA

20 10 0 1977

1984

1991

1998

2005

2012

2019

Source: Euromonitor

19 April 2010

[email protected]

143

Mr & Mrs Asia

Appendices

Appendix 5: Chindonesia by numbers China 2007

2008

2009

10CL

11CL

11.5

9.9

16.7

19.5

17.1

Breakdown of real GDP

Private consumption¹ Public consumption

na

na

na

na

na

11.3

12.1

33.0

10.9

11.6

7.4

4.9

13.9

9.7

8.7

Exports, goods & services³

23.1

14.4

(9.5)

27.9

20.2

Imports, goods & services³

15.9

8.2

(0.5)

37.1

27.3

Real GDP growth

13.0

9.6

8.7

10.0

8.0

Consumer prices (y/e)

6.5

1.2

1.0

3.8

2.0

Consumer prices (average)

4.8

5.9

(0.7)

3.5

2.9

Producer prices (y/e)

5.4

(1.1)

1.7

9.5

4.5

Rmb/US$ (y/e)

7.3

6.8

6.8

6.6

6.2

Rmb/US$ (average)

7.6

7.0

6.8

6.7

6.4

1-year savings rate (% y/e)

4.1

2.3

2.3

2.8

2.8

1-year lending rate (% y/e)

7.5

5.3

5.3

6.1

6.1

25.8

17.6

(16.1)

33.0

20.0

GFCF² Domestic demand

Prices

Currency & interest rates

External sector Carry effects are massive in 2010 exports and imports

Exports (US$, % YoY) Imports (US$, % YoY)

20.3

18.7

(11.2)

47.5

26.0

Trade balance (US$bn)

315.4

360.7

249.3

193.2

147.5

Current account balance (US$bn)

371.8

426.1

284.1

222.5

137.1

- as a % of nominal GDP FDI (US$bn) Adjusted resource gap (% of GDP) External debt (total, US$bn) Debt service ratio (% exports) International reserves (US$bn, y/e)4

10.6

9.4

5.8

3.9

2.1

121.4

94.3

36.5

45.6

59.3

14.1

11.5

6.5

4.8

3.0

373.6

374.7

na

na

na

2.0

1.8

na

na

na

1,528

1,946

2,399

2,667

2,864

Money supply

Stimulus starting up again in 2011 but much more modestly

Money supply M1 (y/e)

21.0

9.1

32.4

28.0

22.0


16.7

17.8

27.7

20.0

20.0

Financial institutions loans (y/e)

16.1

18.8

31.7

17.0

20.0

Financial institutions loans (% of GDP)

98.4

99.0

122.1

126.7

138.2

(0.6)

0.4

2.2

2.3

3.0

Nominal GDP (US$bn)

3,498

4,519

4,910

5,643

6,511


2,647

3,403

3,679

4,207

4,830

26,581

31,405

33,535

37,811

41,571

22.9

18.1

6.8

12.8

9.9

Industrial production

18.5

12.9

11.0

20.0

16.0

Retail sales

16.8

21.6

15.5

23.0

20.0

Government sector

General government deficit (% of GDP) Nominal GDP

Nominal GDP (Rmbbn) Nominal GDP (Rmb, % YoY) Other data

Unemployment (% y/e) Population (m)

4.0

4.2

4.3

na

na

1,321

1,328

1,335

1,341

1,348

¹ Deflated by CPI. ² Deflated by GDP deflator; ³ Deflated by estimated G&S deflators; 4 PBoC foreign exchange balances. Note: % YoY rates unless otherwise stated. Source: IMF, World Bank, China Economic News, CEIC

144

[email protected]

19 April 2010

Mr & Mrs Asia

Appendices

India 2007/08 2008/09 09/10CL 10/11CL 11/12CL Breakdown of real GDP Confidence good but this is still an early cycle recovery

Domestic investment to offset weaker net exports in 2011/12

Private consumption Public consumption

9.8

6.8

3.7

5.5

6.3

9.7

16.7

10.4

6.4

4.2

GFCF

15.2

4.0

7.5

13.1

15.8

Domestic demand

10.7

6.7

5.6

8.3

10.0

Exports, goods & services

5.2

19.3

(7.0)

21.2

13.2

Imports, goods & services

10.0

23.0

(5.9)

14.8

17.8

9.2

6.7

6.8

8.8

8.6

Wholesale prices (y/e)

7.5

1.2

10.4

9.6

5.1

Wholesale prices (average)

4.7

8.4

3.7

9.0

8.0

Rs/US$ (y/e)

40.0

51.0

45.2

42.0

40.5

Rs/US$ (average)

Real GDP¹ Prices

Currency & interest rates

40.1

46.5

47.4

43.7

41.1

Reverse repo rate (% y/e)

6.0

3.5

3.5

4.5

5.0

Prime lending rate (% y/e)

12.5

12.0

11.5

12.0

12.5

Exports (US$, %YoY)

28.9

13.7

(9.8)

33.7

24.2

Imports (US$, %YoY)

35.1

19.4

(8.7)

30.6

21.0


(91.5)

(118.7)

(110.3)

(138.5)

(160.4)


(15.7)

(28.7)

(49.7)

(93.8)

(115.9)

- as a % of nominal GDP

(1.3)

(2.4)

(3.8)

(5.7)

(5.5)

FDI (US$bn)

15.9

17.5

31.2

38.2

31.2

External sector

Current account blown out by import prices in 2010

Adjusted resource gap (% of GDP) External debt (total, US$bn) Debt service ratio (% exports) International reserves² (US$bn, y/e)

0.0

(0.9)

(1.4)

(3.4)

(4.0)

223.3

224.0

250.0

275.0

300.0

5.8

5.3

7.6

8.5

9.1

299.2

241.4

260.0

279.3

284.6

Money supply

Best private sector credit cycle in Asia


18.6

9.2

19.6

21.1

21.1


21.2

18.8

18.5

22.5

22.5

Private sector credit (y/e)

21.0

17.0

15.0

21.6

28.0

Private sector credit (% of GDP)

52.1

54.1

56.6

58.0

62.7

2.6

5.8

6.5

5.1

4.7

Government sector

Central gov't deficit (% of GDP) General gov't deficit (% of GDP)

4.0

8.5

9.7

na

na

Central gov't debt (% of GDP, y/e)

57.3

56.3

57.1

52.6

48.7

General gov't debt (% of GDP, y/e)

84.2

82.5

83.8

na

na

Nominal GDP (US$bn)

1,235

1,202

1,296

1,665

2,097


1,098

1,054

1,120

1,419

1,763

49,479

55,744

61,253

72,660

86,008

15.5

12.7

9.9

18.6

18.4

1,124

1,141

1,157

1,173

1,189

Nominal GDP

Nominal GDP (Rsbn) Nominal GDP (Rs, % YoY) Other data

Population (m)

¹ At factor cost. ² Excluding gold and SDRs. Note: All figures % YoY growth rates, unless otherwise stated. All data refer to fiscal years starting April. Source: CMIE, Reserve Bank of India, IMF, ADB, World Bank, IIF, CEIC

19 April 2010

[email protected]

145

Mr & Mrs Asia

Appendices

Indonesia 2007

2008

2009

10CL

11CL

Private consumption

5.0

5.3

4.9

5.4

4.8

Public consumption

3.9

10.4

15.7

8.9

3.8

GFCF

9.3

11.9

3.3

12.0

13.0

Domestic final sales

6.0

7.5

5.4

7.5

6.9

Exports, goods & services

8.5

9.5

(9.7)

23.5

16.4

Imports, goods & services

9.1

10.0

(15.0)

30.0

19.8

Real GDP growth

6.3

6.0

4.5

7.0

6.5

5.5

11.5

2.6

6.0

4.5

Breakdown of real GDP Rural income will drive consumption

Prices For inflation to stay in BI’s 4-6% target range, interest rates must rise

Consumer prices (y/e) Consumer prices (average)

5.8

9.5

4.8

5.2

5.0

21.9

9.7

4.7

9.5

3.0

Rp/US$ (y/e)

9,419

10,950

9,400

8,800

8,400

Rp/US$ (average)

9,164

9,757

10,356

9,106

8,563

8.0

9.3

6.5

7.3

8.0

13.1

14.3

12.8

13.2

13.7

Exports (US$, % YoY)

14.0

18.3

(14.4)

29.5

18.2

Imports (US$, % YoY)

15.4

36.9

(27.7)

32.0

22.0


32.8

22.9

35.2

43.5

47.1


10.5

0.1

10.6

18.5

20.5

- as a % of nominal GDP

2.4

0.0

2.0

2.6

2.3

FDI (US$bn)

2.3

3.4

2.3

3.5

4.0

Wholesale prices (y/e) Currency & interest rates

BI policy rate (% y/e) Base lending rate (% y/e) External sector

Buoyant exports will keep current account in surplus despite surging imports

Adjusted resource gap (% of GDP)

3.0

0.7

2.4

3.1

2.8

136.6

149.1

157.4

161.8

163.8

Debt service ratio (% exports)

19.2

14.2

16.0

12.6

10.9

International reserves (US$bn, y/e)

56.9

51.6

66.1

88.0

102.0

External debt (total, US$bn)

Money supply

More profitable for banks to lend in a strengthening demand environment


29.7

1.5

10.7

11.3

11.6


19.3

14.9

12.4

13.7

15.0

Private sector credit (y/e)

27.6

30.8

10.1

24.5

20.5

Private sector credit (% of GDP)

24.9

26.0

25.2

27.0

28.2

Government sector

Public sector deficit (% of GDP)

1.3

0.1

2.4

2.6

1.7

35.2

32.8

31.3

29.7

27.4

Nominal GDP (US$bn)

431.0

510.5

546.9

717.9

880.1


1,910

2,234

2,362

3,061

3,705

Nominal GDP (Rptn)

3,951

4,951

5,613

6,538

7,535

18.3

25.3

13.4

16.5

15.3

4.7

3.7

2.1

4.8

5.5

Public sector debt (% of GDP, y/e) Nominal GDP

Nominal GDP (Rp, % YoY) Other data

Industrial production Unemployment (% y/e) Population (m)

9.1

8.4

7.9

7.0

6.5

225.6

228.5

231.5

234.5

237.6

Note: % YoY rates unless otherwise stated. Source: IMF, IFS, CEIC, CLSA estimates, Bank Indonesia

Source: Eye on Asian Economics 2Q10 ‘Fibrillation USA: Recovery in a creditless world’

146

[email protected]

19 April 2010

Important notices

© 2010 CLSA Asia-Pacific Markets ("CLSA"). This publication/communication is subject to and incorporates the terms and conditions of use set out on the www.clsa.com website. Neither the publication/ communication nor any portion hereof may be reprinted, sold or redistributed without the written consent of CLSA. CLSA has produced this publication/communication for private circulation to professional and institutional clients only. The information, opinions and estimates herein are not directed at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject CLSA to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable. Such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgment of CLSA at the date of this publication/ communication and are subject to change at any time without notice. Where any part of the information, opinions or estimates contained herein reflects the views and opinions of a sales person or a non-analyst, such views and opinions may not correspond to the published view of the CLSA research group. This is not a solicitation or any offer to buy or sell. This publication/communication is for information purposes only and is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this publication/ communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice, including tax advice. CLSA does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein. To the extent permitted by applicable securities laws and regulations, CLSA accepts no liability whatsoever for any direct or consequential loss arising from the use of this publication/communication or its contents. The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling such publication/ communication. Subject to any applicable laws and regulations at any given time CLSA, its affiliates or companies or individuals connected with CLSA may have used the information contained herein before publication and may have positions in, may from time to time purchase or sell or have a material interest in any of the securities mentioned or related securities or may currently or in future have or have had a business or financial relationship with, or may provide or have provided investment banking, capital markets and/or other services to, the entities referred to herein, their advisors and/or any other connected parties. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests that could affect the objectivity of this report. The Hong Kong Securities and Futures Commission requires disclosure of certain relationships and interests with respect to companies covered in CLSA's research reports and the securities of which are listed on The Stock Exchange of Hong Kong Limited and such details are available at http://www.clsa.com/member/research_disclosures/. Disclosures therein include the position of the CLSA Group only and do not reflect those of Credit Agricole Corporate & Investment Bank and/or its affiliates. If investors have any difficulty accessing this

website, please contact [email protected] on (852) 2600 8111. If you require disclosure information on previous dates, please contact [email protected]. This publication/communication is distributed for and on behalf of CLSA Limited (for non-US markets research) and /or Credit Agricole Securities (USA) Inc. (for US research) in Australia by CLSA Limited; in Hong Kong by CLSA Research Ltd.; in India by CLSA India Ltd.; in Indonesia by PT CLSA Indonesia; in Japan by Credit Agricole Securities Asia B.V., Tokyo Branch, a member of the JSDA licensed to use the "CLSA" logo in Japan; in Korea by CLSA Securities Korea Ltd.; in Malaysia by CLSA Securities Malaysia Sdn Bhd; in the Philippines by CLSA Philippines Inc. (a member of Philippine Stock Exchange and Securities Investors Protection Fund); in Thailand by CLSA Securities (Thailand) Limited; and in Taiwan by CLSA Limited, Taipei Branch. United States of America: This research report is distributed into the United States by CLSA solely to persons who qualify as "Major U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934 and who deal with Credit Agricole Corporate & Investment Bank. However, the delivery of this research report to any person in the United States shall not be deemed a recommendation to effect any transactions in the securities discussed herein or an endorsement of any opinion expressed herein. Any recipient of this research in the United States wishing to effect a transaction in any security mentioned herein should do so by contacting Credit Agricole Securities (USA) Inc. (a broker-dealer registered with the Securities and Exchange Commission) and an affiliate of CLSA. United Kingdom: Notwithstanding anything to the contrary herein, the following applies where the publication/communication is distributed in and/or into the United Kingdom. This publication/communication is only for distribution and/or is only directed at persons ("permitted recipients") who are (i) persons falling within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (the "FPO") having professional experience in matters relating to investments or high net worth companies, unincorporated associations etc. falling within Article 49 of the FPO, and (ii) where an unregulated collective investment scheme (an "unregulated CIS") is the subject of the publication/communication, also persons of a kind to whom the unregulated CIS may lawfully be promoted by a person authorised under the Financial Services and Markets Act 2000 ("FSMA") by virtue of Section 238(5) of the FSMA. The investments or services to which this publication/communication relates are available only to permitted recipients and persons of any other description should not rely upon it. This publication/ communication may have been produced in circumstances such that it is not appropriate to categorise it as impartial in accordance with the FSA Rules. Singapore: This publication/communication is distributed for and on behalf of CLSA Limited (for non-US markets research) and /or Credit Agricole Securities (USA) Inc. (for US research) in Singapore through CLSA Singapore Pte Ltd solely to persons who qualify as Institutional, Accredited and Expert Investors only, as defined in s.4A(1) of the Securities and Futures Act. Pursuant to Paragraphs 33, 34, 35 and 36 of the Financial Advisers (Amendment) Regulations 2005 with regards to an Accredited Investor, Expert Investor or Overseas Investor, sections 25, 27 and 36 of the Financial Adviser Act shall not apply to CLSA Singapore Pte Ltd. Please contact CLSA Singapore Pte Ltd in connection with queries on the report. MICA (P) 168/12/2009 File Ref. No. 931318

MSCI-sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by CLSA Asia-Pacific Markets.

06/02/2010

Research & sales offices www.clsa.com

Australia CLSA Limited Sydney Branch Level 15 20 Hunter Street Sydney NSW 2000 Tel: (61) 2 8571 4200 Fax: (61) 2 9221 1188

Indonesia PT CLSA Indonesia WISMA GKBI Suite 901 Jl Jendral Sudirman No.28 Jakarta 10210 Tel: (62) 21 2554 8888 Fax: (62) 21 574 6920

Taiwan CLSA Limited Taiwan Branch 27/F, 95 Tun Hwa South Road Section 2 Taipei Tel: (886) 2 2326 8188 Fax: (886) 2 2326 8166

China - Beijing CLSA Limited Beijing Representative Office Unit 10-12, Level 25 China World Trade Centre Tower 2 1 Jian Guo Men Wai Ave Beijing 100004 Tel: (86) 10 5965 2188 Fax: (86) 10 6505 2209

Japan Credit Agricole Securities Asia B V Tokyo Branch 15/F, Shiodome Sumitomo Building 1-9-2, Higashi-Shimbashi Minato-ku, Tokyo 105-0021 Tel: (81) 3 4580 5533 (General) (81) 3 4580 5171 (Trading) Fax: (81) 3 4580 5896

Thailand CLSA Securities (Thailand) Ltd 16/F, M Thai Tower All Seasons Place 87 Wireless Road, Lumpini Pathumwan, Bangkok 10330 Tel: (66) 2 257 4600 Fax: (66) 2 253 0532

China - Shanghai CLSA Limited Shanghai Representative Office Room 910, 9/F 100 Century Avenue Pudong New Area Shanghai 200120 Tel: (86) 21 2020 5888 Fax: (86) 21 2020 5666

Korea CLSA Securities Korea Ltd 15/F, Sean Building 116, 1-Ka, Shinmun-Ro Chongro-Ku Seoul, 110-061 Tel: (82) 2 397 8400 Fax: (82) 2 771 8583

United Kingdom CLSA (UK) 12/F, Moor House 120 London Wall London EC2Y 5ET Tel: (44) 207 614 7000 Fax: (44) 207 614 7070

China - Shenzhen CLSA Limited Shenzhen Representative Office Room 3111, Shun Hing Square Di Wang Commercial Centre 5002 Shennan Road East Shenzhen 518008 Tel: (86) 755 8246 1755 Fax: (86) 755 8246 1754

Malaysia CLSA Securities Malaysia Sdn Bhd Suite 20-01, Level 20 Menara Dion 27 Jalan Sultan Ismail 50250 Kuala Lumpur Tel: (60) 3 2056 7888 Fax: (60) 3 2056 7988

USA - New York Credit Agricole Securities (USA) Inc 15/F, Credit Agricole Building 1301 Avenue of The Americas New York 10019 Tel: (1) 212 408 5888 Fax: (1) 212 261 2502

Hong Kong CLSA Limited 18/F, One Pacific Place 88 Queensway Hong Kong Tel: (852) 2600 8888 Fax: (852) 2868 0189

Philippines CLSA Philippines, Inc 19/F, Tower Two The Enterprise Center 6766 Ayala corner Paseo de Roxas Makati City Tel: (63) 2 860 4000 Fax: (63) 2 860 4051

USA - San Francisco Credit Agricole Securities (USA) Inc 9/F, 388 Market Street San Francisco, CA 94111 Tel: (1) 415 392 3500 Fax: (1) 415 392 3558

India CLSA India Ltd 8/F, Dalamal House Nariman Point Mumbai 400021 Tel: (91) 22 6650 5050 Fax: (91) 22 2284 0271

Singapore CLSA Singapore Pte Ltd 80 Raffles Place, No.18-01 UOB Plaza 1 Singapore 048624 Tel: (65) 6416 7888 Fax: (65) 6533 8922

CLEAN &

GREEN

TM

At CLSA we support sustainable development. We print on paper sourced from environmentally conservative factories that only use fibres from plantation forests. Please recycle.

CLSA Sales Trading Team Australia China (Shanghai) Hong Kong India Indonesia Japan Korea

(61) 2 8571 4201 (86) 21 2020 5810 (852) 2600 7003 (91) 22 6622 5000 (62) 21 573 9460 (81) 3 4580 5169 (82) 2 397 8512

Malaysia Philippines Singapore Taiwan Thailand UK US

(60) 3 2056 7852 (63) 2 860 4030 (65) 6416 7878 (886) 2 2326 8124 (66) 2 257 4611 (44) 207 614 7260 (1) 212 408 5800

CLSA is certified ISO14001:2004

© 2010 CLSA Asia-Pacific Markets ("CLSA"). Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%. 14/04/2010 Performance is defined as 12-month total return (including dividends).