Main contributors Macro

Equity Strategy
Garry Evans* Q4 2008
Pan-Asian Equity Strategist
+852 2996 6916
garryevans@hsbc.com.hk

Garry heads HSBC’s equity strategy team in Asia-Pacific. His previous roles at HSBC include Head of Pan-Asian Equity
Research and Chief Japan Strategist. Garry began his career as a financial journalist and was editor of Euromoney magazine
for eight years before joining HSBC in Tokyo in 1998.

Next problem: growth

Steven Y. Sun, CFA*

Next problem: growth

CFA Regional Equity Strategist
+852 2822 4298
stevensun@hsbc.com.hk

Steven Y. Sun is a strategist on HSBC’s Asia-Pacific equity strategy team. Steven joined HSBC in 2006, prior to which he was a
China specialist for a private macroeconomic consultancy in Washington DC. Steven began his career as a financial analyst
for a state-owned financial institution in Beijing in 1996.

Akane Nishizaki*
It will start to wilt
Strategist
+813 5203 3943
akane.nishizak@hsbc.co.jp

Akane joined HSBC as a graduate trainee in 2001. After training, she worked in the treasury department in Tokyo for more
than a year, selling foreign exchange, mainly options. She joined the equity research department in April 2005 as an associate
in strategy.

Vivek Ranjan Misra*

Equity Strategist
HSBC Bank Plc
+91 80300 13699
vivekmisra@hsbc.co.in

Vivek joined HSBC in May 2005 and works for the equity strategy team. Previously, he worked in the manufacturing sector and
as an M&A analyst in the oil and gas sector. Vivek is a chemical engineer from Indian Institute of Technology (IIT) and has an
MBA from the University of Rochester.

Jacqueline Tse*
Strategist
Risk aversion won’t ease quickly, but it is unlikely to get much worse.

Equity Strategy
+852 2996 6602
jacquelinetse@hsbc.com.hk
The focus now will shift from rising risk to falling growth. As global growth slows,
Jacqueline joined HSBC in February 2008 as an Equity Strategist, Asia Pacific. Her previous experience includes working with
the corporate treasury team of a leading investment bank with particular emphasis on Korea, Thailand and Malaysia, Associate so will Asian exports, GDP growth and earnings. With valuations perhaps 15-20%
Economist for a leading bank, and Senior Financial Analyst for Hewlett Packard. She holds an MSc in Management Science and
Operations Research from Columbia University, and a BA in Economics from the University of California, Berkeley. above rock-bottom levels, Asian stock markets are likely to fall for another quarter or two.
Leo Li* We stay defensive, and favour markets such as China and Singapore,
Strategy Associate
+852 2996 6919 which should have limited downside risk but also the chance of a good bounce
leofli@hsbc.com.hk
when the bottom is reached.
Leo Li joined HSBC as a strategy associate in 2007. He started his career in the finance industry as a marketing executive in
RNC Capital after graduating from UC Irvine with an MBA in 2004. Leo also has a Bachelors degree in Information
Engineering from the Chinese University of Hong Kong.

Devendra Joshi*
Associate
Bangalore

*Employed by non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations.
By Garry Evans

Disclosures and Disclaimer This report must be read with the disclosures and analyst
Q4 2008

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Country and sector weightings, and the key reasons for our view
1. By country
Neutral HSBC Last Rel perf Key pluses Key minuses
___rec weighting___ quarter last 3M
Japan 47.5% 47.5% Neutral Neutral 4.4% As a developed market, should be fairly stable Corporate earnings depend on global economy
Valuations suggest downside risk is limited Stock market reliant on foreign buying
Australia 15.1% 13.0% Under Under -7.1% PE at lowest level since early 1990s Structural problems like current account deficit
Hurt by fall in commodities prices
China 9.0% 11.0% Over Over -5.1% Pro growth policymaking to provide support Regulatory risk
PE only 9.1x 2009 earnings Earnings visibility
Korea 7.6% 6.5% Under Neutral -3.2% President Lee likely to start reform programme Risk of a housing crisis
Exports likely to slow
Taiwan 6.0% 5.0% Under Under -8.1% Negotiations with Beijing Further downward earnings revisions likely
Highly dependent on tech exports
Hong Kong 4.9% 5.0% Neutral Neutral -2.3% Fed to cut rates further Property prices to fall 10%
Strong China growth continues Liquidity drying up as RMB not appreciating
India 3.7% 4.0% Neutral Under 9.4% Monetary policy to be eased Slowdown in corporate earnings likely
Domestic investors remain positive Political uncertainty ahead of election
Singapore 2.8% 4.5% Over Over -1.7% Developed economy, defensive market GDP growth to slow to 4% this year
Stock market relatively immune to slower exports
Malaysia 1.4% 2.0% Over Over 3.9% Most defensive market in Asia Political uncertainty
Valuation low, earnings forecasts conservative
Indonesia 0.9% 0.5% Under Under -6.7% Structural improvements Too risky in current environment
Next year’s elections add to uncertainty
Thailand 0.7% 0.0% Under Under -2.5% Political situation remains dangerous
Philippines 0.2% 0.0% Under Under 30.3% High risk
New Zealand 0.2% 0.0% Under Under 14.6% Few interesting investible stocks
Pakistan 0.1% 0.0% Under Under -6.3% Political situation still very unstable
Vietnam 0.0% 1.0% Off-bmk Off-Bmk 46.1% Non-correlated, exciting long-term story Valuation at premium to other Asian markets
Earnings outlook very unclear
Source: HSBC
w

2. By sector
Neutral HSBC Last Rel perf Key pluses Key minuses
___rec weighting___ quarter last 3M
Financials 26.6% 23.0% Under Under 4.8% NPLs rising in many Asian countries
Regulators trying to limit Chinese banks’ profits
Real estate markets at risk in HK, India, China
Industrials 14.6% 18.0% Over Under -6.5% Infrastructure spending should hold up well Corporate capex could be cut
Cheap – on 9x 2009 earnings
IT 12.8% 11.0% Under Under -3.4% End-demand likely to fall further
Inventories being purged; production to be cut
Consumer 11.4% 9.0% Under Under 4.8% US and European consumers won’t spend
discretionary Asian consumers could tighten belts, too
Materials 11.4% 9.5% Under Under -17.7% Metals prices may not fall much further Supply increasing, for example in iron ore
Earnings estimates are too high
Telecoms 5.6% 7.0% Over Over 6.9% Stable earnings Already well owned
Subscriber growth and ARPUs to stay strong
Energy 5.3% 5.5% Neutral Neutral -10.2% Refiners will be helped if crude stays at $100 Demand likely to soften
Consumer 5.1% 5.0% Neutral Over 9.6% Weakening consumer demand
staples Valuations stretched
Utilities 3.9% 6.0% Over Neutral 20.4% Classic defensive; high dividend yields
Lower coal prices to help Chinese IPPs
Healthcare 3.3% 6.0% Over Over 19.3% Defensive Few large cap stocks
Structural growth (demographics, better R&D)
Source: HSBC
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Charts of the quarter

3. Risk measures have spiked …but can they really get any worse?
 Spreads on Asian corporate bonds have widened dramatically.
1500
A BBB rated Asian corporate now pays 512bps over Treasuries
for five-year money compared to 120-130bps before the Credit
1000 Crunch started.
 Most worryingly, risk measures showed no sign of coming
down even as the likelihood increased of Congress passing the
500 bank rescue bill; rather, they continued to spike.
 Risk aversion is unlikely to disappear, or even ease much, any
0 time soon. But can it really get any worse?
Jul-06
Sep-06

Jan-07
Mar-07

Jul-07
Sep-07

Jan-08
Mar-08

Jul-08
Sep-08
May-06

Nov-06

May-07

Nov-07

May-08

AAA A BBB
BB+ B+
Source: HSBC

4. Export growth is almost certain to slow …but a good deal of slowdown is already priced in
 We think market attention is going to shift away from rising risk
40 100
towards falling growth.
30  The most immediate impact on Asia is likely to come from
slowing exports. So far, these have held up remarkably well –
20 50
indeed, export growth has even accelerated this year to 21%
10 from 17% last December. But with global growth slowing, surely
this cannot last.
0 0  That may not be as serious for equities as it sounds. The equity
-10 91 93 95 97 99 01 03 05 07 market has clearly already discounted a serious slowdown in
exports, perhaps to as much as a 10% y-o-y decline, which was
-20 -50 what happened in both the 1998 and 2001 recessions.

Total Ex ports MSCI AEJ (RHS)

Source: HSBC, CEIC, Bloomberg

5. Earnings growth forecasts have come down …but by nothing like as much as in previous bear markets
 Analysts have been slower to cut earnings forecasts this time
40
than in the past.
35
 This year’s EPS growth forecast for Asia ex Japan has come
30 '08 down to -2%, compared to a forecast of +10% at the start of the
25 98 year. But the 2009 forecast still looks over-optimistic at 14%.
'04  In the 1997-8 bear market, a year after the stock market
20 97 '01
peaked, analysts had cut their 1997 EPS forecast by 51% and
15 their 1998 one by 56%. After 2000, the cuts at the same point
10 '00 were 30% and 45%. This time, almost a year since the market
started to fall, both 2008 and 2009 earnings forecasts have
5 been cut by only 17%.
0
96 97 98 99 00 01 02 03 04 05 06 07 08

Source: HSBC, Datastream, IBES

 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

6. Price/book is still 1.7x, versus previous bottoms of 1.2x …but better ROE means it may fall only to 1.4x or 1.5x
 The PB ratio for MSCI Asia ex Japan has typically bottomed (in
3.5
1997, 2001 and 2003) at 1.2x. Having peaked at 3.3x last year,
AEJ it has now fallen back to 1.7x. But that does not necessarily
3.0 mean we still have 29% to fall before hitting a firm bottom.
 ROE has trended higher over the past few years. ROE peaked
2.5 at 15% before the Asia Crisis, and then at 14% at the height of
the TMT bubble in 2000. This time, however, forecast ROE
2.0 reached as high as 18.5% at the beginning of this year.
 If ROE also bottoms at a higher level than previously, then PB
1.5 may not fall to 1.2x as in previous bear markets, but maybe to
only 1.4x or 1.5x. In this case, stocks may have only 12-18% to
1.0 fall before they hit an ultra-cheap level.
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Source: HSBC, IBES, Datastream

7. In the last two bear markets, indexes fell 66% and 57% So far this time, the fall is only 39%
 The 1997-8 bear market lasted 14 months and saw the index
110
fall in total by 66%; the 2000-1 decline was 19 months and
100 57%.
90
 This bear market has so far lasted 11 months and seen the
80 index fall 39%.
70
 On the pattern of previous bear markets, this one would end
60 between December and May, and would bottom between 36%
50 and 20% lower than the current level.
40
30
-50 0 50 100 150 200 250 300 350 400 450 500
94 97 00 07

Source: HSBC, Bloomberg

8. US house prices are likely to fall further …which means the slowdown could be prolonged
 How long and strong will the rebound be when it comes? The
250
unresolved strains in the global financial system mean it could
be a stuttering rebound, with stock market returns after the
200 initial bounce remaining quite poor for some time.
 Our biggest worry is that the US housing market could remain
weak for years. The Case-Shiller index has already fallen 21%
150 from its peak in June 2006. But futures (the dotted line in the
chart) imply a further 15% decline, with prices not bottoming
until the end of 2010.
100
 A glance at the chart suggests even the futures may be too
optimistic. House prices rose by 226% between 2000 and
50 2006. The decline implied by futures would take them back only
to the level of summer 2003.
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: Bloomberg
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Summary
It has been a funny bear market. While stocks have fallen 39% in
Asia this year, economic growth, exports and earnings all look fairly
robust. Unfortunately, that is about to change. We see analysts’ and
economists’ forecasts being cut sharply over the next few months,
as the global economy goes into recession. Valuations in Asia are
still 15-20% away from rock-bottom levels, so the bear market is
unlikely to end just yet. But don’t get too bearish either – the world is
not about to end. And remember that when Asian stocks rebound,
they tend to rebound big, at least to start with.

From risk to growth

Consensus is still too optimistic about growth
The 39% fall in MSCI Asia ex Japan so far this year has been all about derating, rather than worsening
growth. The forward PE for the region has been derated from 15.6x at the end of last year to 10.3x. But
analysts’ forecasts for earnings growth in 12 months’ time have stayed at around 10%.

That is likely to change. It is improbable that Asian exports will keep growing at the current pace of 21%
y-o-y if the world goes into recession. That means that GDP growth next year, particularly in the most
cyclically sensitive markets such as Taiwan and Korea, could slow sharply. We forecast only 3.3%
growth next year for Taiwan, versus a consensus forecast of 4.4%, and 3.4% in Korea against the
consensus of 4.3%.

Earnings forecasts will have to come down, too. So far, analysts have cut their EPS forecasts for this year
and next by only 17%. In the 1997-8 bear market, they had cut by 56% at this stage, and in 2000-1 by
45%. In particular, analysts still forecast 14% growth in earnings for 2009. That is far too optimistic. If
past bear markets are anything to go by, that forecast could be cut to as little as -15%.

1. Key changes in view

To From Reason
Raise India Neutral Underweight Long-term story remains good; domestic investors supportive
Lower Korea Underweight Neutral Credit risk has risen significantly; exports to slow
Raise Industrials Overweight Underweight Infrastructure likely to prove more resilient than consumption
Raise Utilities Overweight Neutral Defensive; Chinese utilities should return to decent profits
Lower Consumer Neutral Overweight Valuations stretched; consumption likely to slow
staples
Source: HSBC

1
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

This is not to say that risk aversion will disappear. The extraordinary events of the past few weeks mean
that banks – and investors – will be reluctant to take a lot of risk for some time to come. But we do not
see measures of risk getting much worse. Spreads on sub-investment Asian bonds have risen to more than
1000bps over US Treasuries and the US dollar TED spread is at a historic high of 380bps. With the bank
rescue bill now passed by Congress, spreads should ease a little – which could trigger a bear-market rally
in equities in October and November.

Downside limited to 15-20%

Our analysis of various valuation measures suggests that, if Asian equities fall another 15-20%, they will
be at previous bear market rock-bottom lows. Price/earnings ratio and dividend yield, for example, are
within 10% of historic lows and, even if we take into account lower-than-forecast earnings growth and
dividend cuts, the downside is probably limited to 20%. Price/book has fallen to 1.7x from a high of 3.3x.
Given the trend improvement in ROE over the past few years, we do not see PB falling to previous lows
of 1.2x – 1.4-1.5x is more likely. The pattern of previous bear markets also suggests that a further fall of
20% is the near-worst case scenario.

Our baseline scenario is that slowing growth will pull Asian equities down for another one to two
quarters. Our targets assume that most indexes will end the year at a lower level than now (Table 2). But
it is wrong to get too bearish. Remember that after the last two bear markets in 1997-8 and 2000-1, Asian
stocks rose by 46% and 47% respectively in the first six months after the bottom. That is why our index
targets assume a rebound of 20-30% during 2009.

Market calls
How to have the best of both worlds
In the current uncertain environment, we want to minimise risk. But we also don’t want to miss out
completely on the rebound in markets when it happens – perhaps in early 2009.

In our view, the way to have the best of both worlds is through exposure to Asia’s two structural growth
stories, China and India. We think investors at some point will become willing to look through the short-
term uncertainties to the increasingly attractive (because now reasonably valued) long-term story. China,

2. Index targets
Index Current level Target Potential Old end-2008 Target Upside Old end-2009
30 Sep 2008 end-2008 upside target end-2009 vs 2008 target
Japan TPX Index 1,087 1,100 1.2% 1,350 1,250 13.6% 1,400
Australia AS51 Index 4,601 4,500 -2.2% 5,500 5,000 11.1% 5,750
China MXCN Index 46 48 4.4% 70 60 25.0% 77
Korea KOSPI Index 1,448 1,300 -10.2% 1,300 1,400 7.7% 2,000
Taiwan TWSE Index 5,719 5,500 -3.8% 7,500 5,750 4.5% 8,000
Hong Kong HSI Index 18,016 18,000 -0.1% 24,000 22,000 22.2% 25,000
India Sensex Index 12,860 12,000 -6.7% 14,000 15,000 25.0% 15,000
Singapore FSSTI Index 2,359 2,200 -6.7% 3,300 2,800 27.3% 3,400
Malaysia KLCI Index 1,019 1,000 -1.8% 1,350 1,150 15.0% 1,450
Indonesia JCI Index 1,833 1,700 -7.2% 2,000 1,900 11.8% 2,000
Thailand SET Index 597 550 -7.8% 750 600 9.1% 750
Vietnam VNINDEX Index 457 450 -1.5% 400 550 22.2% 450
MSCI Asia ex Japan MXFEJ Index 344 333 -3.2% 480 389 16.8% 500
MSCI Asia Pacific MXAP Index 107 106 -1.0% 140 121 14.5% 145
Source: HSBC

2
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

in particular – where we remain overweight – should see economic growth remain strong. We look for
GDP growth of 9.1% next year. Earnings growth for the MSCI universe, even if it comes in below the
current consensus forecast of 17%, is unlikely to fall below 10-15%. And you can buy this growth for a
prospective PE of 9.4x. Moreover, the Chinese government has a lot of ammunition if it needs to
stimulate growth, either through an infrastructure spending programme or pro-market reforms. India is
not quite so straightforward. The general election, which must be held by next May, complicates the
picture. And the market is not as cheap, on a PE of 12.2x. But a cut in interest rates and support from
domestic investors will help. We raise India to neutral.

We keep our overweights on Asia’s two most defensive markets, Singapore and Malaysia. While both
have seen large falls this year, they have outperformed Asia ex Japan by 14% and 9% respectively. We
look for reasonably decent economic growth next year, 4.8% in both countries. Both have a selection of
blue-chip companies with transparent earnings prospects. In line with our defensive posture, we also keep
Hong Kong and Japan at neutral. Both have problems that make us hesitate about going overweight
(Japan’s dependence on overseas markets for earnings growth; the likelihood that Hong Kong real estate
prices will fall 10% next year). But, as lower-beta developed markets, both should emerge relatively
unscathed from further market weakness, and both should see decent bounces when the market bottoms.

Our biggest underweight remains Taiwan because of its dependence on exports and the technology
sector. Analysts have got realistic about this year’s earnings growth, where they now forecast a 20%
decline. But next year’s forecast of 12% EPS growth will have to be cut. We are also unenthusiastic about
the chances of major breakthroughs in negotiations with Beijing.

We lower Korea from neutral to underweight. We see growing risk of a housing and debt crisis. Export
growth has held up rather well, but is now likely to slow sharply, which makes the consensus forecast of
15% EPS growth in 2009 look too optimistic. We also look for GDP growth to slow to 3.4% next year.

We remain underweight on most of the smaller ASEAN markets, which are simply too risky and high
beta for the current environment. We are also underweight Australia, which we believe will not prove as
defensive in this recession as in the past. The country has too many structural problems: current account
deficit, overheated property market and dependence on commodities.

3
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

3. Key country and sector recommended weightings

Financials Industrials IT Consumer Materials Telecoms Energy Consumer Utilities Healthcare
discretionary staples
Overall Under Over Under Under Under Over Neutral Neutral Over Over
Japan Neutral Under Under Under Over Over
Australia Under Under Under
China Over Over Under Over Over Under Over
Korea Under Under Over Under Under Under Over
Taiwan Under Under Under Under Under Over Over Over Under
Hong Kong Neutral Over Under Under Over
India Neutral Under Over Under Under Over Under
Singapore Over Over
Malaysia Over Over Over
Indonesia Under
Thailand Under
Philippines Under
New Zealand Under
Pakistan Under
Vietnam Off-Bmk
Source: HSBC

Sector calls
Stick to defensives; prefer infrastructure to consumption
Spending a lot of time thinking about sector allocation has not been a very valuable exercise recently. If
you had judged correctly at the beginning of 2008 that we were in a bear market, you would, without
thinking about it very hard, have overweighted utilities, healthcare and consumer staples, and avoided
materials, financials, industrials and technology. You would have been exactly right.

Since we expect that the bear market has at least another quarter or two to run, and that earnings growth is
likely to disappoint next year, it makes sense to stick largely to the same sector allocation model. Our
preference is for sectors where growth is structural rather than cyclical, where downward earnings
surprises are relatively unlikely, and where leverage and financial risk are low.

In an environment of slowing global growth, therefore, our preference is for sectors such as telecoms and
healthcare, where decent growth is fairly assured even if the cycle continues to turn down. We stay
overweight both. We raise utilities from neutral to overweight, particularly since in China the squeeze on
profits from higher coal prices should end. We remain squarely underweight IT, financials and
consumer discretionary.

Our main change this quarter is to raise industrials from underweight to overweight, and to cut
consumer staples from overweight to neutral. We believe that infrastructure spending is likely to hold up
better than consumer spending in the slowdown in coming quarters. Moreover, valuations in consumer
sectors have got stretched; those in capital goods now look cheap.

4
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Stock picks
Buy quality, sell risk
For our high-conviction buy ideas, we stick to a solid, no-surprises list (Table 4). The stocks included are
all liquid, large-cap names, with solid balance sheets, good long-term prospects for earnings growth and
quality managements. We have avoided most cyclical sectors, and also stocks in markets such as Taiwan
and south-east Asia, which we see as high risk. New names this quarter are Singapore Airlines, a blue-
chip name which should additionally benefit from lower oil prices; Petrochina, which we think will
benefit from the falling crude price, relaxation of government energy price restrictions, and the buyback
plan of its parent; China Resources Power to give us exposure to the defensive utilities sector where we
see profitability rebounding as coal prices fall; Shanghai Electric, since we see infrastructure spending in
China being stronger than consumption; and Bharti Airtel, a good example of a long-term growth story
now trading on attractive valuations.

Our highest-conviction sell ideas generally reflect our nervousness about (1) balance sheet risk, (2)
funding issues for banks in certain markets, and (3) the risk of a US consumer slump hurting the IT
sector. We include Tokyo Electron and Chi Mei on expectations that demand for electronics products
will slow sharply; China Eastern on worries about its balance sheet and long-term future; ICICI Bank
in India and Sumitomo Mitsui in Japan on concerns about funding issues and rising NPLs; and Korea’s
SK Telecom, where we see excess competition for new subscribers denting profits until the end of 2009.

4. HSBC's top 10 high-conviction buy ideas

Code Name Country/ Sector HSBC rating Potential upside to Price Market cap
region target price (%) (local cur) (USDm)
836 HK CHINA RESOURCES PWR CH Utilities Overweight (V) 51.6 17.02 (HKD) 9,175
857 HK PETROCHINA CH Energy Overweight (V) 48.4 8.56 (HKD) 197,430
2727 HK SHANGHAI ELECTRIC CH Industrials Overweight (V) 66.7 2.40 (HKD) 6,262
823 HK LINK REIT HK Real estate Overweight 27.7 16.84 (HKD) 4,683
19 HK SWIRE PACIFIC LTD HK Industrials Overweight 45.7 70.00 (HKD) 8,248
BHARTI IN BHARTI AIRTEL IN Telecoms Overweight (V) 23.6 810.55 (INR) 33,486
LT IN LARSEN & TOUBRO IN Industrials Overweight (V) 29.5 2,550.55 (INR) 16,228
9433 JP KDDI CORP JP Telecoms Overweight 47.2 598,000.00 (JPY) 25,295
033780 KS KT&G CORP KR Consumer Overweight 17.9 89,100.00 (KRW) 10,864
SIA SP SINGAPORE AIRLINES SG Airlines Overweight 28.9 14.74 (SGD) 12,287
Source: HSBC

5. HSBC's top sell ideas

Code Name Country/ Sector HSBC rating Potential upside to Price Market cap
region target price (%) (local cur) (USDm)
670 HK CHINA EASTERN AIRL CH Airlines Underweight (V) -62.4 1.33 (HKD) 962
ICICIBC IN ICICI BANK IN Financials Underweight (V) -5.0 600.10 (INR) 14,537
017670 KS SK TELECOM KR Telecoms Underweight -15.0 203,500.00 (KRW) 12,963
3009 TT CHI MEI OPTOELECT TW IT Underweight (V) -20.4 22.60 (TWD) 5,159
8316 JP SUMITOMO MITSUI FIN JP Financials Underweight (V) -26.9 684,000.00 (JPY) 50,906
8035 JP TOKYO ELECTRON JP IT Underweight (V) -14.0 5,510.00 (JPY) 9,352

Source: HSBC

5
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Contents

Investment strategy 7 China (overweight) 42

Next problem: growth 7 Investors’ dilemma 42

Earnings 20 Taiwan (underweight) 46

2008 EPS forecasts have been cut a little… 20 Further to fall 46

…but 2009 EPS has even more room for decline 20

Hong Kong (neutral) 50
Stay defensive 50
Valuation 22
Forward PE close to bottom 22

PB not yet low enough… 22

India (neutral) 54
The bad news and the good 54
But bottom might be close 22

ASEAN (overweight) 58
Supply and demand 24 Stick to defensive markets 58
USD31bn of foreign money left Asia in 3Q08 24

Equity issuance difficult in current environment 24 Sectors and stocks 65

Stick to the obvious 65
Politics and risk 26 What we like 67
Politics remains an important theme for markets 26
What we don't like 67

Quantitative scorecards 68
Country profiles 29
Scorecards 69
Japan (neutral) 30
Rudderless boat on rough seas 30
Top stock picks 72
What to buy – and what not 72
Australia (underweight) 34
More risks than are apparent 34
Disclosure appendix 90

Korea (underweight) 38 Disclaimer 93

Credit risk rises 38

6
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Investment strategy
 Equities have crashed this year mainly because of risk aversion.
While risk won’t ease quickly, it is unlikely to get much worse
 The focus will now shift to a slowdown in growth – of US
consumption, exports, Asian GDP and earnings
 Being more like a normal recession, that is easier to deal with.
With valuations only 15-20% away from rock-bottom, the bad
times – at least in Asia – may last only another quarter or two

Next problem: growth EPS growth in China and 11% in India this year –
and then 14% for the region as a whole next year.
Given the way that Asian equities have crashed
this year (MSCI Asia ex Japan was down 39% in What pulled stock indexes down was largely risk
US dollar terms by the end of September), it is aversion – and a consequent dramatic repricing of
remarkable how well growth has held up. The risk assets, including equities. Chart 2 is a simple
consensus expects Chinese and Indian real GDP way of thinking about the drivers of a stock
to grow by 9.9% and 7.5% respectively this year, market, breaking the return down into the 12-
and 9.1% and 7.6% next. Analysts may have cut month forward PE and the 12-month forward
their earnings growth forecasts for Asia ex Japan consensus earnings expectation. The forward PE
this year to below zero, but they still expect 13% for MSCI Asia ex Japan fell from 15.6x at the end

1. MSCI Asia-Pacific and MSCI Asia ex Japan (in dollars) vs MSCI World

200
Asia ex Japan rel to MSCI World Asia Pac rel to MSCI World
180

160

140

120

100

80
Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08
Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Source: HSBC, Bloomberg

7
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

of December 2007 to 10.3x by end-September. 3. US dollar versus Asian currencies (MSCI weighted)

That explains almost all the decline in the stock 130

market. Over the same time, the 12-month 125
forward earnings forecast has stayed around 10- 120
115
12% – analysts have cut their 2008 EPS growth
110
forecast from 10% to -2% over the course of the
105
year, but they still expect 14% growth in 2009. 100

2. Drivers of the stock market 95

USD/Asia
90
PE
18 88 91 94 97 00 03 06

16 Jan +10% Source: HSBC, MSCI

14
Apr
12
10
Oct
8 in Asia falling that much further. As we argue
-2% 0% 2% 4% 6% 8% 10%
EPS grow th
Source: HSBC
The other factor to bear in mind is currency
movements. After five years of appreciation
against the US dollar, Asian currencies have
weakened this year (Chart 3). Since the beginning
of the year, this has subtracted a further 6% from
the performance of MSCI Asia ex Japan in US
dollars versus that in local currency terms. (And
the degree of depreciation is softened by the fact
that Chinese shares, the largest component of the
index, are denominated in Hong Kong dollars
which are pegged to the US dollar. By contrast,
this year the Korean won has fallen by 31%
against the dollar and the Indian rupee by 19%.)
HSBC’s view is that the dollar will continue to
appreciate, including against Asian currencies.
0%
-10% Our investment thesis this quarter is that market
Jun -20%
attention is going to shift away from rising risk
-30%
towards falling growth. We do not see valuations
-40%
12% 14% below, Asian stock markets are within 10-20% of
historic lows on most measures. But expectations
of growth are likely to be reduced very rapidly.
That suggests, referring back to our schematic in
Chart 2, that forward PE for the market will not
fall much below its current level, but earnings
forecasts could be slashed quite quickly.
Risk will stay high for a while, too
That is not to say that risk aversion will disappear
altogether, or even ease much, any time soon. But,
with the passage of the financial system rescue
bill in the US Congress, it is probably fair to say
that it will not get any worse.
Measures of risk aversion are at historic highs. At
the end of September, with one-month USD Libor
rising to over 4% and one-month Treasury bills
falling to 0.2%, the TED spread reached 3.8%,
compared to pre-Credit Crunch levels of 30-
40bps. That is the highest level since at least the
1970s.

Perhaps a better measure of bank risk is the spread

between interest rate swaps (OIS) and Libor.
Since the OIS incorporates minimal credit
exposure (the flows are swapped and netted at

8
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

maturity) whereas inter-bank lending is pure 5. Spread over Treasuries of Asian USD 5-year corp bonds

counterparty risk, this is a cleaner measure of 1500

bank credit risk than the TED spread. As shown in
Chart 4, the OIS spread has blown out in an 1000

extraordinary way to 2.7% – whereas the average

500
spread in 2004-6 was only 9bps.

4. 3-month OIS spread (USD) 0

Jul-06
Sep-06

Jan-07
Mar-07

Jul-07
Sep-07

Jan-08
Mar-08

Jul-08
Sep-08
May-06

Nov-06

May-07

Nov-07

May-08
3.0

2.5 AAA A BBB

BB+ B+
2.0
Source: HSBC
1.5

1.0 But can it really get any worse? Measures of stock

0.5 market volatility are at, or close to, previous peak
0.0 levels. The VIX index, measuring the implied
02 03 04 05 06 07 08 volatility on the US S&P500 index, has spiked to
45 – higher than the peak during the TMT bubble
Source: HSBC, Bloomberg
or at the time of the bail-out of LTCM in 1998. In
Asia, the average implied volatility of the six
Closer to home in Asia, spreads on corporate
indexes that have options (Japan, Korea, Hang
bonds have also widened dramatically (Chart 5).
Seng, HSCEI, Taiwan and India) reached 47% at
A BBB rated Asian corporate would now pay
the end of September, only slightly lower than the
512bps over Treasuries for five-year money – if it
peak of 53% in January this year (Chart 6).
could issue a bond at all – compared to 120-
130bps before the Credit Crunch started. And for 6. Implied and historic volatility – six Asian markets

sub investment grade companies – which we 80

estimate comprise one-quarter to one-third of the 70 Imp v ol 10D hist v ol

MSCI Asia ex Japan universe – the situation is 60

50
even more dire: a B+ rated corporate issuer now
40
pays 13% over Treasuries. 30
20
Most worryingly, none of these risk measures 10
showed any sign of coming down even as the 0
Oct-06

Oct-07
Apr-06

Jul-06

Jan-07

Apr-07

Jul-07

Jan-08

Apr-08

Jul-08

likelihood increased of Congress passing the bank

rescue bill; rather, they continued to spike.
Source: HSBC, Bloomberg

Inter-bank, commercial paper and other money

markets have increasingly dried up – even in Asia
– with banks generally unwilling to take any
counterparty risk. Since this is a situation without
parallel in history, never mind in the memories of
any of today’s market participants, it is impossible

9
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

to predict with conviction how this seizing-up of
the credit markets will pan out. But we find it hard
to see how it can get much worse. If credit spreads
were to start to come down a little and money
markets to begin functioning again, this could
have a dramatic positive short-term impact on
equities.
It must not be forgotten that bear markets tend to
see tremendously strong, if short-lived, rallies. In
the 2000-1 bear market in Asia ex Japan, for
instance, there were five rallies of 10% or more,
although the index eventually fell 57% from peak
to trough. In the current bear market, early on
there were three strong bear market rallies (see
Chart 7). But we have not had a 10% rally since
May – five months now. Once the Q3 earnings
season in the US is out of the way – and the
Troubled Assets Relief Program (TARP) starts to
function – it seems quite likely that there could be
another bear market rally. Given the depth of the
decline over the past few months, it could be quite
a powerful one.
7. We haven’t had a bear market rally for a while
650 Top
600
10.0%
13.5%
550
500
450
400
350
back on capital investment, US consumers
repairing their balance sheets by increasing
savings, and falling commodities prices.
Leading indicators have just recently started to
turn down sharply. The US manufacturing ISM
(Chart 8) – which we have long regarded as the
single best indicator of the cyclical factors driving
Asian equities – fell suddenly in September to
43.5, having been stuck at around the 50 level (the
dividing-line between expansion and recession)
since the beginning of the year. In previous
recessions, it has typically fallen to 40-41 (see, for
example, 1991 or 2001). And the bottom for the
stock market tends to be roughly simultaneous
with the bottom in the ISM (not surprising, since
both are leading indicators of the economy). That
suggests that stocks have further – but perhaps not
that much further – to fall. Of course, that
assumes this is a fairly normal recession – in
really nasty ones, such as 1975 or 1980, the
manufacturing ISM fell to around 30.
8. US manufacturing ISM vs. MSCI Asia ex Japan
65 80%
60%
60
40%
19.4% 55 20%
50 0%
-20%
45
-40%
40 -60%
1990

1993

1996

1999

2002

2005

2008

300
ISM Manufacturing (LHS) MXFEJ y /y
Oct-07

Dec-07

Oct-08
Jan-08
Feb-08
Mar-08
Apr-08

Jun-08
Jul-08
Aug-08
Sep-08
Nov-07

May-08

Source: HSBC, Bloomberg

Source: HSBC, Bloomberg

Exports
Where growth will slow The most immediate impact on Asia is likely to
But with growth starting to slip, the rally should come from slowing exports. So far, these have
not be taken as a signal that the bear market is held up remarkably well – indeed, export growth
over. In our view, a nasty combination of factors has even accelerated this year (Chart 9). The
will threaten global growth over the coming three-month moving average of Asian total export
quarters: weakening consumer sentiment, a growth has risen to 21% from 17% last December
drying-up of credit availability, companies cutting (see Chart 9). Korean exports, for example, grew

10
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

28% y-o-y in September, Chinese and Indian has been cut to 6.1% from 6.7% at the end of last
exports 22% and 29% respectively in August. year, and the 2009 forecast by a similar amount.
While exports to the US have slowed to only 6%
10. Average real GDP growth (MSCI weighted)
y-o-y, exports to the EU (+22%), Asia (+22%)
7.5
and commodity producing countries (for example, Asia ex -Japan
7.0
Australia +45%, Middle East +21%) continue to
6.5
hold up well. Surely, this cannot last. Indeed,
6.0
some lead indicators of exports have started to
5.5
slip: Taiwan export orders in August, for example,
5.0
slowed to 5% y-o-y, the lowest level since May
4.5
2003. It seems highly likely, then, that export
4.0
growth will begin to slow quickly over the next
Jan-05 Jan-06 Jan-07 Jan-08
few months. 2006 2007 2008 2009

9. Asian export growth vs MSCI Asia ex Japan

Source: Consensus Economics

40 100
30 HSBC believes that economies – particularly
20 50 export-oriented ones – could slow significantly
10 more than this, particularly next year. Our
0 0 economists are happy that growth in China and
-10 91 93 95 97 99 01 03 05 07 India will hold up – partly because of government
-20 -50 infrastructure spending in the face of slowing
exports – but they are well below consensus in
Total Ex ports MSCI AEJ (RHS) forecasts for Thailand (3.1% next year versus
Source: HSBC, CEIC, Bloomberg
consensus of 4.6%), Taiwan (3.3% versus 4.4%),
Korea (3.4% versus 4.3%), and the Philippines
That may not be as serious for equities as it (3.9% versus 4.8%), as shown in Table 11.
sounds. Chart 9 also shows the y-o-y change in 11. HSBC and consensus real GDP growth forecasts (% y-o-y)
the MSCI Asia ex Japan index. The correlation
2007 2008F 2009F
with exports is quite good (correlation since 1998, Actual HSBC Consensus HSBC Consensus
using a three month lag, is 78%). The equity CN 11.9 9.7 9.9 9.1 9.1
IN 9.0 7.5 7.5 7.3 7.6
market has clearly already discounted a serious ID 6.3 6.1 5.9 4.9 5.6
slowdown in exports, perhaps to as much as a MY 6.3 6.0 5.5 4.8 5.1
HK 6.3 4.5 4.4 3.9 4.2
10% y-o-y decline, which was what happened in PH 7.2 4.1 4.7 3.9 4.8
TH 4.8 4.1 4.8 3.1 4.6
both the 1998 and 2001 recessions. KR 5.0 3.9 4.4 3.4 4.3
TW 5.7 3.9 4.3 3.3 4.4
GDP SG 7.7 3.8 4.2 4.8 4.6
AU 2.5 2.7 2.6 3.0 2.6
Economic growth in Asia has already been JP 2.1 0.8 0.9 0.6 0.9
revised down a little, but is likely to slow further. AsiaPac 3.7 2.9 3.0 2.7 2.9
AEJ 7.2 5.8 6.1 5.4 5.9
Chart 10 shows the consensus forecast for real
Source: HSBC, Consensus Economics
GDP growth in Asia ex Japan (weighted by the
MSCI index weights). The 2008 growth forecast

11
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Overall, they look for MSCI-weighted growth 13. Movements in the 2001 GDP forecast
next year of 5.4%, versus 5.8% this year and 10
versus a consensus forecast of 5.9%. 8
6
Consensus economic forecasts still look rather
4
optimistic in the light of what has happened over
2
the past few years. The consensus still forecasts
0
6% GDP growth for Asia over the next 12 months
-2 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02
(again, on an MSCI index weighted basis). While
-4 CH IN KR
that may not be as good as last year, it is
SG TW Ax J
significantly better than anything achieved before
2006 (see Chart 12). Source: Consensus Economics

12. GDP growth forecasts versus MSCI Asia ex Japan

Table 14 shows how much the 2008 and 2009
8 80 forecasts have been revised down since last
7 60
December, compared to how much the 2001
40
6 forecasts were revised down between January
20
5 2001 and the final result. The biggest revision
0
4 down this time has come in Singapore, where
-20
3 -40 2008 growth has been cut to 4.2% from 6.3%, a
2 -60 2.1ppt cut. But in 2001, four countries were cut by
2001 2002 2003 2004 2005 2006 2007 2008 more than this.
12-mth forw ard GDP f'cast
MXFEJ y /y (RHS)
14. Revisions to GDP forecasts: Jan-latest
Source: Consensus Economics, Bloomberg
2001 2008 2009
SG -8.5 -2.1 -1.4
Moreover, the degree by which the consensus PH -1.1 -1.2 -1.0
AU -0.7 -1.0 -0.9
economic forecast was cut in the 2000-1 recession HK -3.8 -0.8 -1.1
(the only one, unfortunately, we have data for) CN 0.6 -0.6 -0.7
IN -0.7 -0.6 -0.6
was significantly bigger than the forecast cuts this JP -1.5 -0.6 -1.1
time so far. For example, the 2001 GDP growth KR -0.9 -0.5 -0.7
MY -5.5 -0.2 -0.8
forecast for Asia ex Japan was cut from 5.3% at ID -0.4 -0.2 -0.5
TH -1.7 -0.1 -0.3
the start of 2001 to a final outcome of only 1.6% TW -7.2 0.0 -0.3
(Chart 13). In particular, Taiwan was cut from AEJ -3.7 -0.6 -0.8
Source: Consensus Economics
5.0% to -2.2% and Singapore from 6.2% to -2.3%.
Only China and India remained relatively
Earnings
resilient. While this recession is likely to be
Analysts have also been slower to cut earnings
different in character – it is not as concentrated on
forecasts this time than in the past. This year’s
a slowdown in technology-based capex, for
EPS forecasts have come down, it is true.
example – it is notable that forecasts this time
Analysts are now forecasting -2% growth in Asia
have not (yet) been cut by anything like as much.
ex Japan for the current year, compared to a
forecast of +7% at the beginning of July, and
+10% at the start of the year (Chart 15).

12
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

15. Consensus forecast for EPS growth this year and next best (Indonesia and India) 20%-plus. This
25% suggests either that analysts are looking for a
strong economic recovery next year or (more
20%
likely) that, in an environment where it is tricky to
15% forecast even three months out let alone more than
10% a year away, they have simply pencilled in the
usual 10-15% for most of their coverage
5%
This y ear companies.
Nex t y ear
0%
Oct-06

Oct-07

And, indeed, in September the 2009 forecast at

Jan-06
Apr-06
Jul-06

Jan-07
Apr-07
Jul-07

Jan-08
Apr-08
Jul-08

-5%
last showed the first signs of being downgraded.
Source: HSBC, Datastream, IBES The overall growth rate for the region has fallen to
14%, from 16% at the end of August. China, in
And, in the most cyclically sensitive markets, particular, has been cut to 17% from 19%, and
earnings have been slashed: for Taiwan, for Taiwan to 12% from 14%. Those numbers still
instance, analysts have cut their 2008 EPS growth look too high, but they are starting to come down
forecast to -20%. At the start of the year, they had quite quickly.
reckoned +15%. As Table 16 shows, every market
in Asia has seen forecasts cut to some extent but, But in previous bear markets, analysts were much
in contrast to Taiwan’s 28% cut over the past six quicker to cut forecasts. Chart 17 shows analysts’
months, earnings in Hong Kong, Australia, consensus forecasts of the absolute EPS integer
Thailand, Malaysia, India and China have all been for MSCI Asia ex Japan over the past 10 years.
pared back by less than 4%. They will probably The final point on each line is the actual EPS for
need to be revised down further. that year. This enables us to see the magnitude of
EPS changes over time in previous bear markets,
16. Consensus EPS forecasts by country for example 1997-8 or 2000-3.
2008 3-mth 6-month 2009 3-mth 6-month
EPS revision revision EPS revision revision 17. Absolute EPS forecast by year – MSCI Asia ex Japan
growth growth
40
ID 16.3 -5.0 -6.6 29.0 -1.6 3.2
IN 19.3 -2.7 -3.6 23.2 -4.0 -4.5 35
AU 9.1 7.3 -2.2 17.1 15.3 3.2 30 '08
CN 13.3 -2.1 -3.9 16.6 -3.3 -3.5
25 98
KR 3.5 -8.9 -7.4 14.8 -9.4 -7.0 '04
PH 0.8 -7.4 -15.8 14.1 -9.5 -19.1 20 97 '01
TW -20.2 -22.6 -28.1 12.1 -23.1 -27.1 15
JP -4.0 -3.4 -11.9 10.3 -5.8 -14.6
HK -26.1 -4.4 -0.8 8.3 -7.1 -6.9 10 '00
TH 114.1 0.2 -3.0 7.2 -1.0 -3.2 5
SG -3.4 -2.3 -6.3 7.1 -4.9 -10.7
MY -12.6 -2.7 -3.2 4.9 -7.5 -8.9 0
AP -2.7 -10.4 -17.7 16.2 -9.1 -14.7 96 97 98 99 00 01 02 03 04 05 06 07 08
AEJ -1.9 -12.5 -15.8 14.0 -13.6 -16.3
Source: HSBC, Datastream, IBES Source: HSBC, Datastream, IBES

Moreover, the 2009 forecasts still look In 1997-8, for instance, a year after the stock
particularly over-optimistic. Analysts are market peaked in July 1997, analysts had cut their
forecasting 14% growth for Asia ex Japan, with 1997 EPS forecast by 51% and their 1998 one by
even the slowest markets such as Malaysia and 56%. After 2000, the cuts at the same point were
Singapore expected to see 5-10% growth, and the 30% and 45%. This time, almost a year since the

13
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

market started to fall, both 2008 and 2009 2003. Five markets in the region are lower than
earnings forecasts have been cut by only 17% the bottom they reached even in the 2000-3 bear
(Table 18). market (Japan, Australia, Singapore, Thailand and
Malaysia).
There is likely to be a lot further to go. In the end,
the 1998 EPS forecast was cut by 68% and the 19. 12-month forward consensus PE, MSCI Asia ex Japan
2001 one by 45%. Our rough guess would be that 30
the 2009 EPS forecast could be cut by a total of Forw ard PE - Asia ex -Japan
25
40% from the peak. That would imply that
earnings next year for Asia ex Japan could fall by 20

as much as 15% y-o-y (if we assume a small 15

further cut in the 2008 forecast, too).
10
18. Analyst earnings cuts in previous bear markets
5
EPS cut first Total EPS cut Date of market
year after from market peak 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
market peak peak
Source: HSBC, IBES, Datastream
1997 51.2% 51.2% Jul-97
1998 55.8% 67.6%

2000 29.8% 29.8% Feb-00 Of course, that might not be very meaningful if, as
2001 24.6% 44.7% discussed above, earnings have not come down as
2008 16.7% ? Oct-07 quickly this time as in previous bear markets. If
2009 16.5% ?
we assume, for example, that Asia ex Japan
Source: HSBC, Datastream, IBES
earnings do not grow at all next year, forward PE
would be 11.3x – cheap, but not bear market
How much further to fall?
bottom levels. And if, as we suggested above,
In a way, though, if our thesis is correct and this
earnings fall by 15%, PE would be 12.8x. If
bear market shifts in nature from being the result
earnings really come down that much, and PE
of a US-engendered credit crisis to being driven
bottoms out at, say, 10x, that would give 22%
by a normal economic slowdown, it will be easier
downside from the current level.
for investors (and strategists) to cope with.
Normal rules of thumb and historical relationships We would suggest two better methods for judging
– which have not worked while unprecedented when valuations have reached rock-bottom in a
events were happening – will be of use again. We bear market: price/book ratio and dividend yield.
will be able to think, for example, about the
Price/book suggests 12-18%
valuation level at which the market is likely to
The PB for MSCI Asia ex Japan has typically
bottom out.
bottomed out (in 1997, 2001 and 2003) at 1.2x.
PE suggests 22% Having peaked at 3.3x last year, it has now fallen
On many measures, Asian equities are starting to back to 1.7x (Chart 20). But does that mean we
look quite cheap. The 12-month forward PE ratio still have 29% to fall before hitting a firm bottom?
for MSCI Asia ex Japan, for instance, has fallen to
10.3x (see Chart 19). That is lower than it got to
in the Asia Crisis of 1997-8 (when it bottomed at
10.8x) and not that far from the low of 9.0x in

14
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

20. Prospective price/book ratio – MSCI Asia ex Japan If that is the case, then PB may not fall to 1.2x as
3.5 at the bottom of previous bear markets, but maybe
AEJ to only 1.4x or 1.5x – it is better not to claim any
3.0
spurious scientific accuracy about the exact level.
2.5 In this case, stocks may have only 12-18% to fall
2.0
before they hit an ultra-cheap level.

1.5 Dividend yield suggests 19%

1.0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: HSBC, IBES, Datastream
One hard-to-define factor to take into account is
that ROE has trended higher over the past few
years (and this despite, in most countries, leverage
falling). As Chart 21 shows, ROE (based on one-
The story is similar for dividend yield. Currently,
dividend yield (using this year’s forecast
dividend) for Asia ex Japan is 3.2% (Chart 22).
That is not far below the peaks of 3.6% reached in
1998 during the Asia Crisis and 3.4% reached in
2003.
22. Prospective dividend yield, MSCI Asia ex Japan
4.0

year forward forecasts) peaked at 15% before the 3.0

Asia Crisis, and then at 14% at the height of the
TMT bubble in 2000. This time, however, 2.0

forecast ROE reached as high as 18.5% at the 1.0

beginning of this year. While some of the
improvement in the past five years was clearly 0.0

cyclical, should we not also assume a structural 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

improvement in ROE? This would suggest that Div idend Yield - Asia ex Japan

the bottom for ROE will not be 9%, as in 1998, or Source: HSBC, IBES, Datastream

11%, as in 2002, but perhaps 3 or 4 percentage

points higher, i.e. 14-15%. Price/book has the advantage that, except in a
very nasty downturn, book value is relatively
21. 12-month forecast ROE, MSCI Asia ex Japan
solid. Dividend yield is not so reliable, since
20
dividends can be cut. But, even in deep
recessions, it is surprising how little they are in
15 fact cut. In 1998, for example, of the major
markets, only Malaysia cut dividends by more
than 20% (Table 23), though cuts in the small
10
ASEAN markets were more drastic (Thailand
-73%, the Philippines -33%). In the TMT bust of
5
2000-1, Korea and Taiwan both cut dividends by
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

a little more than 10% over two years, but

Source: HSBC, Datastream, IBES Singapore and Malaysia did not cut at all.

15
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

23. Change in annual dividends – MSCI universe Bottom comes when things are worst
AU HK IN JP KR MY SG TW So when will the bear market end? It is always
1996 -1% 17% 3% 7% -13% 3% -2% -11% one of the trickiest moments for a fund manager:
1997 4% -10% 13% -5% -38% -5% 1% 8%
1998 -14% -16% -5% -3% 57% -27% -1% 33% when to call the bottom of a bear market. Leave it
1999 15% 30% 10% -13% 67% 25% 24% -8%
2000 16% -22% 2% 14% -9% 8% 0% -8%
too late, and you miss the initial rise, which is
2001 2% -8% 17% 7% -3% 22% 6% -3% often the biggest. Time it too early, and your
2002 9% 0% 20% -19% 70% 10% 10% 38%
2003 8% 10% 17% 10% 27% 33% 19% 83% performance can suffer for months or years.
2004 36% 14% 35% 42% 43% 38% 55% 31%
2005 24% 9% 3% 45% -12% 1% 12% 3% For example, if you had called the bottom of the
2006 2% 6% 41% -7% 14% 28% 46% 30%
2007 5% 40% -6% 10% 14% 43% -10% 1% 2000-1 bear market six months too early in March
Source: HSBC, Datastream, IBES 2001, it would have taken you almost three years
to get your money back. As Table 25 shows,
If we assume, then, that dividend yield rises to the buying even three months too soon can be painful,
previous peak of 3.6% and that dividends are cut as the last leg-down of a bear market – the
by 10%, that would give 19% further downside capitulation stage – is often the nastiest. A glance
for Asia ex Japan. back at Chart 24 will show that the fall in the last
…and history suggests 20% month of each of the three previous bear markets
And, while it is not a particularly scientific was particularly steep (the index fell 15%, 17%
method of analysis, that sort of decline would be and 20% respectively).
typical of previous bear markets in Asia. The 25. How many months it took to square one if you bought early
1997-8 bear market lasted 14 months and saw the 1994-5 1997-8 2000-1
index fall in total by 66%; the 2000-1 decline was 9 months too early 13 17 16
19 months and 57% (Chart 24). On the same 6 months too early 10 14 32
3 months too early 16 5 7
pattern, this bear market would end between 1 month too early 5 2 3
December and May, and would bottom between Source: HSBC, Bloomberg

36% and 20% lower than the current level. We

doubt that this episode will turn out to be as bad Getting the timing right is particularly difficult
for the region as the Asia Crisis, so probably 20% because markets, by definition, bottom at the
is a fair assumption for a near-worst case scenario. point of maximum bearishness. Naturally, that
will be the moment when the worst news comes
24. Previous bear markets in MSCI Asia ex Japan
out. Markets are frighteningly good at bottoming
110 at the point – often to the day – which, in
100
retrospect, proves to be the turning-point. Barton
90
80 Biggs’s recent book on markets during World
70 War Two Wealth, War and Wisdom shows, for
60
50 example, how the London stock market bottomed
40 at the time of the Battle of Britain and the Berlin
30
one peaked with the failure to capture Stalingrad,
-50 0 50 100 150 200 250 300 350 400 450 500
both with hindsight the key moments in the war.
94 97 00 07
The best recent example of this in Asia is SARS.
Source: HSBC, Bloomberg
The MSCI Asia ex Japan index bottomed, almost

16
 Equity Strategy
Asia Pacific
Fourth Quarter 2008
to the day, at the peak of deaths from the epidemic
(Chart 26).
26. SARS deaths versus MSCI Asia ex Japan index
40 85
30 90
20 95
10 100
0 105
Mar-03 Apr-03 May -03 Jun-03 Jul-03
SARS deaths MSCI AEJ rel to w orld (RHS, inv )
Source: HSBC, WHO, Bloomberg
We include these remarks, at the risk of sounding
whimsical, to remind investors that it can be
dangerous to be too bearish when there is such a
high level of fear around.
Previous financial crises may give some guidance.
The series of US bank failures in 1907 (described
in The Panic of 1907, published last year by
Robert Bruner and Sean Carr) has many
similarities with the current situation. The
financial crisis provoked an economic slowdown
not, as more commonly, the other way around.
Banks, brokers and companies failed because of
links between them that no one had foreseen. But,
most usefully as a lesson for the current situation,
the New York Stock Market bottomed on
November 4, 1907, the day that JP Morgan
organised for US Steel to buy Tennessee Coal and
Iron, which saved the largest Wall Street broker,
Moore & Schley (we told you that the links were
surprising). This proved to be the last in the series
of bailouts organised by JP Morgan. The stock
market rose by some 40% over the following year
although the economy entered a nasty recession,
with production falling 11% and unemployment
rising from 2.8% to 8%.
The lesson for 2008 would seem to be that, once
the problems at the last troubled financial
abc
institution are resolved – for example, by a
government bail-out – this should mark the
bottom for the stock market.
That may take a while yet – we see unresolved
problems in the US and Asia, and particularly in
Europe. But, when the mood is as bleak as it is
currently, it may be worth remembering that there
will be an end to the crisis eventually – and that
this will give a tremendous opportunity to buy
stocks.
This is why our index targets for Asia generally
assume that markets will end the year down from
their current levels. The falls may continue into
next year, but once the bottom is reached the
initial rebound is likely to be very strong. After
the 1997-8 bear market, Asian stocks rose 46% in
the six months after the bottom; after 2000-1 they
rose by 47%. We can not predict the timing of the
bottom with any certainty. But we do have
confidence that, when it comes, stocks will rise
strongly. Better be on your guard not to miss that
opportunity.
But the rebound might be anaemic
How long and strong will the rebound be? That is
a different question altogether. The unresolved
strains in the global financial system mean that it
could be a stuttering rebound, with stock market
returns after the initial bounce remaining quite
poor for some time. Equally, there could be a
double dip (as, remember, there was in 2002 and
in 1981) with the economy failing to maintain the
momentum of any recovery.
Our biggest worry is that the US housing market
could remain weak for years. The Case-Shiller
index has, it is true, already fallen 21% from its
peak in June 2006. But Case-Shiller index futures
(the dotted line in Chart 27) are implying a further
15% decline, with prices not bottoming until the
end of 2010. But a glance at the chart suggests
that even the futures may be too optimistic. House
17
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

prices rose by 226% between 2000 and 2006. The
decline implied by futures would take them back
only to the level of summer 2003.
27. S&P/Case-Shiller Composite 10 Home Price Index
250
200
150
100
50
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Bloomberg
We also fear that the US and European financial
markets may struggle to provide the credit needed
to fuel the economy for some time to come. In the
US, loan growth has already slowed sharply,
Moreover, regulators’ laissez-faire attitude toward
risk-taking by financial instructions will change.
Simply put, many financial institutions allowed
themselves to become excessively leveraged in
recent years. Chart 29 is a scary one. It shows the
asset/equity ratio (forget BIS ratios – this is what
central banks will increasingly focus on) for
groups of banks. The group that has recently got
into the most problems – US commercial banks –
turns out to be relatively lowly leveraged, with
assets/equity only 12.9x at the end of last year,
with this figure not having risen appreciably over
the past few years. By contrast, large European
banks are 37x leveraged, compared to 26x at the
start of the decade, and US investment banks 29x.
Much of that leverage is going to disappear from
the system permanently.
29. Asset/equity ratios of large banks
40

falling to 7% y-o-y in August (Chart 28). But that

30
hides the fact that loans have not grown at all
since the start of the year. It seems inevitable that 20
by December loan growth will be in negative
10
territory for the first time since 1993. Given the
magnitude of banks’ risk aversion, loans could 0
continue to shrink for some time. 00 01 02 03 04 05 06 07
Europe US IBs UK US Comm
28. US bank loan growth y-o-y
Source: HSBC, Bloomberg
25%

20% Could Asia finally decouple?

15% We include these comments on the US financial
market to make one point. We wonder whether,
10%
once the dust has settled on the financial crisis,
5%
Asia might not start to decouple. If global
0% portfolio investors worry about the poor outlook
-5%
70 75 80 85 90 95 00 05 for bank lending in the US and Europe and about
the likely multi-year sub-trend growth of US
Source: CEIC
consumption, does not investment in Asia start to
look relatively attractive? Asia does not, in
general, have the same worries with its financial
system. Asian banks have so far written off only

18
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

USD24bn in credit costs over the past year or so –

a miniscule proportion of the global total
USD587bn. FX reserves remain strong.
Governments generally have healthy budgets that
will enable them to spend to mitigate the effects
of global economic slowdown – most particularly
China, which reported a budget surplus in the first
half of this year of 9% of GDP.

We do not suggest that this will happen

immediately. While risk aversion is high,
investors will withdraw money from high-beta
emerging markets. US investors, in particular,
typically bring their money back home in a crisis
– even when the crisis is home made. That is why
USD75bn has flowed out of Asia ex Japan
equities (and another USD25bn out of Japan)
since last August (Chart 30). Add in countries
such as China and Singapore that do not report
flow data, and we estimate total outflows of
around USD125bn in just over a year.

30. Net foreign purchases of Asian equities since 2000

350
300 Japan Asia ex -Japan
250
200
$ bn

150
100
50
0
-50
2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: HSBC, Bloomberg

But some time next year perhaps, when growth is

showing signs of bottoming and risk aversion is
easing a little, developed country investors may
again look to Asia as a more attractive long-term
story than the US or Europe.

19
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Earnings
 Current earnings forecasts are excessively optimistic
 Analysts have revised down forecasts by 14% over the past six
months, but this is nothing like as much as peak-to-trough cuts in
previous bear markets
 We see perhaps another 34% downward revision to come

2008 EPS forecasts have trough cuts of 68% in the 1997-98 bear market
been cut a little… and 45% in 2000-01. In other words, we expect to
see further downward revision in coming months.
Reacting to the constant negative news flow
regarding the credit meltdown in the US, the …but 2009 EPS has even
equity market valuation entered into a correction more room for decline
phase. The 12-month forward PE of MSCI Asia
Moreover, 2009 forecasts still look ludicrously
ex Japan has come down almost to 10x, compared
over-optimistic. Analysts forecast 14% growth for
to 12x at the end of last quarter. However,
Asia ex Japan overall, with even the slowest
earnings forecasts are much slower to reflect the
markets such as Malaysia still expecting to see
downturn as analysts are still trying to assess the
5% growth in 2009 (Table 2). The best markets
situation and probably waiting for next year’s
such as Indonesia and India are expecting over
guidance in the upcoming earnings season.
20% growth. Over the past few weeks, the 2009
Although all markets except Australia have forecast has showed some signs of being
revised down this year’s earnings forecasts (Table downgraded. China, in particular, has been cut to
5), these cuts, compared to the forecast six months 17% from 19%, and Taiwan to 12% from 14%.
ago, are still mostly single-digit. Only in Taiwan, However, these numbers still look too optimistic,
Japan and the Philippines has EPS been revised and they are likely to come down quickly as the
down aggressively, by 25%, 17% and 15% next earnings season starts.
respectively. Year-to-date, in Asia ex Japan
Therefore, even if the magnitude of the current
analysts have cut their earnings forecasts by only
downturn is somewhat less severe than previous
17%; they currently expect EPS to decline by 2%
bear markets in 1997-8 and 2000-1, earnings
in 2008 (Table 2). Even after all the bad news in
forecasts will likely to be cut by something like
the financial markets, only Hong Kong, Japan,
45% from peak to trough. Therefore, earnings
Malaysia, Singapore and Taiwan are expecting
forecasts for 2009 could easily be cut by another
earnings to contract in 2008. These EPS forecasts
34% in coming months.
are closer to reality than a few months ago, but
revisions are very mild compared to the peak-to-

20
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

1. 12-month forward EPS growth vs MSCI Asia ex Japan 2. Consensus forecast for EPS growth

(%) 2007 2008 2009

50 80%
Australia 3.9 9.1 17.1
60% China 32.4 13.3 16.6
40
40% Hong Kong 44.0 -26.1 8.3
30 20% India 11.2 19.3 23.2
Indonesia 47.2 16.3 29.0
20 0% Japan 3.6 -4.0 10.3
-20% Korea 8.2 3.5 14.8
10 Malaysia 43.8 -12.6 4.9
-40%
Philippines -2.6 0.8 14.1
0 -60% Singapore 11.6 -3.4 7.1
1994 1996 1998 2000 2002 2004 2006 2008 Taiwan 24.8 -20.2 12.1
Thailand -35.9 114.1 7.2
EPS grow th MSCI AEJ index y -o-y (RHS) Asia ex-Japan 12.4 -1.9 14.0
Asia Pacific 6.1 -2.7 16.2
Source: Bloomberg, I/B/E/S, HSBC
Source: I/B/E/S, HSBC

3. Earnings momentum – Asia ex Japan 4. Upgrades as % of total earnings revisions – Asia Pacific

40 70
30 60
20
50
10
40
0
30
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

-10
-20 20
2000

2001

2002

2003

2004

2005

2006

2007

2008

-30
Asia ex -Japan Upgrades as % ot total

Source: I/B/E/S, HSBC Source: I/B/E/S, HSBC

5. Revisions to 2008 EPS forecasts by country 6. Revisions to 2008 EPS forecasts for Asia Pacific sectors
Country vs 3M ago Rank vs 6M ago Rank Sector vs 3M ago Rank vs 6M ago Rank
AU 0.7% 1 1.6% 1 Health care 4.3% 1 -27.2% 9
TH -0.1% 2 -3.0% 4 Energy -2.8% 2 -5.7% 1
CN -2.0% 3 -3.5% 6 Telco -3.9% 3 -7.4% 2
IN -2.1% 4 -3.4% 5 Industrials -4.4% 4 -8.8% 3
SG -2.2% 5 -6.2% 7 Cons. stap -5.4% 5 -10.1% 4
MY -2.9% 6 -2.5% 3 Cons. discr -6.2% 6 -21.6% 7
ID -4.5% 7 -7.1% 8 Materials -9.8% 7 -16.1% 5
HK -4.6% 8 -1.0% 2 Financials -11.9% 8 -20.4% 6
JP -6.6% 9 -16.5% 11 IT -19.2% 9 -23.2% 8
PH -6.9% 10 -15.3% 10 Utilities -66.8% 10 -81.5% 10
KR -9.2% 11 -7.1% 9 Source: I/B/E/S, HSBC
TW -22.5% 12 -25.4% 12
AEJ -12.6% -14.2%
AP -10.0% -18.7%
Source: I/B/E/S, HSBC

21
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Valuation
 Asia ex Japan PE is 10.3x, close to bottom of its historical range
 PB is still 1.7x, not near the typical 1.2x bottom yet, but a higher
trough ROE might justify a PB bottom of 1.4-1.5x
 Valuation is not at rock-bottom yet, but perhaps not too far away

Forward PE close to bottom But bottom might be close

Valuations are starting to look positively cheap.
The 12-month forward consensus PE for MSCI
Asia ex Japan is now 10.3x, approaching the
bottom of its long-term range (Chart 1). In 2003,
PE got down to 9x, but in the 1997-98 Asian
Crisis, its low was 10.8x.
In chart 3, we plot the 2008 PE versus the average
EPS growth forecasted for 2007-09. On a
PER/growth basis, India looks expensive while
China, Thailand and Indonesia are cheap relative
to the rest of Asian markets.
PB not yet low enough…
Price to book (PB) for Asia ex Japan has
bottomed fairly consistently at around 1.2x. It is
currently at 1.7x, so it appears to have about 30%
to fall before hitting previous lows.
Unlike PE, most markets in the region are still at
least 15% away from the previous low reached in
the 2000-3 bear market. Japan is the only
exception. Its PB is now trading at the previous
low of 1.2x. (Chart 2).
However, looking at PB alone misses out the fact
that investors might be more willing to pay a
higher premium over book value now. Return on
equity (ROE) peaked at 15% before the Asian
Crisis, and then at 14% at the height of the TMT
bubble in 2000. This time, however, forecast ROE
peaked at 18.5% and has since come back only
slightly to about 17%. PB might not go all the
way down to the previous bottom because ROE
has structurally improved. This would suggest that
the bottom for ROE may not be 9% as in 1998 or
11% as in 2002, but perhaps 3 or 4 percentage
points higher, i.e. 14-15%. If that is the case, then
PB may not fall to 1.2x as at the bottom of
previous bear markets, but maybe to only 1.4x or
1.5x. In this case, stocks may only have another
15-20% to fall before they hit bottom.
In chart 4, we plot the PB versus ROE/COE to see
how much premium investors are paying for the
value companies are creating over their cost of
equity. On this basis, India looks expensive again
while China and Australia look cheap.
In conclusion, stocks are not at rock-bottom
valuations yet, but they may not be that far away.

22
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

1. 12-month forward PE – Asia ex Japan 2. Current forward PE versus historical average

20 PE Average % Average %
now 2001– diff 1993– diff
18
China 9.4 13.0 -28% 13.3 -29%
16 HK 11.8 16.1 -26% 14.9 -21%
India 12.2 13.9 -13% 13.6 -11%
14 Indonesia 8.6 9.1 -6% 12.9 -33%
12 Korea 9.5 9.0 6% 11.2 -15%
Malaysia 11.2 14.2 -21% 16.3 -32%
10 Philippines 12.4 14.1 -12% 14.9 -17%
Singapore 10.8 15.1 -28% 16.6 -35%
8 Taiwan 11.1 13.5 -18% 18.2 -39%
2001 2002 2003 2004 2005 2006 2007 2008 Thailand 7.9 10.6 -26% 21.2 -63%
Japan 12.4 19.2 -36% 31.8 -61%
Forw ard PE - Asia ex -Japan Australia 10.0 14.7 -32% 15.1 -33%

Source: Bloomberg. I/B/E/S, HSBC Asia ex-Japan 10.3 12.4 -17% 14.6 -30%
Asia Pacific 11.5 16.1 -29% 26.0 -56%
Source: Bloomberg, I/B/E/S, HSBC

3. PE versus average EPS growth 2007-09 4. PB versus ROE/ COE

14 3.5 PBR
13 ID
PH
12 JP SG AP HK IN 3.0
MY IN
11 TW
PE 2008

10 AU AEJ 2.5
KR CH PH
9 CH AU
ID 2.0 MY
8
TH SG
7 1.5 TW
JP
6 KR TH ROE/COE
HK
0 10 20 30 40 1.0
EPS growth 2007-9 0.8 1.3 1.8 2.3 2.8 3.3

Source: I/B/E/S, HSBC Source: Bloomberg, I/B/E/S, HSBC

5. Dividend discount model

SG AU CH MY TW IN HK ID TH JP PH VN
Inputs
DPS year1 59.6 48.8 1.5 18.6 13.8 8.4 318.6 110.7 13.4 14.8 21.5 12.3
EPS year 1 120.1 91.6 4.5 32.6 20.2 42.6 665.1 276.5 30.5 55.4 40.6 38.6
EPS year 2 131.8 98.6 5.2 35.1 23.5 49.7 753.3 324.1 33.2 62.0 45.6 46.3
Growth in stage 2 (%) 9 7 13 9 6 12 6 15 10 6 10 15
No. of years of excess growth 10 10 12 10 10 15 10 15 10 10 10 20
Perpetual growth rate (%) 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 5.0 6.0 6.0
Payout ratio now (%) 49.6 53.2 33.6 57.1 68.4 19.7 47.9 40.0 43.9 26.6 52.9 32.0
Payout ratio at end stage 2 (%) 50.0 50.0 40.0 50.0 50.0 40.0 50.0 45.0 45.0 40.0 45.0 40.0
COE (%) 9.3 9.2 11.3 10.3 9.8 10.8 9.3 15.3 12.8 8.3 11.3 16.8
Result
MSCI index now 1,404 1,002 49 377 234 537 8,610 2,580 259 727 512 470
Fair value 2,296.0 1,516.5 69.0 486.2 301.5 678.5 10,823.7 3,027.5 271.7 753.3 518.1 337.2
Under/over valued (%) -38.9 -34.0 -29.5 -22.5 -22.3 -20.8 -20.4 -14.8 -4.6 -3.5 -1.1 39.5
Source: HSBC

23
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Supply and demand

 Korea has seen the biggest outflows in 2008, but funds are now
so underweight that selling pressure should abate somewhat
 Outflow in other Asian markets continues to accelerate
 Equity issuance has also dwindled

USD31bn of foreign money year-to-date. As of 24 September, foreign

left Asia in 3Q08 investors are holding USD152bn worth of
Taiwanese equities. With weakening export
2008 has not been a good year for foreign fund
demand and lingering concerns around the
flows. The cumulative net foreign buying since
financial sector worldwide, foreign investors are
2000 has decreased from USD441bn to
likely to seize any further chance to take profits.
USD410bn, or 7%, in Asia. If we exclude Japan,
which had USD23bn inflow in Q2, the outflow is Thailand has a similar situation as Taiwan,
even more pronounced (Chart 1). experiencing a large outflow of USD4bn year-to-
date, after an inflow of USD1.6bn in 2007 that
Year-to-date, foreign investors have been net
was triggered by expectations that the political
sellers in all Asian markets except Indonesia.
turmoil might end. When it did not, foreigners
Most notably, USD29bn worth of equity has been
started to sell again. India has also seen foreign
sold by foreign investors in Korea to end-
selling since January, with total outflows for the
September – equivalent to the total amount of
year-to-date reaching USD9bn.
selling in 2007 (Table 2). Large foreign funds
have now become deeply underweight: the main Equity issuance difficult in
global asset management companies have only 9- current environment
12% of equity assets of their Asia ex Japan funds
Unsurprisingly, 2008 has not been a good year for
in Korea, versus an MSCI benchmark of 20.4%. It
equity issuance either. Table 3 compares the
seems unlikely that fund managers would be
annualised 2008 year-to-date issuance amount to
prepared to go much more underweight than this
2007 total issuance. All markets except Thailand
and thus the pressure from further foreign selling
experienced a significant drop-off in equity
in Korea should ease.
issuance in 2008 (and Thailand’s has stayed flat
Other than Korea, all major Asian markets saw a only because 2007 was also poor). Equity
net inflow in 2007 but have reversed this trend in issuance has largely ground to a halt since early
2008 so far. Data on Taiwan illustrates this point summer. Only Australia has seen a healthy
well. In 2007, foreigners bought a total of amount of deals so far this year.
USD2bn worth of stock in Taiwan. However, they
have sold over USD9bn worth of stocks in 2008

24
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

1. Cumulative net buying by foreign investors since 2000 2. Foreign net buying by markets 2007-8

450 (USDbn) JP TW KR TH IN ID
Sep-07 -4.3 1.9 -2.1 0.1 4.7 0.3
350
Oct-07 2.0 1.6 -2.3 0.4 4.4 0.1
250 Nov-07 -3.1 -4.6 -7.3 -1.2 -1.2 0.1
USDbn

Dec-07 -2.9 0.8 -2.6 -0.5 1.2 0.0

150 2007 43.5 2.1 -29.4 1.6 17.8 3.2
Jan-08 -3.3 -1.0 -9.0 -1.2 -4.4 0.1
50 Feb-08 -3.5 3.1 -2.1 1.0 1.2 0.2
Mar-08 -13.0 -0.6 -3.1 -0.3 0.0 -0.3
-50
Apr-08 8.0 -1.0 -1.2 0.0 0.2 0.2
2000

2001

2002

2003

2004

2005

2006

2007

2008

May-08 10.8 0.4 0.9 0.0 -1.1 0.4

Jun-08 4.5 -3.8 -4.6 -1.1 -2.5 0.0
Japan Asia ex -Japan Jul-08 -4.6 -3.6 -4.8 -1.1 -0.2 -0.1
Aug-08 -1.5 -0.7 -2.8 -0.3 -0.5 0.0
Source: Bloomberg, HSBC Sep-08 -4.8 -2.2 -2.1 -0.7 -1.3 0.3
2008 Y-t-d -7.4 -9.3 -29.0 -3.7 -8.5 0.8
Source: Bloomberg, HSBC

3. Total equity issuance by market 2005-8 4. Net inflows into Japanese equity investment trusts
(USDbn) 2005 2006 2007 2008 Y-t-d 2008* v 2007
300 (JPYbn)
AU 15.5 30.8 23.3 13.4 -30%
CH 28.5 69.0 53.1 11.9 -73% 200
HK 10.1 20.2 20.7 3.8 -78%
100
IN 10.1 12.2 24.3 6.0 -70%
JP 43.9 56.6 19.5 4.5 -72%
0
KR 15.8 11.3 10.1 2.4 -71%
MY 1.3 1.1 3.1 0.5 -82% -100
SG 3.7 5.2 6.1 0.5 -89%
TH 1.2 2.9 0.6 0.6 23% -200
TW 15.8 11.3 10.1 2.4 -84%
2001

2002

2003

2004

2005

2006

2007

2008

AEJ 86.0 132.1 158.0 43.5 -66%

AP 145.3 219.6 177.6 48.0 -67% Stock IT
Notes: 2008 Y-t-d data up to 25 Sep 2008' * = annualized
Source: Bloomberg, HSBC Source: IT association, HSBC

5. Net inflows into Korean equity-related investment trusts 6. Net inflows into Indian mutual funds

18,000 (KRWbn) 1000 (INRbn)

800
13,000 600
400
8,000 200
0
3,000 -200
-400
-2,000 -600
2001

2002

2003

2004

2005

2006

2007

2008

2001

2002

2003

2004

2005

2006

2007

2008

Net inflow into equity related inv estment trust Mutual funds net flow

Source: CEIC, HSBC Source: CEIC, HSBC

25
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Politics and risk

 Thai political unrest is likely to continue
 New Japanese Prime Minister Taro Aso will probably call an early
election but this is unlikely to resolve the stalemate
 The opposition party in Malaysia is gearing up to seize power

Politics remains an important Aso urges Japan to be more assertive in taking a

theme for markets
A lot of things happened in Asian politics during
3Q08. Political unrest added downside risk to the
financial markets. Most notable were the street
protests in Thailand. On August 25, protesters
accused Prime Minister Samak’s government of
corruption and being a proxy for ex-Prime Minister
Thaksin. Protestors demanded Samak’s resignation
by occupying the Prime Ministerial compound and
various airports, causing tourists and investors to
panic. MSCI Thailand tumbled 24% during the
quarter. The conflict was finally resolved on
September 9 when Somchai Wongsawat, the People
Power Party’s deputy leader, took office.
Unfortunately, Prime Minister Somchai now also
faces an investigation into his holding in an internet
service provider that has contracts with a state-
owned telecom service provider. If found guilty,
Somchai would be disqualified from serving as the
prime minister. Thai political risk is likely to remain
a key concern among foreign investors.
In Japan, Prime Minister Fukuda surprisingly
stepped down because of the political deadlock that
made it impossible for him to implement policies.
The ruling Liberal Democratic Party chose Taro Aso
to be the third prime minister in less than two years.
Well known for his hawkish views, Prime Minister
global role; this causes concern in China and the US
that it will be harder to forge regional agreements in
future. Meanwhile, the opposition party controls the
Upper House of Parliament, which will continue to
make it difficult for the Prime Minister to pass any
legislation. This unstable situation is unlikely to be
resolved by a general election that may be called late
this year or in early 2009.
Taiwanese politics have, for once, been relatively
uneventful. The next key milestone is the second
round of negotiations with Beijing that is
scheduled to take place in November. There are
hopes that these may reach agreement on cross-
strait cargo flights and mainland investment in
Taiwanese stocks.
In Malaysia, opposition party leader Anwar
Ibrahim continues to make noise on his ability to
topple current Prime Minister Abdullah Ahmad
Badawi, who has failed to implement key pledges
such as ending corruption and boosting the
independence of the judiciary. Anwar has so far
failed to call the no-confidence motion he
threatened for September. But, within the ruling
party, frustration with Abdullah is rising and he
may be quickly replaced by his deputy Najib
Razak. One way or the other, the situation looks
likely to resolve itself over the next few months.

26
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

1. Average sovereign credit rating – Asia ex Japan 2. S&P long-term foreign currency credit ratings

17.0 Latest rating Date Previous rating

AU AAA Feb-03 AA+
16.5 SG AAA Mar-95 AA+
HK AA+ Jul-08 AA
16.0
JP AA Apr-07 AA-
TW AA- Dec-02 AA
15.5
CH A+ Jul-08 A
KR A Jul-05 A-
15.0
MY A- Oct-03 BBB+
TH BBB+ Oct-06 BBB+
14.5
IN BBB- Jan-07 BB+
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

ID BB- Jul-06 B+
PH BB- Jan-05 BB
Av erage credit rating VN BB Sep-06
Source: Bloomberg
Source: Bloomberg. HSBC

3. Spread on Asian USD bonds versus MSCI Asia ex Japan 4. Government approval ratings

750 100 80
150 70
650
200 60
550
50
250
450 40
300
350 30
350
20
250 400 10
150 450 0
2001 2002 2003 2004 2005 2006 2007 2008 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08
MSCI Asia ex J ADBI spread (RHS, inv erse) KR TW AU JP HK

Source: I/B/E/S, HSBC Source: Bloomberg, I/B/E/S, HSBC

5. Political snapshot of Asia Pacific markets

Country Head of government Latest approval rating Next significant political events Consensus view of result
Australia Kevin Rudd (Prime Minister) 54% Federal Election to be held in 2010
China Hu Jintao (President) n/a Next Presidential election by mid - March 2013
Hong Kong Donald Tsang (Chief Executive) 52% Chief Executive election to be held in 2012
India Manmohan Singh (Prime Minister) 77% Parliamentary election in May 2009 The ruling Congress Party and opposition
BJP have equal chance to form coalition
govt
Indonesia Susilo Bambang Yudhoyono (President) 21% Presidential and legislative elections April 2009 Close call between SBY and Megawati
Soekarnoputri for president
Japan Taro Aso(PM) 54% Possible general election by early 2009 Hard to call
Korea Lee Myung bak 24% Parliamentary election December 2012
Malaysia Abdullah Ahmad Badawi (PM) 50% Parliamentary election by 2013
Philippines Gloria Macapagal-Arroyo (President) 22% Presidential election 2010 Gloria Macapagal-Arroyo to stay in power till
2010
Singapore Lee Hsien Loong (PM) - Parliamentary election by 2010 Ruling party to win next election
Taiwan Ma Ying-jeou (President) 25% Presidential election by March 2012
Thailand Somchai Wongsawat (PM) 40% Parliamentary election by Dec 2011
Source: Various polling agencies and media, HSBC

27
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

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28
Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Country profiles

29
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Japan (neutral)
 Performance of Japanese stocks depends on external factors
 Risks: further downward earnings revisions and a policy shift
towards fiscal spending
 Valuations have not yet hit historical lows but downside risk is
limited

Rudderless boat on rough We expect the Japanese economy to remain in

seas recession and to experience only a moderate
recovery after bottoming in April-June 2009.
In the current environment, Japan looks relatively
Corporate earnings forecasts continue to be
stable as a developed market. So far this year, the
revised down. The latest Japan Company
stock market has performed well compared to other
Handbook published on 16 September cut
Asian countries (although one reason was that it
aggregate operating profit forecasts for ex-
underperformed last year). However, Japan is a
financials companies by 3.3pts to -7.1% for the
highly cyclical market, since its main drivers are
fiscal year ending March 2009. Many of our
external: 1) corporate earnings are highly dependent
analysts expect companies to lower their forecasts
on the global economy, and 2) the performance of
in the coming two months, since companies tend
the stock market is largely reliant on foreign buying.
to revise full-year forecasts in October and

Key financial and economic forecasts

1. Returns (%, USD) 2. Economic forecast 3. Valuation
MSCI Japan TOPIX 2008 2009 2008 2009
3-month -18.3 -17.6 GDP growth (%) 0.8 0.6 PE (x) 13.2 12.0
6-month -18.4 -12.6 Consumer prices (%) 1.4 0.9 P/B (x) 1.2 1.1
12-month -28.3 -32.7 JPY/ USD 115 118 Dividend yield (%) 2.2 2.3
24-month -24.2 -32.5 Short interest rate (%) 0.6 0.6 Implied growth (%) 4.0
Long interest rate (%) 1.4 1.6 Implied COE (%) 5.6

4. Q3 2008 sector performance (%) 5. Earnings (%)

Absolute Relative 2008 2009
Defensives -4.4 17.3 Earnings growth (y-o-y) -4.0 10.3
Telecom -7.4 14.4 ROE 9.0 9.1
Financials -14.2 7.6 ROA 1.6 1.9
Cyclicals -23.2 -1.4 Net debt/ equity ratio 0.0 0.0
Technology -23.7 -1.9
Energy -27.9 -6.2
Notes: Performance for Q3 2008 is up to 30 Sep 2008. Implied growth is derived from a 3-stage NPV analysis based on earnings stream: the first stage is 2 years of I/B/E/S earnings forecasts; the final stage is perpetual growth of 2.5-
8% depending on the country; implied growth is calculated for years 3-10. COE is derived from a weighted average of USD bonds with the same credit rating as the country, local 10-year government bond yields and an equity risk
premium. MXAP = MSCI Asia Pacific index
Source: HSBC, I/B/E/S

30
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

November when they announce interim results. look to have limited downside risk. Current PB of
1.3x is close to the low of 1.1x hit in spring 2005.
Political paralysis is unlikely to end in the short
term. Japan’s new Prime Minister Taro Aso is Sectors and stocks
likely to call a general election late this year or
We keep a cautious investment stance and stay
early in 2009, after passing the JPY1.8trn
fairly defensive. Our biggest overweights are
supplementary budget for economic stimulus that
telecoms and healthcare. KDDI (9433) is likely
was proposed by his predecessor Fukuda.
to benefit from the reduction in competitive
However, the outcome of the election is too close
intensity in the mobile business. We would
to call. There are three scenarios: 1) the ruling
recommend investors to focus on large caps with
party narrowly wins – this causes further political
strong balance sheets. We prefer sectors and
turmoil as it won’t be able to pass legislation due
companies that will enjoy structural growth, for
to the split parliament, 2) DPJ wins – this mends
example, games companies. The utilities sector is
the split parliament situation but implementation
defensive and was the best performing sector in
of DPJ policy remains uncertain, and 3) neither
Q3, but we remain neutral since the sector looks
LDP nor DPJ wins the majority – this potentially
particularly expensive after earnings forecast
triggers political realignment.
revisions and a share price rally since mid-May.
Furthermore, Japan is likely to shift away from We continue to avoid consumer discretionary
structural reform. No matter which party wins, the and technology stocks, where we expect more
new prime minister is likely to increase fiscal downward earnings revisions due to a slowdown
spending and postpone the FY2011 target for in global demand.
achieving a primary balance.

Valuations have not hit historical lows yet. For

example, 12-month forward PE is currently 12.4x, 6. Inflection points
still above the historical low of 11-12x hit in How much the economy slows
March. In addition, we estimate actual PE would Outcome of Lower House election (probably late 2008 or early 2009)
be around 15x, since analysts are still too Size of fiscal stimulus package likely to be implemented by next PM
optimistic with their forecasts, especially for next Companies to revise down earnings forecasts after half-year results
fiscal year. From a PB point of view, Japan does Source: HSBC

7. Sector weightings and Stock screening

Sector Sector weightings Stocks rated Overweight Stocks rated Underweight
Consumer discretionary underweight Toyota Boshoku Corp, Isuzu Motors, Sky Perfect JSAT Honda Motor
Corp
Consumer staples neutral
Energy neutral
Financials underweight Sompo Japan Insurance Inc, Mitsui Sumitomo Group Mitsubishi UFJ FINL, Sumitomo
Hol Mitsui Financial
Healthcare overweight Olympus
Industrials neutral Nippon Electric Glass Co, Yokogawa Electric Corp,
Nikon Corp.
Technology underweight Konami Corporation,Nintendo Co., Ltd. Tokyo Electron
Materials underweight Asahi Glass Co., Ltd., JFE Holdings, Nippon Steel
Telecoms overweight KDDI Corp, NTT
Utilities neutral
Notes: Stocks shown are those with market cap above USD1bn, where HSBC's analysts have an Overweight or Underweight rating, and where their target price is at least 15% away from the
current stock price. Up to three stocks are shown in each category for each sector.
Source: HSBC

31
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

8. Market performance 9. Dragged down by cyclicals and tech

 MSCI Japan is down 24% since the start of the year, but outperformed MSCI
120
Asia Pacific by 26%
 In Q3, MSCI Japan is down 13.8% but is the third best performer in Asia-
100
Pacific
 Worst performing sectors: energy and technology
80

60
Sep-07 Nov -07 Jan-08 Mar-08 May -08 Jul-08 Sep-08
Cy clicals Defensiv e Energy
Financials IT Telecoms
Main index

Source: HSBC

10. Economy 11. Forecasts cut further

 Consensus forecasts for real GDP growth have slipped to +0.9% in 2008 and
3.5% Consensus forecast on Real GDP growth
+0.9% in 2009
3.0%  Our economist expects the Japanese economy to remain in recession for
2.5% another two quarters due to the weak US economy
2.0%  HSBC revised down real GDP growth forecasts to +0.8% and +0.6%
1.5% respectively for 2008 and 2009
1.0%
0.5%
Dec-05

Dec-06

Dec-07
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

2006 2007 2008 2009

Source: Consensus Economics, HSBC

12. Leading indicators 13. Getting worse

 Our Economic Performance index has continued to drop since summer 2007
220 1200
 External demand continues to deteriorate. Export volume fell 3.1% y-o-y in
170 1000 August
120  Core machinery orders were down 3.9% m-o-m in July. Our economist
800 expects further decline towards year-end on slowdown in the global economy
70
20 600

-30 400
2002 2003 2004 2005 2006 2007 2008
JP Econ Performance Index MSCI JP (RHS)

Source: Bloomberg, MSCI, HSBC

14. Earnings 15. Earnings growth to turn negative in 2008

Japan  The consensus forecasts 4% decline in EPS for MSCI Japan in 2008, followed
200
by 14% recovery in 2009
150
 The September edition of Toyo Keizai Japan Company Handbook revised
100 down operating profit forecasts for ex-financials companies to -7.1% from
50 -3.8% in the June edition
% y-o-y

0  The biggest downward revisions came from the chemicals, autos and electric
machinery sectors
-50
-100
-150
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Source: I/B/E/S, HSBC

32
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

16. Earnings momentum 17. Expect more downward revisions in October- November
 Consensus EPS forecasts for 2008 have been revised down over the past
80
eight months
60
 We expect further downward revisions to come in October-November, when
40 companies announce their first-half results for FY2008
20  Compared to three months ago, recurring profit forecasts have been revised
0 down in 22 out of 33 TOPIX sectors
-20
-40
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08 Japan 6-month earning momentum

Note: Earnings momentum = 6-month % change in 12- month forward consensus forecast. Source: HSBC

18. Valuation 19. Still above historical low

 12 month forward PE is currently 12.4x, low compared to history but above the
80x
historical low of 11-12x hit in March…
70x
60x  …in addition, we estimate actual PE is around 15x after earnings have been
50x revised down further
40x  Current PBR of 1.3x is also cheap but still above the historical low of 1.1x hit
30x in 2005
20x
10x
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

20. Sector valuation 21. Utilities sector looks particularly expensive

 Utilities looks particularly expensive with combination of stock outperformance
50x 12-month fw d PE 5-y ear PE mean
and downward revision in earnings
40x  Except utilities, all sectors are trading below their five-year mean
30x  Healthcare, energy and industrials are trading in-line with Pan-Asian peers
20x
10x
0x
als
IT
s

lco

ls
re

y
s
tap

r
ie

is c

rg
ial

ria
ca

i
Te
ilit

st r
e
.s

nc

.d

ate

En
Ut

du
ns

na
alt

ns

In
Co

Fi
He

Co

Source: I/B/E/S, HSBC

22. Foreign flows 23. Foreigners turned net sellers

 Foreigners have turned net sellers since end-June, having sold a net
350
JPY1.4trn after buying net JPY2.7trn between April and late June
300  Problem of Japan is an absence of domestic investor base. Individuals only
250 buy when stock market falls
USDbn

200  Domestic stock funds have largely seen net outflows since November 2006
150
100
50
Dec-04

Dec-05

Dec-06

Dec-07
Mar-04
Jun-04
Sep-04

Mar-05
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

Source: Bloomberg. HSBC

33
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Australia (underweight)
 Australia is superficially attractive as a cheap developed market
 But PE of 10.0x is distorted by overly optimistic earnings forecasts
 …and both the economy and banking sector are fragile

More risks than are apparent absolute amount, behind only the US, UK and
Spain. That is one reason why the Australian
Australia might seem a natural overweight in an
dollar fell 15% in Q3. Australia’s banks have also
environment of global uncertainty. As a
been unusually active in overseas markets, not
developed market, it had indeed outperformed
least in asset securitisation. Add to that an
MSCI Asia Pacific until September, although it is
overheated property market at home, now
now down 34% in USD terms. Valuation-wise,
showing signs of weakness, and Australian banks
too, it looks cheap, with a 12-month forward PE
are likely to have to write off more than the tiny
of 10.0x – the lowest level since the early 1990s.
amounts they have so far.
It is supported by steady buying from a well-
developed superannuation (pension) system. Moreover, the earnings outlook is unlikely to be
as good as analysts are forecasting – which
We are not convinced, though, that Australia is
suggests that 10.0x forward PE may not be
going to prove so defensive this time. For one,
meaningful. Analysts are looking for 35% net
there are structural problems: Australia’s current
profit growth in the fiscal year ending June 2009,
account deficit is the fourth largest in the world in
and 14% for June 2010.

Key financial and economic forecasts

1. Returns (%, USD) 2. Economic forecast 3. Valuation
MSCI Australia S&P/ ASX 200 2008 2009 2008 2009
3-month -27.3 -11.8 GDP growth (%) 2.7 3.0 PE (x) 11.6 9.9
6-month -25.3 -14.0 Consumer prices (%) 4.5 3.5 P/B (x) 2.0 1.9
12-month -37.4 -30.0 USD/ AUD 0.86 0.74 Dividend yield (%) 5.3 5.6
24-month -5.1 -10.7 Short interest rate (%) 7.2 6.0 Implied growth (%) 5.5
Implied COE (%) 10.1

4. Q3 2008 sector performance (%) 5. Earnings (%)

Absolute Relative 2008 2009
Technology -17.0 4.8 Earnings growth (y-o-y) 9.1 17.1
Financials -17.9 3.9 ROE 17.6 19.1
Defensives -18.1 3.6 ROA 3.6 4.0
Telecom -19.0 2.8 Net debt/ equity ratio 285.2 282.5
Energy -31.8 -10.0
Cyclicals -38.5 -16.7
Notes: Performance for Q3 2008 is up to 30 Sep 2008. Implied growth is derived from a 3-stage NPV analysis based on earnings stream: the first stage is 2 years of I/B/E/S earnings forecasts; the final stage is perpetual growth of 2.5-
8% depending on the country; implied growth is calculated for years 3-10. COE is derived from a weighted average of USD bonds with the same credit rating as the country, local 10-year government bond yields and an equity risk
premium. MXAP = MSCI Asia Pacific index
Source: HSBC, I/B/E/S

34
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Commodities prices versus MSCI Australia
500
CRB (LHS)
450
400
350
300
250
200
150
90 92 94 96 98 00
Source: HSBC, Bloomberg
As always with Australia, earnings will be very
dependent on commodity prices. For the current
fiscal year, three-quarters of the growth in profits
comes from just the two largest resources
companies. We do not expect metals prices to
collapse (partly because we see Chinese demand
remaining strong). But an increase in supply,
especially in iron ore and copper, means that
prices may well continue to soften somewhat over
the next 12 months. A combination of weaker
commodities profits (even an outright decline),
more bank provisioning, and a slowdown in
earnings from consumer-oriented companies,
means that profit forecasts may have to be cut
significantly. The Australian stock market has
long shown a close correlation with commodity
prices – it is unlikely to rebound in a sustainable
way until commodities also find a bottom.
Meanwhile, the economy shows signs of
1300 slowdown. GDP grew only 0.3% q-o-q in Q2. The
MSCI AU
1100
consensus has cut this year’s growth forecasts to
2.6% (from 3.6% in January). On the positive
900
side, this will push the Reserve Bank to cut rates
700
again – it took them down 25bps in September.
500
We forecast a further 150bps of easing over the
300 next 12 months. This will eventually help the
100 economy to bottom out – but not yet.
02 04 06 08
Sectors and stocks
We remain most wary on the financials sector,
which will continue to be under strain from the
slowing economy and from overseas exposure.
We are also underweight on the resources sector;
we think the consensus remains too sanguine
about the outlook for iron ore prices, in particular,
next year. We are also cautious on consumer
discretionary stocks: not only do they have
significant exposure to the US, but there are
growing signs of weakness for Australian
consumption too.
6. Inflection points
How quickly Reserve Bank cuts rates
How much further commodities prices fall
Further credit-related write-offs from the banks
Source: HSBC

7. Sector weightings and Stock screening

Sector Sector weightings Stocks rated Overweight Stocks rated Underweight
Consumer discretionary Underweight
Consumer staples Underweight
Energy Neutral
Financials Underweight
Healthcare
Industrials Underweight
Technology
Materials Underweight BlueScope Steel Lihir Gold
Telecoms Neutral
Utilities
Notes: Stocks shown are those with market cap above USD1bn, where HSBC's analysts have an Overweight or Underweight rating, and where their target price is at least 15% away from the
current stock price. Up to three stocks are shown in each category for each sector.
Source: HSBC

35
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

8. Market performance 9. Slight outperformance

 MSCI Australia is down 34% y-t-d, underperforming Asia Pacific by 3%
150
 Energy is the only sector to rise y-t-d, up 9%
130
 Biggest declining sectors y-t-d were industrials (-30%) and financials (-29%)
110
90
70
50
Sep-07 Nov -07 Jan-08 Mar-08 May -08 Jul-08 Sep-08
Cy clicals Defensiv e Energy
Financials IT Telecoms
Main index

Source: HSBC

10. Economy 11. Growth downgraded

 The consensus real GDP growth forecast for 2008 has been cut to 2.6%, from
4.0% Consensus foreast on Real GDP growth
3.6% at the start of the year
3.5%  The consensus forecast for next year is also 2.6%
 HSBC forecasts 2.7% growth this year and 3.0% growth next
3.0%

2.5%

2.0%
Dec-05

Dec-06

Dec-07
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

2006 2007 2008 2009

Source: Consensus Economics, HSBC

12. Leading indicators 13. Weakening economy will lead to rate cuts
 Australian economic data has deteriorated sharply in the past few months
35 1500
 The HSBC Economic Performance Index shows that net 10% of indicators
25 1300 have declined over the past month and net 4% have declined over three
months
15 1100
 In particular, labour market indicators have begun to weaken, which makes it
5 900 likely that the RBA will cut rates further.

-5 700

-15 500
2002 2003 2004 2005 2006 2007 2008
AU Econ Performance Index MSCI AU (RHS)

Source: Bloomberg, MSCI, HSBC

14. Earnings 15. Earnings forecasts still optimistic

Australia  Consensus expects Australian EPS to grow 9.1% in CY2008 and 17.1% in
40
CY2009 on a calendarised basis
30  This year the strongest growth is expected from energy (+66%) and
healthcare (+20%)
20
% y-o-y

 In 2009, strongest growth is forecast for healthcare (22%) and materials (16%)
10

-10
1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: I/B/E/S, HSBC

36
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

16. Earnings momentum 17. One of the few countries with upward earnings revisions
 Over the past three months, the Australia 2008 EPS forecast has been
20
revised up by 7% and the 2009 forecast by 15%
10  For the current year, the biggest upward revision in the past three months has
been in financials (-9%) and biggest downward revision in materials (+17%)
0  For next year, the biggest revisions have been industrials (-8%) and materials
(+21%)
-10

-20
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08 Australia 6-month earning momentum

Note: Earnings momentum = 6-month % change in 12- month forward consensus forecast. Source: HSBC

18. Valuation 19. Close to historical lows

 12-month forward PE has fallen to 10.0x
21x
19x  That is far below the long-run average of 15.1x, and even below the low of
17x 12.9x that Australia reached in the 2001-3 bear market
15x  Price/book has fallen to 2.2x. In the last bear market it got to 1.7x
13x
11x
9x
7x
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

20. Sector valuation 21. Cheap across the board

12-month fw d PE 5-y ear PE mean  Most sectors are trading at significantly lower multiplies than the average over
25x
the past five years.
20x  Cheapest sectors relative to history are materials (7.8x v. 12.2x) and
15x consumer discretionary (11.6x v. 17.8x)
10x  Only energy (18.6x v. 16.8x) and utilities (17.5x v. 16.9x) are expensive
relative to history
5x
0x
C o al s

IT
ies

ls
re

lco
y

tap

s
r
is c
g

ial

ria
ca

er

Te
ilit

st r

.s

nc
.d

ate
En

Ut
h

du

ns

na
al t

ns

M
In

Fi
He

Co

Source: I/B/ES, HSBC

22. Foreign flows 23. How scared are the local investors?
 Australia does not provide timely foreign flow data, so we rely on data for
3.5
global mutual funds from EPFR
3.0
2.5  This shows that foreigners were big sellers in Q1, but have sold only a small
2.0 amount more since then
USDbn

1.5  Domestic investors, especially superannuation funds, provide some support –

1.0 but they are becoming more risk averse with the losses on asset-backed
0.5 securities holdings
0.0
-0.5
-1.0
Oct-04

Oct-05

Oct-06

Oct-07
Apr-04
Jul-04

Jan-05
Apr-05
Jul-05

Jan-06
Apr-06
Jul-06

Jan-07
Apr-07
Jul-07

Jan-08
Apr-08
Jul-08

Source: EPFR, HSBC

37
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Korea (underweight)
 Korea could be about to face its own credit problems…
 …at the same time that slowing exports dent GDP growth
 We lower our recommendation to underweight

Credit risk rises which have financed as much as 40% of recent

real estate developments. Construction companies
The Korean market looks increasingly risky. Debt
have already started to go bankrupt, and
in the household and SME sectors has built up to
delinquency rates on real estate project loans may
dangerous levels. Household debt is now 88% of
be as high as 10%. In an environment of high risk
GDP, up from 75% after the bursting of the 2002-
aversion, the last thing Korea can afford is a credit
3 credit card bubble. Corporate debt has risen to
crisis of its own. But one may be in the works.
230% of GDP.
Meanwhile, the economy remains very export-
What makes this particularly worrying is that the
sensitive. Exports have so far held up well. As the
housing market is starting to experience
chart below shows, exports have grown on
difficulties. Prices of apartments in the top
average 24% y-o-y over the past three months.
locations in Seoul have fallen 15% y-o-y and the
But a recession in the US and a slowdown in
number of unsold units has reached 200,000,
China are likely to cause Korean exports to slow
according to industry sources. This presents a
sharply over coming months. That should
significant risk for small financial institutions,
negatively impact consumption and capex growth,

Key financial and economic forecasts

1. Returns (%, USD) 2. Economic forecast 2. Valuation
MSCI Korea KOSPI 2008 2009 2008 2009
3-month -24.3 -13.5 GDP growth (%) 3.9 3.4 PE (x) 10.6 9.2
6-month -29.7 -14.9 Consumer prices (%) 4.7 3.5 P/B (x) 1.3 1.2
12-month -42.7 -25.6 KRW/ USD 1039 1100 Dividend yield (%) 0.3 0.3
24-month -18.3 5.6 Short interest rate (%) 5.4 5.0 Implied growth (%) 10.0
Implied COE (%) 9.3

4. Q3 2008 sector performance (%) 5. Earnings (%)

Absolute Relative 2008 2009
Telecom -9.5 12.3 Earnings growth (y-o-y) 3.5 14.8
Defensives -15.7 6.1 ROE 12.3 12.6
Cyclicals -25.0 -3.3 ROA 2.6 2.6
Financials -25.1 -3.3 Net debt/ equity ratio 0.0 0.0
Technology -26.4 -4.6
Energy -28.4 -6.6
Notes: Performance for Q3 2008 is up to 30 Sep 2008. Implied growth is derived from a 3-stage NPV analysis based on earnings stream: the first stage is 2 years of I/B/E/S earnings forecasts; the final stage is perpetual growth of 2.5-
8% depending on the country; implied growth is calculated for years 3-10. COE is derived from a weighted average of USD bonds with the same credit rating as the country, local 10-year government bond yields and an equity risk
premium. MXAP = MSCI Asia Pacific index
Source: HSBC, I/B/E/S

38
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

too. HSBC’s economists have cut their forecasts
for next year’s real GDP growth to 3.4% from
3.7% previously. This is much more gloomy than
the consensus, which still forecasts 4.3%.
Korean export growth and stock index movement
40%
20%
new president has been quietly announcing new
measures over the past few weeks. These include
a new house-building programme to help
construction companies, corporate tax cuts and
increased infrastructure spending. So far, he has
skirted around more controversial issues (such as
100%
labour reform) but these could come if there is
progress on less controversial changes.
50%

Sectors and stocks

0% 0%
In an environment of credit risk and slowing
1992

1994

1996

1998

2000

2002

2004

2006

2008

-20% -50% growth, we recommend sticking to large, well-run

companies with clean balance sheets in defensive
-40% -100%
or structural growth sectors. We are overweight
Korean ex ports y /y (LHS) KOSPI y /y (RHS)
industrials (which will benefit from infrastructure
Source: HSBC, Bloomberg spending in China and elsewhere) and healthcare.

Of course, some of the bad news is in the price. Our biggest concerns are in financials (likely to
be hurt by rising corporate defaults), IT (where
MSCI Korea is down 40% y-t-d, just slightly
worse than the decline in Asia as a whole. earnings forecasts are still too high), consumer
discretionary (which are likely to be affected by
Moreover, valuations in Korea look fairly cheap,
with 12-month forward PE on 9.5x and price/book a slowdown in consumer spending) and telecoms
(excess competition).
on 1.3x. However, Korea has been significantly
cheaper than this in the past (PB got down to 0.8x
in the last bear market). Also, analysts’ forecasts 6. Inflection points
for 4% EPS growth this year and – especially – Will export growth start to slow
15% growth next year look too optimistic. Can President Lee Myung-Bak start to implement reforms
Further declines in house prices in Seoul
The success of President Lee Myung-bak’s reform
How much danger of failures among small banks
programme will be a swing factor. After a bad
Will retail investors continue to put money in investment trusts
start – most notably allowing imports of US beef,
Source: HSBC
which provoked daily mass demonstrations – the

7. Sector weightings and Stock screening

Sector Sector weightings Stocks rated Overweight Stocks rated Underweight
Consumer discretionary Underweight Lotte Shopping Co Ltd
Consumer staples Neutral LG Household & Health Car, KT&G
Financials Underweight Dongbu Insurance Co Ltd, Pusan Bank, Shinhan FGL Hyundai Marine & Fire Ins
Healthcare Overweight Yuhan Corp
Industrials Overweight Samsung Techwin Hyundai Heavy Industries
Technology Underweight
Materials Neutral POSCO LG Chemical Limited
Telecoms Underweight KT Freetel
Utilities Neutral
Notes: Stocks shown are those with market cap above USD1bn, where HSBC's analysts have an Overweight or Underweight rating, and where their target price is at least 15% away from the
current stock price. Up to three stocks are shown in each category for each sector.
Source: HSBC

39
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

8. Market performance 9. Further falls

 MSCI Korea has fallen 40% y-t-d in dollar terms
120
 Worst performing sector y-t-d is energy (-43%)
100  Best performing sectors are consumer discretionary (-5%) and consumer
80 staples (-9%)

60

40
Sep-07 Nov -07 Jan-08 Mar-08 May -08 Jul-08 Sep-08
Cy clicals Defensiv e Energy
Financials IT Telecoms
Main index

Source: HSBC

10. Economy 11. HSBC forecasts below consensus

 The consensus real GDP growth forecast for 2008 has been cut to 4.4%, from
5.5% Consensus forecast on Real GDP growth
4.9% at the start of the year
 The consensus forecast for next year is 4.3%
5.0%
 HSBC forecasts 3.9% growth this year and 3.4% growth next

4.5%

4.0%
Dec-05

Dec-06

Dec-07
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

2006 2007 2008 2009

Source: Consensus Economics, HSBC

12. Leading indicators 13. Economic indicators deteriorating

 Korean economic data has deteriorated sharply in the past few months
40 600
 The HSBC Economic Performance Index shows that net 11% of indicators
20 500 have declined over the past three months
0 400  In particular, the Business Confidence Index has fallen to 79 from 92 in May,
and consumer confidence to 91 from 104 at the start of the year
-20 300

-40 200
-60 100
2002 2003 2004 2005 2006 2007 2008
KR Econ Performance Index MSCI KR (RHS)

Source: Bloomberg, MSCI, HSBC

14. Earnings 15. Strong rebound forecast for next year…

Korea  Consensus expects Korean EPS to grow by 4 % in 2008 and 15% in 2009
120
100  This year, the strongest growth is expected from consumer discretionary
80 (+37%)
60  In 2009, strongest growth is forecast for utilities (which are expected to make
% y-o-y

40 zero in 2008) and telecoms (37%%)

20
0
-20
-40
-60
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Source: I/B/E/S, HSBC

40
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

16. Earnings momentum 17. …but downward revisions continue

 Over the past three months, the Korean 2008 EPS forecast has been revised
100
80 down by 8.9% and the 2009 forecast by 9.4%
60  For the current year, the biggest revisions in the past three months have been
40 in IT (-35%) and materials (+17%)
20
0  For next year, the biggest revisions have been utilities (-82%) and materials
-20 (+13%)
-40
-60
-80
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Korea 6-month earning momentum

Note: Earnings momentum = 6-month % change in 12- month forward consensus forecast. Source: HSBC

18. Valuation 19. Cheap – but it has been cheaper in the past
 12-month forward PE has fallen to 9.5x
60x
 That is well below the long-run average of 11.2x, but still well above the low of
45x 5.3x that Korea reached in the 2001-3 bear market
 Price/book has fallen to 1.3x, lowest in Asia ex Japan after Hong Kong. In the
30x last bear market it got to 0.8x
15x

0x
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

20. Sector valuation 21. Mostly in line with history

12-month fw d PE 5-y ear PE mean  Aside from utilities, where earnings are temporarily depressed, the most
60x expensive sectors relative to the past five years are telcos (11.5x v. 9.3x) and
50x consumer staples (16.2x v. 13.6x)
40x  Cheapest sectors relative to history are energy (6.3x v. 8.4x) and industrials
30x (7.9x v. 10.3x)
20x
10x
0x
s
es

s
IT
lco

gy
tap

s
r

ial

l
is c

ial

ria
i

er
Te
ilit

st r
.s

nc
.d

ate

En
Ut

du
ns

na
ns

M
Co

In

Fi
Co

Source: I/B/E/S, HSBC

22. Foreign flows 23. The selling goes on

 Over the past two years, foreign investors have sold USD59bn net of Korean
40 stocks
20  The selling has accelerated in recent months, with net sales of USD10bn in
July-September alone
USDbn

0  Domestic equity investment trusts were supporting the market, but their net
-20 inflows have slowed to a trickle, with September likely to see net outflows for
the first time since April 2007
-40
-60
Dec-03

Dec-04

Dec-05

Dec-06

Dec-07
Mar-04
Jun-04
Sep-04

Mar-05
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

Source: Bloomberg, HSBC

41
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

China (overweight)
 Pro-growth and pro-market policymaking could provide downside
protection, though market valuation isn’t rock bottom yet
 MSCI China 2008 target revised down to 48 and 2009 target to 60
 Regulatory risk, earnings visibility and share buybacks are key
considerations for sector allocation

Investors’ dilemma government’s decision to cut stock trading stamp

duty and increase its holdings in A-share listed
In spite of resilient economic growth, Chinese
state-owned enterprises. Notably, the PBoC also
equity markets have been in free-fall this year,
made a pre-emptive move to cut the benchmark
crippled by the once-in-a-century US financial
lending rate, and the reserve requirement ratio for
crisis. The valuation of MSCI China dropped
smaller banks, in order to cushion against
below 9x on 12-month consensus forward PE
downside growth risk.
basis during intraday trading on 17 September,
down 65% from its peak level last October and Investors are left in a dilemma: in the short term,
close to previous market bottoms in 1997 and risk aversion will probably continue and analysts’
2003. But sentiment appears to have bottomed out earnings forecasts are subject to further downward
after the announcement of the US government’s revisions; but valuation has become quite
USD700bn bailout plan and the Chinese attractive from both a historical and regional

Key financial and economic forecasts

1. Returns (%, USD) 2. Economic forecast 3. Valuation
MSCI China HSCEI 2008 2009 2008 2009
3-month -25.7 -23.8 GDP growth (%) 9.7 9.1 PE (x) 10.6 9.1
6-month -30.8 -27.0 Consumer prices (%) 6.7 4.2 P/B (x) 1.9 1.7
12-month -48.0 -46.7 CNY/ USD 6.9 6.5 Dividend yield (%) 3.3 3.8
24-month -8.3 2.7 Short interest rate (%) 3.3 2.7 Implied growth (%) 8.7
Implied COE (%) 12.0

4. Q3 2008 sector performance (%) 5. Earnings (%)

Absolute Relative 2008 2009
Financials -18.2 3.6 Earnings growth (y-o-y) 13.3 16.6
Technology -18.6 3.2 ROE 18.0 18.3
Defensives -22.9 -1.2 ROA 2.8 3.0
Telecom -25.3 -3.5 Net debt/ equity ratio -42.9 -48.1
Energy -29.3 -7.6
Cyclicals -35.0 -13.2
Notes: Performance for Q3 2008 is up to 30 Sep 2008. Implied growth is derived from a 3-stage NPV analysis based on earnings stream: the first stage is 2 years of I/B/E/S earnings forecasts; the final stage is perpetual growth of 2.5-
8% depending on the country; implied growth is calculated for years 3-10. COE is derived from a weighted average of USD bonds with the same credit rating as the country, local 10-year government bond yields and an equity risk
premium. MXAP = MSCI Asia Pacific index
Source: HSBC, I/B/E/S

42
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

comparison perspective, and the long-term growth regulations to balance growth of strong and weak
profile of China remains intact. We revise down players; iii) temporary price caps for coal to help
our end-2008 index target for MSCI China to 48 IPPs; and iv) highly-regulated oil and electricity
from 70, or largely flat to year-end. We derive this prices to subsidise manufacturers, though these
by adding 150bps to our usual cost of equity of subsidies could be removed gradually going
11.5% to take into account higher risk perception, forward. Second, consumer staple, telecom and
and assume only 10% EPS growth in 2009 (versus banking sectors appear most vulnerable to
consensus of 18%). Our end-2009 target is revised earnings revision post 3Q08 results. Last, we in
to 60, giving 25% upside in 2009, on the grounds general prefer big-cap SOEs due to their stronger
that risk premiums should normalise. financial position, better trading liquidity and
higher possibility for share buybacks or increase
Investors need to closely monitor: i) the scope and
of shareholding by controlling shareholders.
scale of a possible fiscal stimulus package for
2009; ii) the overall credit quota and credit policy For the three index heavyweights, we downgrade
in the property sector; iii) financial innovations financials to neutral, and retain overweight energy
such as margin trading, short-selling and onshore and neutral telecoms. We see more risk of a
index futures in the A-share market; and iv) share slowdown in consumption than in fixed-asset
buybacks or increased shareholdings by investment, so we end the overweight on consumer
controlling shareholders such as Central Huijin, staples and downgrade to underweight. We upgrade
PetroChina, China Unicom, China Coal and both industrials and materials to overweight from
Tsingtao Beer group companies. underweight, due to attractive valuations, gradually
easing raw materials costs and probable financial
Sectors and stocks
stimulus package that will spur infrastructure
In addition to valuation – where we now focus spending.
more on PB than on PE – the three key
considerations for our sector allocations and stock 6. Inflection points
picks are regulatory risk, earnings visibility and Party plenary session in early October – land reform bill
share buybacks. First, the Chinese government is 3Q08 macroeconomic statistics to be announced in mid-October
very hands-on, micro-managing profits of state- National Economic Conference in Dec. – fiscal/monetary policies
owned enterprises. For instance: i) asymmetrical Financial innovation in A-share market in 4Q08
rate cuts/hikes to shift profits between banks and Source: HSBC

non-financial sectors; ii) asymmetrical telecom

7. Sector weightings and Stock screening

Sector Sector weightings Stocks rated Overweight Stocks rated Underweight
Consumer discretionary Underweight
Consumer staples Underweight Li Ning Co Ltd., China Yurun Food
Energy Overweight Sinopec, CNOOC Ltd., PetroChina
Financials Neutral CIIH, China Citic Bank, Industrial Com Bank Of Ch PICC Property & Casualty
Healthcare
Industrials Overweight China COSCO Holdings Co, Shanghai Electric Group, China Eastern Airlines-A, China Southern
Dongfang Electric Corp Airlines-A, China State Shipbuilding
Technology Underweight Lenovo Group Ltd
Materials Overweight Maanshan Iron & Steel, Yanzhou Coal Mining Co Lt
Telecoms Neutral China Mobile LTD
Utilities Neutral Xinao Gas, Datang Power, China Resources Power
Notes: Stocks shown are those with market cap above USD1bn, where HSBC's analysts have an Overweight or Underweight rating, and where their target price is at least 15% away from the
current stock price. Up to three stocks are shown in each category for each sector.
Source: HSBC

43
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

8. Market performance 9. Testing the baseline

 MSCI China slumped to a 22-month low, or 47% down from the peak of last
130
October, but the latest government actions are likely to set a baseline to the
110 market
90  Technology, financials and defensives led the market; telecom and energy
70 were in line; cyclicals lagged
50  Helped by the government’s intention to purchase shares of the three largest
banks, financials ended up down only 14% last quarter, compared to a 19%
30 fall for the main index
Sep-07 Nov -07 Jan-08 Mar-08 May -08 Jul-08 Sep-08
Cy clicals Defensiv e Energy
Financials IT Telecoms
Main index

Source: HSBC

10. Economy 11. 2008 GDP revised down

 China’s economy grew 10.4% in the first half of this year, a sharp slowdown
12% Consensus forecast on Real GDP growth
from 11.95% in the first half of last year
11%  The current consensus for 2008 GDP growth is 9.9%, which has been revised
10% down slightly from 10.1% forecast in June
9%  HSBC forecasts GDP growth at 9.7% for 2008

8%
7%
Dec-05

Dec-06

Dec-07
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

2006 2007 2008 2009

Source: Consensus Economics, HSBC

12. Leading indicators 13. Pre-emptive move

 Economic performance has stayed roughly steady amid the continued decline
140 110
in the stock market
120
90  Government started easing monetary policy as a pre-emptive move to limit
100 further downside risk of the economy
80 70
 Other growth figures, such as exports, retail sales and fixed asset investment,
60 50 stay above 10%
40
30
20
0 10
2002 2003 2004 2005 2006 2007 2008
CH Econ Performance Index MSCI CH (RHS)

Source: Bloomberg, MSCI, HSBC

14. Earnings 15. Worries about profitability

China  Currently, analysts forecast 13.3% and 16.6% EPS growth for 2008 and 2009,
100
respectively
80
60  Over the past quarter, the forecast for 2008 has been revised down from
40 16.5% and that for 2009 from 18.0% due to a tougher business environment
and worries about the impact of the US financial crisis
% y-o-y

20
0  Sector-wise, consumer staples and IT are forecast to have the highest growth
-20 rates, and industrials and utilities the lowest
-40
-60
-80
1995 1997 1999 2001 2003 2005 2007 2009

Source: I/B/E/S, HSBC

44
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

16. Earnings momentum 17. Earnings momentum abated

 Earnings momentum has been sluggish since the peak last November, and
40
there is no sign of a swift recovery
20
 Consumer staples, financials and telecoms exhibit the strongest earnings
0 momentum, with utilities and consumer discretionary the weakest
-20
 This kind of low level of momentum was seen at the end of 2006. In an
-40 environment of more expansionary policies, forward earnings may slowly
-60 improve in coming quarters
-80
Sep-96

Sep-97

Sep-98

Sep-99

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

China 6-month earning momentum Sep-08

Note: Earnings momentum = 6-month % change in 12- month forward consensus forecast. Source: HSBC

18. Valuation 19. Market derated further

 PE plummeted to 10.5x in September, a month-end level the market last saw
40x
in late 2005
35x
30x  The number briefly touched 9.0x on September 17 but quickly rebounded,
25x shored up by US bail-out news and Chinese market-support measures
20x  The current valuation is lower than most markets in the region, except
15x Indonesia, Thailand and Korea
10x
5x
Sep-96

Sep-97

Sep-98

Sep-99

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

12-month fw d PE

Source: HSBC

20. Sector valuation 21. Financials under pressure

12-month fw d PE 5-y ear PE mean  Financials, industrials, materials and consumer staples have been sharply
30x
derailed from their five-year averages. Consumer staples suffered from recent
25x food safety news, and financials have seen continued selling pressure
20x  IT trades about 48% above its five-year average
15x
 Other sectors, such as energy and telecoms, are rated around their averages,
10x reflecting a mean reversion pattern
5x
0x
s
IT

ies

s
lco

gy
s
tap

ial

l
is c

ial

ria
er
Te
ilit

str
.s

nc

ate
.d

En
Ut

du
ns

na
ns

M
In
Co

Fi
Co

Source: I/B/E/S, HSBC

22. Foreign flows 23. Ebbs and flows

 Since the beginning of this year, global mutual funds have sold Chinese
20
equities at net value of USD4.9bn
15  A net buy of USD0.36bn occurred in July, yet not significant enough to reverse
the downward course
USDbn

10  Foreign flows accounted for over 40% of the Hong Kong market’s turnover in
2007
5

0
Oct-04

Oct-05

Oct-06

Oct-07
Apr-04
Jul-04

Jan-05
Apr-05
Jul-05

Jan-06
Apr-06
Jul-06

Jan-07
Apr-07
Jul-07

Jan-08
Apr-08
Jul-08

Source: EPFR, HSBC

45
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Taiwan (underweight)
 Taiwan was the worst performing market in Asia in Q2
 Risks remain high: we expect foreigners to continue to sell,
confidence to weaken further, and earnings to be revised down
 We forecast TAIEX to end 2008 at 5500 and recommend
defensive sectors such as materials, energy and telecoms

Further to fall ordering the National Stabilization Fund, which

has funds of TWD500bn, to buy stocks.
TAIEX fell 23% in Q3. It is easy to blame this on
the financial turmoil in the US, but Taiwan The market rebounded somewhat on news of a
underperformed the S&P500 by as much as 14%. bail-out for US financial institutions. But we do
What made investors particularly nervous was not think this is sustainable and expect the market
that the Taiwanese government pulled everything to fall further. Why?
out of its tool box to prop up the market, but in
 Foreign selling is likely to continue. The
vain. The government introduced a stream of
market value of foreign holdings of
measures in an attempt to stabilise the market.
Taiwanese stocks totals USD152bn. Given
These included a ban on shorting stocks, relaxing
the average daily pace of net sales by
the capital adequacy ratio for financial holding
foreigners in Q3, USD105m, it takes two
companies so more could buy back shares, and

Key financial and economic forecasts

1. Returns (%, USD) 2. Economic forecast 3. Valuation
MSCI Taiwan TSE 2008 2009 2008 2009
3-month -28.1 -24.0 GDP growth (%) 3.9 3.3 PE (x) 12.1 10.8
6-month -36.2 -33.7 Consumer prices (%) 4.2 3.7 P/B (x) 1.4 1.3
12-month -37.6 -39.2 TWD/ USD 31.1 32.2 Dividend yield (%) 6.0 6.1
24-month -19.6 -16.9 Short interest rate (%) 2.3 2.2 Implied growth (%) -3.7
Implied COE (%) 9.4

4. Q3 2008 sector performance (%) 5. Earnings (%)

Absolute Rel to MXAP 2008 2009
Telecom -12.5 9.2 Earnings growth (y-o-y) -20.2 12.1
Energy -13.3 8.5 ROE 11.2 11.9
Defensives -19.9 1.9 ROA 1.7 2.8
Technology -24.2 -2.4 Net debt/ equity ratio -6.8 -8.2
Cyclicals -35.5 -13.7
Financials -37.4 -15.6
Notes: Performance for Q3 2008 is up to 30 Sep 2008. Implied growth is derived from a 3-stage NPV analysis based on earnings stream: the first stage is 2 years of I/B/E/S earnings forecasts; the final stage is perpetual growth of 2.5-
8% depending on the country; implied growth is calculated for years 3-10. COE is derived from a weighted average of USD bonds with the same credit rating as the country, local 10-year government bond yields and an equity risk
premium. MXAP = MSCI Asia Pacific index
Source: HSBC, I/B/E/S

46
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

years to liquidate that position. Foreign forecasts are likely to have significant
selling abated a little in September, but this downward revisions in October when pre-
was misleading: during the most bearish announcements start for Q3 results and
phase, foreigners who wanted to sell were companies give more guidance on the 2009
unable to do so because many stocks fell by outlook.
their 7% daily price fluctuation limits. We
Sectors and stocks
believe foreign selling will intensify if stock
prices recover. In such a risky environment, we recommend
investors stay defensive and pick sectors that have
 Confidence is deteriorating. President Ma’s
high dividend yields, attractive valuations, low
approval rating has dropped to 25% and his
exposure to exports and sound balance sheets, in
disapproval rating has risen to 48%,
particular materials, energy and telecoms.
according to a survey by Taiwan News in
September. As a point of reference, when The rapid slowing of exports and delays in
President Chen was about to leave office in implementing infrastructure projects have
May after a series of scandals, his approval dampened the outlook for employment and
rating was 18%, not a lot lower than Ma’s consequently for domestic consumption. As a
current rating. Domestic investors have lost result, we downgrade retail from overweight to
confidence in the stock market, too. As an underweight. We remain underweight on
indicator of this, outstanding margin long financials, industrials and technology due to the
positions as a percentage of daily turnover unfavourable global environment.
have dropped from 81% in July 2007 to only
29% this August.

 Further downward earnings revisions are

likely. The consensus earnings growth 6. Inflection points

forecast for 2008 was revised down by 9% in Trend of export growth

August and a further 7% in September, Earnings season starting in late October

bringing it to -20%. All sectors except Second round of negotiations with Beijing in November
Source: HSBC
telecoms were revised down. But 2009
earnings growth is still forecast to be 12%,
unrealistically high in our view. Next year’s

7. Sector weightings and Stock screening

Sector Sector weightings Stocks rated Overweight Stocks rated Underweight
Consumer discretionary Underweight
Consumer staples Underweight
Energy Overweight
Financials Underweight Fubon FHC
Healthcare
Industrials Underweight
Technology Underweight Wistron Corporation, Asustek, Acer High Tech Computer
Materials Overweight Nanya Plastics, China Steel Corp
Telecoms Overweight
Utilities
Notes: Stocks shown are those with market cap above USD1bn, where HSBC's analysts have an Overweight or Underweight rating, and where their target price is at least 15% away from the
current stock price. Up to three stocks are shown in each category for each sector.
Source: HSBC

47
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

8. Market performance 9. Following the US

 MSCI Taiwan dropped 26% in Q3
150
 Materials and financials both dropped 34%, technology dropped 21%
130
 Telecoms held up best, dropping only 9% in Q3
110
90
70
50
Sep-07 Nov -07 Jan-08 Mar-08 May -08 Jul-08 Sep-08
Cy clicals Defensiv e Financials
IT Telecoms Energy
Main Index
Source: HSBC

10. Economy 11. Further GDP downgrades likely

 Consensus GDP growth is forecast to be 4.3% in 2008 and 4.4% in 2009
5.5% Consensus forecast on Real GDP growth
 HSBC economics team forecasts GDP growth of 3.9% and 3.5% for 2008 and
5.0% 2009 respectively
 Our revised forecasts are a significant downgrade from the original forecasts
4.5% of 4.9% in 2008 and 5.2% in 2009
4.0%

3.5%
Dec-05

Dec-06

Dec-07
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

2006 2007 2008 2009

Source: Consensus Economics, HSBC

12. Leading indicators 13. Economy turning sour

 Our Economic Performance Index has dropped precipitately
100 400
 Although inflation is contained at 4.8%, exports are growing at the slowest
80 350 pace in five years, only 5.4% y-o-y in August
300  We expect consensus GDP growth forecasts to be revised down further given
60
250 the sluggish domestic demand and deteriorating export growth expected in
40 coming months
200
20 150
0 100
2002 2003 2004 2005 2006 2007 2008
TW Econ Performance Index MSCI TW (RHS)

Source: Bloomberg, MSCI, HSBC

14. Earnings 15. Earnings growth slowdown

Taiw an  Earnings are expected to contract by 20% in 2008

60
50  However, we expect the upcoming earnings season to be even gloomier and
40 think analysts will revise down their forecasts further
30  Analysts still expect 12% earnings growth in 2009, which is unachievable in
% y-o-y

20 our view
10
0
-10
-20
-30
-40
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Source: I/B/E/S, HSBC

48
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

16. Earnings momentum 17. Weakest earnings momentum in Asia ex Japan

 Taiwan’s earnings momentum has been in negative territory for the past eight
50
months
30  It is the weakest among all Asia ex Japan markets
10  Momentum for all sectors has turned negative, with industrials the weakest
sector
-10
-30
-50
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Taiw an 6-month earning momentum Sep-08

Note: Earnings momentum = 6-month % change in 12- month forward consensus forecast. Source: HSBC

18. Valuation 19. PE in the middle among Asia ex Japan peers

 MSCI Taiwan 12-month forward PE is 11x, cheap compared to history but
65x
right in the middle among other markets in Asia ex Japan
55x
 Consumer staples is the most expensive sector, at 16x 12-month forward PE.
45x Materials is the cheapest sector, at 8x 12-month forward PE
35x  Since Taiwan is the most cyclical market in Asia, the mediocre valuation does
25x not present a buying opportunity yet in our view
15x
5x
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

20. Sector valuation 21. Reverting to five-year mean

12-month fw d PE 5-y ear PE mean  Most sectors are trading roughly at their five-year mean
20x
 Financials and tech are slightly below mean, but we expect further declines in
15x these sectors given the unstable global environment
 Materials has the lowest valuation (8x) and the highest dividend yield (10%). It
10x is our favourite defensive pick
5x

0x
s

IT

ls
lco
tap

r
ial

is c
ial

ria
Te
st r
.s

nc

.d

ate
du
ns

na

ns

M
Co

In

Fi

Co

Source: I/B/E/S, HSBC

22. Foreign flows 23. Foreign fund outflows to continue

 Foreign investors sold TWD202bn worth of equities during 3Q08
70
 But they have so far sold only 22% of the funds they put into Taiwan in 2003-7
60
50  Total market value of foreign holdings is TWD5tn, or USD152bn, so there is
still plenty of room for foreigners to sell more
USDbn

40
30
20
10
0
Dec-04

Dec-05

Dec-06

Dec-07
Jun-04
Sep-04

Mar-05
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

Source: Bloomberg, HSBC

49
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Hong Kong (neutral)

 MSCI Hong Kong is a mixed bag: property prices are likely to fall
10%, and liquidity to dry up a little as expectations of RMB
appreciation recede
 But Fed rate cuts, continued strong China growth and Hong
Kong’s defensive nature limit the downside risk
 We cut our Hang Seng Index targets to 18,000 for 2008 and
22,000 for 2009, but remain neutral

Stay defensive at 3.2%, is expected to edge up in coming months.

Hong Kong’s macroeconomic situation has been a Investors’ two major concerns on MSCI Hong
mixed bag this year: i) economic activity has Kong are: i) how severe is the risk of asset price
started to slow, with real GDP growth declining to deflation, given the widely expected strength of
4.2% in 2Q and a forecast 5.1% in 3Q, down from the USD and the fact that the property sector
7.3% in 1Q; ii) headline CPI eased to 4.6% y-o-y represents close to 40% of index weight; and ii)
in August from 6.3% in July, but all due to could further liquidity be withdrawn from Hong
government subsidies; and iii) the job market Kong, given the concerns about China’s economy
remained robust in August despite global slowing and the fact that speculation on RMB
economic fluctuations, but the unemployment rate, appreciation has cooled substantially?

Key financial and economic forecasts

1. Returns (%, USD) 2. Economic forecast 3. Valuation
MSCI Hong Kong HSI 2008 2009 2008 2009
3-month -23.5 -18.5 GDP growth (%) 4.5 3.9 PE (x) 12.6 11.7
6-month -28.2 -22.6 Consumer prices (%) 4.8 5.0 P/B (x) 1.2 1.1
12-month -37.5 -33.6 HKD/ USD 7.8 7.8 Dividend yield (%) 3.5 3.8
24-month -8.3 2.7 Short interest rate (%) 2.2 1.9 Implied growth (%) 6.4
Implied COE (%) 8.1

4. Q3 2008 sector performance (%) 5. Earnings (%)

Absolute Rel to MXAP 2008 2009
Defensives -2.7 19.0 Earnings growth (y-o-y) -26.1 8.3
Financials -24.1 -2.4 ROE 9.3 9.5
Telecom -25.8 -4.0 ROA 2.5 3.3
Cyclicals -27.5 -5.7 Net debt/ equity ratio 12.1 10.4
Technology -35.8 -14.0
Notes: Performance for Q3 2008 is up to 30 Sep 2008. Implied growth is derived from a 3-stage NPV analysis based on earnings stream: the first stage is 2 years of I/B/E/S earnings forecasts; the final stage is perpetual growth of 2.5-
8% depending on the country; implied growth is calculated for years 3-10. COE is derived from a weighted average of USD bonds with the same credit rating as the country, local 10-year government bond yields and an equity risk
premium. MXAP = MSCI Asia Pacific index
Source: HSBC, I/B/E/S

50
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Our property analysts forecast a 10-15% Sectors and stocks

correction in property prices in Hong Kong, but
We are defensive in sector allocation: overweight
they don’t believe a property market meltdown is
telecoms, REITs and industrials; neutral on
likely. The favourable supply and demand
utilities and banks; and underweight property
situation should help limit downside risk.
developers, IT and consumer discretionary.
Moreover, our US economists expect the Fed
funds rate to be cut by 100bps in 2009. This Utilities and telecoms have been relative
implies banks in Hong Kong are unlikely to raise outperformers since the market peaked last
rates and our Hong Kong economists now expect October, and we continue to expect that these
Hong Kong lending and saving rates to stay blue-chip companies will prove to be a shelter for
unchanged in 2009, at 5.25% and 0.01% investors in the bear market, given the high
respectively, which should also help property dividend yield protection and experienced
transaction volume. managements that have gone through many
difficult cycles in the past decades. Between the
China’s GDP growth is likely to stay above 9.5%
two, we prefer telecoms over utilities due to lower
in the coming years, cushioned by the PBoC’s pre-
valuations and better growth profiles.
emptive easing, plus likely fiscal stimulus policies
such as tax rebates on exports and equipment HK-listed REITs continue to offer the best value
investment. Hence, our China economists continue in the market (yielding 5-10%) except that trading
to expect moderate RMB appreciation against the liquidity is thin. We prefer property investors to
USD of about 5% annually. developers.

Raising our cost of equity assumption by150bps In addition to positive earnings revision
to 12% due to higher equity risk and assuming 5% momentum, we also overweight industrials for
EPS growth in 2009 (versus the consensus 12%), similar consideration of low valuation, high
we revise our end-2008 Hang Seng index target dividend yield and good corporate management.
down to 18,000 from 24,000, or largely flat by Liquidity, loan growth and credit quality concerns
year-end. We revise our end-2009 target to 22,000 on banks appear overplayed and we prefer big
from 25,000, giving 20% upside in 2009, on the local banks that are traded at attractive valuations.
grounds that the risk premium is likely to
normalise and growth concerns on China abate.

7. Sector weightings and Stock screening

Sector Sector weightings Stocks rated Overweight Stocks rated Underweight
Consumer discretionary Underweight
Consumer staples n.a.
Energy Underweight
Financials Neutral Sino Land Company Ltd, Champion REIT, Hang Lung
Properties, Bank of China (HK), Swire Pacific
Healthcare n.a.
Industrials Overweight Pacific Basin Shipping, HAECO, Cathay Pacific
Technology Underweight
Materials Underweight
Telecoms Overweight PCCW
Utilities Neutral Hong Kong & China Gas
Notes: Stocks shown are those with market cap above USD1bn, where HSBC's analysts have an Overweight or Underweight rating, and where their target price is at least 15% away from the
current stock price. Up to three stocks are shown in each category for each sector.
Source: HSBC

51
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

8. Market performance 9. Vulnerable to the turmoil

 The market further tumbled amid the aggravated US financial turmoil. MSCI
130
Hong Kong index shed 19% in the past quarter, and 34% year to date
110  Defensives kept outperforming the market, with only a 5% drop in the past
quarter, while technology and cyclicals underperformed
90
 Financials and telecoms ran in line with the market, sliding 17% and 19%
70 respectively during the past quarter

50
Sep-07 Nov -07 Jan-08 Mar-08 May -08 Jul-08 Sep-08
Cy clicals Defensiv e Financials
IT Telecoms Main index

Source: HSBC

10. Economy 11. 2008 GDP revised down

 Hong Kong's GDP growth slowed to 4.2% y-o-y in 2Q from 7.3% in 1Q, or
7% Consensus forecast on Real GDP growth
5.8% for the first half of this year
 Consensus revised down 2008 growth to 4.4% from the 4.9% forecast last
6% quarter
 HSBC forecasts 4.5% GDP growth for the full year 2008
5%

4%
Jan-05

Sep-05

Jan-06

Sep-06

Jan-07

Sep-07

Jan-08

Sep-08
May-05

May-06

May-07

May-08

2006 2007 2008 2009

Source: Consensus Economics, HSBC

12. Leading indicators 13. Macroeconomic situation a mixed bag

 The stock index took a hit amid a harsh environment overseas and gloomy
60 16100
China markets
40 14100  CPI headline inflation eased to 4.6% y-o-y in August from 6.3% in July, but
12100 mainly due to government subsidies
20
10100  Job market remains robust despite global economic fluctuations. But the
0 unemployment rate is expected to edge up in coming months
8100
-20 6100
-40 4100
2002 2003 2004 2005 2006 2007 2008
HK Econ Performance Index MSCI HK (RHS)

Source: Bloomberg, MSCI, HSBC

14. Earnings 15. Growing profit remains challenging

Hong Kong  Earnings growth in 2008 and 2009 are forecast to be -26.1% and 8.3%, with
70
the 2008 number distorted by Hutchison’s telecom deal last year
50  Excluding extraordinary items, aggregate earnings would still slide by about
30 5% in 2008
% y-o-y

 We expect more earnings downgrades to come as the property market

10 corrects: 2009 earnings growth could end up largely flat
-10
-30
-50
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Source: I/B/E/S, HSBC

52
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

16. Earnings momentum 17. Earnings momentum deteriorated

30  Forward earnings momentum, which picked up in Q2, fell back to single digits
in Q3
20
 Sector-wise, IT and industrials exhibited the strongest momentum, with 12-
10 month forward EPS revised up 37% and 23% from six months ago
0  Utilities and materials were the most sluggish sectors, whereas financials and
-10 telecoms moved in line with the overall market
-20
-30
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Hong Kong 6-m onth earning m om entum

Note: Earnings momentum = 6-month % change in 12- month forward consensus forecast. Source: HSBC

18. Valuation 19. PE close to SARS bottom

 PE dived further to 13x, well below its five year average of 16.5x, and
25x
representing a 40% de-rating since the start of the year
20x  The current level is very close to the bottom in 2003, when the city was struck
by the SARS epidemic
15x  Nevertheless, it is still expensive compared to other countries in the region,
being lower only than Japan and India
10x

5x
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

20. Sector valuation 21. Rewards for the defensive

12-month fw d PE 5-y ear PE mean  Industrials, consumer discretionary and IT are obviously derated from their
30x
five-year means due to the concern about cyclicals’ profitability
25x
 Utilities is rewarded with a valuation premium for its defensive characteristics
20x in the bear market
15x  Telecoms is a little above and financials slightly below their five-year means
10x
5x
0x
Utilities

Industrials

IT
Telco

Financials

Cons.
discr

Source: I/B/E/S, HSBC

22. Foreign flows 23. Flee or return

7  Global mutual funds have pulled a total of USD4.4bn from this market since
the beginning of 2008
6
 In July there was small net buying worth USD0.25bn, but this may not be
5 substantial enough to reverse the selling momentum
USDbn

4  Funds are likely to return only when the global investment environment
3 approaches stability
2
1
0
Oct-03

Oct-04

Oct-05

Oct-06

Oct-07
Apr-03
Jul-03

Jan-04
Apr-04
Jul-04

Jan-05
Apr-05
Jul-05

Jan-06
Apr-06
Jul-06

Jan-07
Apr-07
Jul-07

Jan-08
Apr-08
Jul-08

Source: EPFR, HSBC

53
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

India (neutral)
 Concerns remain: global risk aversion, slowing earnings, politics
 But high cash levels and lower valuations should cap downside
 We raise to neutral; Sensex to recover to 15,000 by end-09

The bad news and the good although the decline in commodity prices may
help stabilise margins. This means that, in our
The Indian economy continues to face headwinds,
view, corporate earnings are likely to be
which means the stock market will struggle.
under pressure for four to six quarters. A
 Global risk aversion remains high. Foreign pick-up in earnings growth is likely only
investors sold USD2bn of Indian shares in towards end of CY2009.
September and USD9bn y-t-d.
 Political uncertainties. A general election is
 There has been a significant slowdown in due in May 2009. This is likely to keep
corporate earnings over the past two markets nervous and cap a rally. The shape of
quarters: for the quarter ending June 2008, net the government that emerges after the
income of NSE-listed companies grew 8.8% elections can be a trigger for markets.
y-o-y. Corporate margins are under pressure:
Set against this, however, are a number of positive
EBTDA margins, at 17%, are at the lowest in
factors which we think will limit the downside
three years. Looking ahead, the effects of RBI
risk for India, at least relative to other markets in
monetary tightening will hurt top-line growth,

Key financial and economic forecasts

1. Returns (%, USD) 2. Economic forecast 3. Valuation
MSCI India SENSEX 2008 2009 2008 2009
3-month -14.4 -4.5 GDP growth (%) 7.5 7.3 PE (x) 13.6 11.0
6-month -35.2 -21.5 Consumer prices (%) 8.1 7.5 P/B (x) 2.4 2.0
12-month -38.5 -25.6 INR/ USD 43.3 43.8 Dividend yield (%) 1.7 1.9
24-month -0.8 3.3 Short interest rate (%) 8.9 9.3 Implied growth (%) 19.5
Implied COE (%) 11.4

4. 3Q08 sector performance (%) 5. Earnings (%)

Absolute Relative 2008 2009
Defensives -5.9 15.9 Earnings growth (y-o-y) 19.3 23.2
Financials -7.0 14.8 ROE 17.9 18.5
Energy -11.4 10.4 ROA 5.7 5.9
Cyclicals -16.6 5.1 Net debt/ equity ratio 23.6 12.8
Telecom -27.6 -5.9
Technology -28.7 -7.0
Notes: Performance figures for 3Q08 are updated to 30 Sep 2008. Implied growth is derived from a 3-stage NPV analysis based on earnings stream: the first stage is 2 years of I/B/E/S earnings forecasts; the final stage is perpetual
growth of 2.5-8% depending on the country; implied growth is calculated for years 3-10. COE is derived from a weighted average of USD bonds with the same credit rating as the country, local 10-year government bond yields and an
equity risk premium. MXAP = MSCI Asia Pacific index
Source: HSBC, I/B/E/S

54
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

the region, and could lead to a sharp rebound next sales have held up in 2008, with August being
year once global risk aversion declines. the first month with a (small) negative flow.
Fund managers have been cautious in
 The capex pipeline remains strong at
investing in the market; as a result, cash
USD250bn for listed companies, which will
levels are high, at 14% of assets.
help support earnings growth.
Sectors and stocks
 Monetary policy is likely to be eased in
2009: our economics team is looking for a cut We maintain underweight on the consumer
of 100bps in the during the year starting in the discretionary sector. We are underweight on
first quarter, which is a trigger for markets. materials, as slowing global growth will impact
top-line growth, and neutral on energy, since
 Historically, Indian companies have the lowest
Indian oil marketing companies gain as crude oil
volatility of earnings growth at 12% vs. 43%
prices fall. Consumer staples and healthcare
for the emerging market universe, indicating
have defensive characteristics, but valuations are
(relatively) lower earnings risk. There is good
high compared to growth prospects, so we are
reason to believe that earnings in India will be
neutral. We maintain underweight on utilities,
more resilient than for global peers due to the
and have downgraded IT to neutral reflecting
more diversified nature of the market, lower
concerns about the fate of outsourcing business
exposure to commodities and low debt levels.
from troubled US financial firms. Financials
We look for 5-10% EPS growth this fiscal year
remains our key underweight, as banks are likely
and 10-15% EPS growth next, lower than the
to be hurt by rising NPLs and stress on margins.
11% and 23% currently forecast by the
Industrials and telecoms remain our key
consensus, but nonetheless decent.
overweights.
 Prospective PE, at 13x, is not ultra-cheap, but
in terms of PEG, India is at a 6% discount to 6. Inflection points

emerging markets, while historically it has RBI monetary policy meeting

traded at a premium of 25%. General elections

Impact of trouble in US financial sector on outsourcing firms
 Domestic investors’ support for the market Source: HSBC

remains a supportive factor. Mutual fund

7. Sector weightings and Stock screening

Sector Sector weightings Stocks rated Overweight Stocks rated Underweight
Consumer discretionary Underweight Mahindra & Mahindra, Titan Industries Ltd
Consumer staples Neutral Dabur India
Energy Neutral Welspun Gujarat Stahl Roh, Hindustan Petroleum,
Reliance Industries
Financials Underweight Indiabulls Real Estate, Housing Development & Inf,
Bank of Baroda
Healthcare Neutral Dr. Reddy's Lab.
Industrials Overweight BHEL, Punj Lloyd Limited, Larsen & Toubro
Technology Neutral
Materials Underweight
Telecoms Overweight Idea Cellular Ltd, Bharti Airtel Tata Communications
Utilities Underweight Tata Power Reliance Infrastructure
Notes: Stocks shown are those with market cap above USD1bn, where HSBC's analysts have an Overweight or Underweight rating, and where their target price is at least 15% away from the
current stock price. Up to three stocks are shown in each category for each sector.
Source: HSBC

55
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

8. Market performance 9. Market decline across the board…

 All sectors down compared to one year ago
150
 Defensives, notably healthcare and consumer staples, have outperformed the
130
wider market
110  Cyclicals and telecoms have underperformed
90
70
50
Sep-07 Nov -07 Jan-08 Mar-08 May -08 Jul-08 Sep-08
Cy clicals Defensiv e Energy
Financials IT Telecoms
Main index

Source: HSBC

10. Economy 11. …accompanied by fall in growth projections

9% Consensus forecast on Real GDP growth  Consensus GDP growth projections for 2008 are down from 8.2% last year to
7.5%
 Consensus GDP forecast for 2009 cut to 7.6% from 8% six months ago.
8%
HSBC forecast is 7.1% for CY2009e
 Lower growth projections reflect the effect of a tighter monetary policy.]
7%

6%
Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08
Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

2006 2007 2008 2009

Source: HSBC

12. Leading indicators 13. Leading indicators turning flat

 Economic performance remains robust
25 1010
 Clear signs of slowdown; last quarter’s GDP growth was the lowest since
20 810 2005
15
610
10
410
5
0 210

-5 10
2002 2003 2004 2005 2006 2007 2008
IN Econ Performance Index MSCI IN (RHS)

Source: HSBC

14. Earnings 15. Earnings growth projections optimistic

India  Consensus earnings growth estimates for CY2008 (19%) and CY2010 (23%)
35
look too optimistic; earnings growth averaged 23% during the recent boom
 We expect consensus to revise down these forecasts in coming months
25
 We expect earnings growth of about 10% over the next two years
% y-o-y

15

-5
1994 1996 1998 2000 2002 2004 2006 2008

Source: HSBC

56
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

16. Earnings momentum 17. Earnings momentum losing steam

 Consensus EPS for CY2008 revised down by 3.4% in the past six months;
30
forecast EPS for CY2009 revised down by 4.1% over the same period
20  We expect even slower momentum in the coming months
10
0
-10
-20
Sep-95
Sep-96

Sep-97
Sep-98

Sep-99
Sep-00

Sep-01
Sep-02

Sep-03
Sep-04

Sep-05
Sep-06

Sep-07

India 6-month earning momentum Sep-08

Source: HSBC

18. Valuation 19. Valuations reasonable…

 MSCI India at close to 13x is slightly lower than the historical average of 13.4x
25x
 Earnings forecasts may trend lower; de-rating a sign of concern over earnings
20x growth
 Valuations not cheap yet
15x

10x

5x
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

20. Sector valuation 21. …across the board

12-month fw d PE 5-y ear PE mean  With the exception of industrials, all sectors are close to their five-year mean
25x
 IT and consumer discretionary significantly below the five-year mean
20x
 De-rating of IT reflects concern over the US financial sector
15x
10x
5x
0x
s

IT

ies

ls
re

lco

C o r gy
tap

r
ial

is c
ial

ria
ca

Te
ilit
st r

e
.s

nc

.d

ate
En
Ut
h
du
ns

na
al t

ns

M
Co

In

Fi
He

Source: HSBC

22. Foreign flows 23. Foreign selling to continue

 Foreign investors have shed USD9bn y-t-d
60
 The only other time when foreigners were net sellers was in 1998
50
 Foreign selling may continue for a while as global risk aversion remains high
40
USDbn

30
20
10
0
Dec-04

Dec-05

Dec-06

Dec-07
Jun-04
Sep-04

Mar-05
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

Source: HSBC

57
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

ASEAN (overweight)
 We like Singapore and Malaysia for their defensive characteristics
 Indonesia shows structural progress but is too risky for this market
 Thailand’s political problems won’t get solved soon – avoid

Stick to defensive markets better this year than other markets in the region. It
is down 31% y-t-d in USD terms, compared to the
Singapore (stays overweight)
39% decline in Asia ex Japan. We expect, in a
As befits its status as a developed economy and
difficult global environment, that Singapore will
defensive stock market, Singapore has held up
continue to outperform.

1. Key financial and economic forecasts

Malaysia Thailand Singapore Indonesia Philippines
Return (%, USD)
3-month -18.7 -23.7 -23.1 -27.0 2.0
6-month -27.4 -34.2 -25.5 -32.1 -22.6
12-month -26.4 -28.2 -33.5 -24.4 -33.2
24-month 11.9 -2.4 5.2 15.7 2.7

Q3 2008 relative sector performance (%)

Energy -15.4 -7.1 n/a -38.6 n/a
Cyclicals 5.6 -11.6 -2.6 3.6 25.4
Defensives 4.6 15.1 -25.2 0.4 20.9
Telecom 11.5 5.1 7.1 16.2 23.3
Financials 12.5 4.7 0.5 27.0 24.5
Technology n/a n/a -3.7 n/a n/a

Economic forecast (2008)

GDP growth (%) 6.0 4.1 3.8 6.1 4.1
Consumer prices (%) 5.9 6.5 6.5 10.0 9.2
Exchange rate 3.33 33.7 1.40 9343.0 44.6
Short interest rate (%) 3.6 3.70 5.4 8.8 5.2
Valuations (2008)
PE (x) 11.5 8.3 11.4 10.4 13.7
P/B (x) 1.6 1.5 1.5 2.8 1.9
Dividend yield (%) 4.8 5.4 4.5 4.5 4.4
Implied growth (%) 9.8 2.8 5.4 23.8 23.7
Implied COE (%) 10.2 11.4 9.1 15.9 10.5
Earnings (%) (2008)
Earnings growth (y-o-y) -12.6 114.1 -3.4 16.3 0.8
ROE 13.9 18.0 13.1 26.8 14.2
ROA 3.0 4.2 3.0 6.3 3.4
Net debt/ equity ratio 17.7 10.7 7.0 0.0 4.9
Notes: Performance for Q3 2008 is up to 30 Sep 2008. Implied growth is derived from a 3-stage NPV analysis based on earnings stream: the first stage is 2 years of I/B/E/S earnings forecasts; the final stage is perpetual growth of 2.5-
8% depending on the country; implied growth is calculated for years 3-10. COE is derived from a weighted average of USD bonds with the same credit rating as the country, local 10-year government bond yields and an equity risk
premium. MXAP = MSCI Asia Pacific index
Source: HSBC, I/B/E/S

58
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Valuations are now cheap: because of the drop in for Malaysia to become a more mature
stock prices, PE has fallen to 10.8x, close to the democracy.
low of 10.0x set in the Asia crisis. The economy
Meanwhile, the economy is likely to slow next
is likely to slow further, producing real GDP
year (we forecast 6.2% real GDP growth this year
growth this year of 4% on HSBC’s forecasts. But
and 5.0% next) but not disastrously. Easy
we also expect that Singapore will be one of the
monetary policy has helped: Malaysia has been
few countries in the region where growth next
the one Asian market that has not raised rates this
year should be better than this year: we forecast
year, even though this does raise the risk of core
5.5%.
inflation persisting longer than elsewhere.
Moreover, the stock market is relatively immune
Valuations have become cheap, with 12-month
to slowing exports, which come from foreign
forward PE falling to 11.2x – lower than in the
firms and small bio-technology companies, rather
2000-3 bear market. And that is based on earnings
than listed stocks. Singapore has a range of well-
forecasts which are quite cautious compared to the
diversified and well-managed blue-chip stocks
rest of the region: -13% for this year, and +5% for
which tend to hold their own even in difficult
next.
times. For this reason, we are overweight
Singapore industrials, and include Singapore We expect that Malaysia will continue to perform
Airlines in our top picks. defensively, given its high proportion of non-
cyclical stocks. However, unlike Singapore, it
This is a market that could fall further, but it is
would be likely to lag in a rebound, and so
likely to continue to be relatively resilient. It will
investors should be quicker to switch out of this
also give a decent amount of upside in the event
market in the event of stocks finding a bottom.
of a market rebound, say next year.
Indonesia (stays underweight)
Malaysia (stays overweight)
The Indonesian market has held up remarkably
Malaysia has also proved fairly defensive over the
well this year: it is down only 36%, outperforming
past year, when it has been the third-best
MSCI Asia ex Japan by about 6%. This is despite
performing market in MSCI Asia ex Japan (after
the fact that this is usually a volatile, high-beta
Singapore and Thailand). That is surprising in a
market, with the lowest long-run valuations in the
way, given the political situation. Prime Minister
region.
Abdullah Badawi is under attack both from within
his own party and from opposition leader Anwar Part of the reason is that the Indonesian stock
Ibrahim. These struggles have got progressively market does have a reasonably high exposure to
nastier, with the government invoking the Internal commodities, which helped until recently. But
Security Act to imprison opponents. It is economic growth has been decent too, with GDP
impossible to forecast how the situation will pan growing consistently above 6% since 2006. This
out over coming months, but it is likely to come to may have been propelled by the forthcoming
a head soon. presidential election, due in April next year,
which has led to a certain degree of government
We are not too concerned about these
spending. Structural improvements are
developments. While they lead to short-term
contributing, too. The political situation is stable
uncertainties, we believe that the development of
(unusual in south-east Asia this year), and
a viable opposition is an important step forward
Indonesia’s rampant corruption is starting slowly

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 Equity Strategy
Asia Pacific
Fourth Quarter 2008
to improve: in Transparency International’s latest
annual survey, Indonesia rose 17 places among
the 180 countries surveyed – although it still
comes a rather lowly 126th.
However, while we are happy to keep some
exposure to this market, we feel that global risk is
too great to make it an overweight. There are still
many problems facing the country. For one, next
year’s presidential race is currently too close to
call, with former president Megawati
Sukarnoputri putting up a strong challenge to
President Susilo Bambang Yudhoyono. Megawati
was not an effective president before, and her
election would unsettle the market. The economy
is also unlikely to maintain its current momentum:
we forecast growth to slow to 4.9% next year.
Moreover, valuations remain relatively expensive
compared to history. PE, at 8.6x, compares to a
low of 5x in the 2000-3 bear market, and PB is
still high at 2.9x, compared to previous lows of
1.3x. Indonesia has undoubtedly improved
structurally over the past few years and therefore
deserves a higher rating – but not that much
higher.
Thailand (stays underweight)
The Thai market remains mired in the ever-
shifting political situation, with one Prime
Minister forced out in September and ongoing
demonstrations in Bangkok. We cannot see
prudent portfolio investors putting their money
back into this country until a lasting solution to
the current impasse has been found. Foreigners
have already sold a net USD4bn so far this year.
The underlying political problem is deep-rooted.
The Bangkok middle class likes the status quo and
is suspicious of democracy; it is supported by the
establishment. The rural populace has a majority
and likes the populist reforms of former Prime
Minister Thaksin and his proxies. Until this
60
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underlying tension is sorted out, there can be no
sustainable government.
In the meantime, the economy continues to
stagnate. We forecast real GDP growth at 4.1%
this year and only 3.1% next.
Valuations in the stock market are not high:
forward PE is only just under 8x. But this is based
on analysts’ forecasts of 28% growth in net profit
this year, and 11% next, which seem
unrealistically high. Moreover, Thailand has
consistently traded at a single-digit PE in the past
five years, so the current multiple is not notably
low. Given the risks (for example, of another
coup), we would be reluctant to buy this market at
almost any price.
Philippines (stays underweight)
The Philippines is simply not the sort of market
investors want to be in in an environment like the
current one. This market has high political risk
(with coup attempts almost annually), it allowed
inflation to run away earlier this year because of
irresponsible monetary policy, and its economy is
overly dependent on one driver – remittances –
which seem likely to slow with the world entering
a recession. Neither is it compellingly cheap, with
forward PE at 12.4x, and that based on
unrealistically optimistic earnings expectations of
14% EPS growth next year. One to avoid.
Vietnam (small off-benchmark
position)
Valuations have got pricey after the strong stock
market rally in the summer. By end-August, the
market reached a 12-month forward PE (assuming
-10% growth this year, and +20% next) of 14.8x,
and has now fallen back to 14.6x. This represents
a significant premium compared to other long-
term structural growth markets such as China and
India.
Foreigners have started to sell, for the first time
since early 2007: in September, they sold
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

USD166m net. In addition to global risk aversion,

this suggests that country funds (which raised
billions of dollars in 2007) are now finally fully
invested. Foreigners, who continued to buy even
as the Vietnamese market crashed earlier this
year, can no longer be relied on to be steady
buyers.

The key, in our view, remains earnings. In H1

2008, large companies’ net profit fell 15%, mainly
because of property and equity-related write-offs.
The full-year numbers could possibly show an
even bigger decline. Until the extent of further
write-offs is known – and investors can judge the
likely rebound in earnings next year – we see the
market struggling. We therefore target the VN
Index to remain roughly at its current level of 450
to the end of 2008, and then rebound to 550 (i.e.
roughly in line with our expectation of 20%
earnings growth) next year.

2. Inflection points
Outcome of political situation in Thailand
Who is next Prime Minister of Malaysia
Events in run-up to next April’s Indonesian elections
Is inflation dead in Indonesia, Philippines, Vietnam
How much do exports decline in Singapore, Malaysia
Source: HSBC

3. Sector weightings and Stock screening

Sector weightings Stocks rated Overweight Stocks rated Underweight
Consumer discretionary
Consumer staples
Energy
Financials UOB
Healthcare
Industrials Singapore Airlines Cosco Corp Singapore Ltd
Technology
Materials
Telecoms Indosat
Utilities
Notes: Stocks shown are those with market cap above USD1bn, where HSBC's analysts have an Overweight or Underweight rating, and where their target price is at least 15% away from the
current stock price. Up to three stocks are shown in each category for each sector.
Source: HSBC

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Fourth Quarter 2008

4. Economy 5. Malaysia
 The consensus real GDP growth forecast for 2008 has been cut to 5.5%, from
6.5% Malaysia Consensus forecast on Real GDP growth
5.7% at the start of the year
 The consensus forecast for next year is 6.2%
6.0%
 HSBC forecasts 6.2% growth this year and 5.0% growth next

5.5%

5.0%
Dec-05

Dec-06

Dec-07
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08
2006 2007 2008 2009

Source: Consensus Economics, HSBC

6. Valuation 7. Malaysia
 12-month forward PE has fallen to 11.2x
25x Malaysia
 That is far below the long-run average of 16.3x, and even below the low of
20x 11.7x that the country reached in the 2001-3 bear market
 Price/book has fallen to1.6x. In the last bear market it got to 1.4x
15x

10x

5x
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

8. Economy 9. Singapore

8% Singapore Consensus forecast on Real GDP growth  The consensus real GDP growth forecast for 2008 has been cut to 4.2%, from
6.2% at the start of the year
7%  The consensus forecast for next year is 4.6%
 HSBC forecasts 4.0% growth this year and 5.5% growth next
6%

5%

4%
Jun-05
Sep-05
Dec-05

Mar-06
Jun-06
Sep-06

Dec-06
Mar-07
Jun-07
Sep-07

Dec-07
Mar-08
Jun-08

Sep-08

2006 2007 2008 2009

Source: Consensus Economics, HSBC

10. Valuation 11. Singapore

Singapore  12-month forward PE has fallen to 10.8x

24x  That is below the long-run average of 16.6x, and even below the low of 11.9x
22x that the country reached in the 2001-3 bear market
20x
 Price/book has fallen to 1.5x. In the last bear market it got to 1.1x
18x
16x
14x
12x
10x
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fwd PE

Source: HSBC

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 Equity Strategy
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Fourth Quarter 2008

12. Economy 13. Thailand

6.0% Thailand Consensus forecast on Real GDP growth  The consensus real GDP growth forecast for 2008 has stayed steady since
the start of the year at 4.8%
5.5%  The consensus forecast for next year is 4.6%
5.0%  HSBC forecasts 4.1% growth this year and 3.1% growth next
4.5%
4.0%
3.5%
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08

2006 2007 2008 2009 Sep-08

Source: Consensus Economics, HSBC

14. Valuation 15. Thailand

 12-month forward PE has fallen to 7.9x
25x Thailand
 That is below the low of 8.4x that country reached in the 2001-3 bear market
20x  Price/book has fallen to 1.5x. In the last bear market it got to 1.3x

15x

10x

5x
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

16. Economy 17. Indonesia

 The consensus real GDP growth forecast for 2008 has been cut to 5.9%, from
6.5% Indonesia Consensus forecast on Real GDP growth
6.2% at the start of the year
 The consensus forecast for next year is 5.6%
6.0%
 HSBC forecasts 6.0% growth this year and 4.9% growth next
5.5%

5.0%
Dec-05

Dec-06

Dec-07
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08

2006 2007 2008 2009

Source: Consensus Economics, HSBC

18. Valuation 19. Indonesia

 12-month forward PE has fallen to 8.6x
30x Indonesia
 That is below the long-run average of 12.9x, but still well above the low of 3.5x
25x
that the country reached in the 2001-3 bear market
20x
 Price/book has fallen only to 2.9x. In the last bear market it got to as low as
15x 1.3x
10x
5x
0x
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

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 Equity Strategy
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Fourth Quarter 2008

20. Economy 21. The Philippines

 The consensus real GDP growth forecast for 2008 has been cut to 4.7%, from
7.0% Philippines Consensus forecast on Real GDP growth
5.7% at the start of the year
6.5%  The consensus forecast for next year is 4.8%
6.0%  HSBC forecasts 4.1% growth this year and 3.9% growth next
5.5%
5.0%
4.5%
Dec-05

Dec-06

Dec-07
Jun-05
Sep-05

Mar-06
Jun-06
Sep-06

Mar-07
Jun-07
Sep-07

Mar-08
Jun-08
Sep-08
2006 2007 2008 2009

Source: Consensus Economics, HSBC

22. Valuation 23. The Philippines

 12-month forward PE has fallen to 12.4x
25x Philippines
 That is below the long-run average of 14.9x, and close to the low of 11.7x that
20x country reached in the 2001-3 bear market
15x  Price/book has fallen to 1.9x. In the last bear market it got to 0.9x
10x
5x
0x
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08

12-month fw d PE

Source: HSBC

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 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Sectors and stocks

 Surprise, surprise – in bear markets, defensive sectors outperform
 We have overweights in telecoms, healthcare, utilities
 But we switch out of consumer staples into capital goods as
infrastructure spending should hold up better than consumption

Stick to the obvious where leverage and financial risk are low.

Spending a lot of time thinking about sector
allocation has not been a very valuable exercise
recently. If you had judged correctly at the
beginning of 2008 that we were in a bear market,
you would, without thinking about it very hard,
have overweighted utilities, healthcare and
consumer staples, and avoided materials,
financials, industrials and technology. As Table 2
shows, you would have been exactly right.
Since we expect that the bear market has at least
another quarter or two to run, and that earnings
growth is likely to disappoint next year, it makes
sense to stick largely to the same sector allocation
model. Our preference is for sectors where growth
is structural rather than cyclical, where downward
earnings surprises are relatively unlikely, and
Valuations and, in particular, earnings forecasts
do not give much guidance in this environment.
As Table 4 shows, analysts are optimistic about
the growth forecasts for every sector in 2009.
They particularly expect a strong bounce-back in
those sectors where growth has been cut sharply
this year, most notably materials and technology.
In an environment of slowing global growth, our
preference would be for sectors such as telecoms
and healthcare, where decent growth is fairly
assured even if the cycle continues to turn down.

1. Sector weightings
Sectors HSBC Benchmark Weightings Countries where Countries where
recommended weight weight sector is Overweight sector is Underweight
Financials 23.0% 26.6% Under AU, IN, JP, KR, TW
Industrials 18.0% 14.6% Over CH, HK, IN, KR, SG TW
IT 11.0% 12.8% Under HK, JP, KR, TW
Consumer discretionary 9.0% 11.4% Under AU, CH, HK, IN, JP, KR, TW
Materials 9.5% 11.4% Under CH, TW AU, IN
Telecoms 7.0% 5.6% Over HK, IN, JP, MY, TW KR
Energy 5.5% 5.3% Neutral CH, TW
Consumer staples 5.0% 5.1% Neutral CH, TW
Utilities 6.0% 3.9% Over CH, MY IN
Healthcare 6.0% 3.3% Over JP, KR
Source: HSBC

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 Equity Strategy
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Fourth Quarter 2008

2. MSCI Asia-Pacific sector performance (Q3) 3. PE vs 2007-9 growth, Asia ex-Japan sectors
% 3M Y-t-d 3M Y-t-d Weight* 35 UT
relative relative
30
Utilities -1.1 -14.0 15.3 11.7 3.7
Health Care -4.8 -9.8 11.5 15.9 3.2 25

12M PE
Consumer staples -10.7 -18.8 5.7 7.0 5.2 20 HC
Telecom -13.3 -27.6 3.0 -1.9 5.2 CS
Financials -13.5 -27.4 2.9 -1.7 26.1 15
CD IT
TC
Consumer durables -15.0 -24.2 1.4 1.6 12.0 MT
10
Information Technology -19.9 -25.1 -3.6 0.6 13.4 FN
Industrials -20.4 -28.9 -4.0 -3.2 15.3 5 EN
IN
Energy -20.8 -30.8 -4.4 -5.1 5.2
Materials -24.8 -28.2 -8.4 -2.5 11.9 0
0 50 100 150 200
MSCI Asia-Pacific -16.4 -25.8 EPS growth 2008-09 (%)
Notes: * = in MSCI Asia Pacific; 3M and Y-t-d data up to 22 Sep 2008
Source: Bloomberg, HSBC Source: I/B/E/S, HSBC

4. Consensus EPS growth (%) by sector 5. Consensus PE (x)

__Asia Pacific___ __Asia ex-Japan__ __Asia Pacific___ __Asia ex-Japan__
2008 2009 2008 2009 2008 2009 2008 2009
Energy 15.6 15.7 14.2 23.3 Utilities 97.1 19.5 17.1 16.9
Consumer staples 4.3 10.4 -6.8 11.6 Health Care 20.3 16.7 18.5 16.0
Financials 2.2 10.3 4.6 13.6 Consumer staples 18.3 16.6 14.9 13.4
Industrials 2.1 10.9 -8.4 19.5 Technology 14.1 12.3 13.0 11.3
Materials -0.1 26.3 5.2 4.1 Financials 12.4 11.3 11.9 10.5
Technology -5.1 14.8 -14.5 14.6 Consumer disc 12.3 10.9 10.8 9.7
Health Care -9.1 21.6 8.8 16.0 Telecoms 12.2 11.1 12.1 10.6
Telecoms -10.0 10.7 -13.9 14.1 Energy 10.4 9.0 9.5 7.7
Consumer disc -11.1 12.4 15.6 11.3 Industrials 10.2 9.2 11.1 9.3
Utilities -72.4 396.9 -20.7 0.9 Materials 10.1 8.0 7.3 7.0
Source: I/B/E/S Source: I/B/E/S

6. MSCI Asia Pacific cyclical sectors vs Manufacturing ISM index 7. Semiconductor shipment vs MSC Asia Pacific IT sector

80% 65 60% 200%

60% 150%
60 40%
40% 100%
20%
20% 55 50%
0% 0%
0% 50
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

-50%
-20% -20%
45 -100%
-40% -40%
-150%
-60% 40 Semicon shipment val y/y
MXAP Cyclicals Manu ISM (RHS) -60% MXAP IT Index y-o-y (RHS) -200%

Source: HSBC, Bloomberg Source: WSTS, Bloomberg

66
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Accordingly, we stay overweight telecoms and Utilities

healthcare. We raise utilities from neutral to A classic defensive sector, with generally high
overweight, particularly since in China the dividend yields. In China, freer domestic energy
squeeze on profits from higher coal prices should prices and falling coal costs will help profits to
end. We remain squarely underweight IT, recover.
financials and consumer discretionary. Our main
Energy
change this quarter is to raise industrials from
While we do not expect the price of crude to rise,
underweight to overweight, and to cut consumer
there should be a rebound in refiners and retail oil
staples from overweight to neutral. We believe
marketers that have been hurt by government
that infrastructure spending is likely to hold up
controls or by artificially low domestic oil prices.
better than consumer spending in the slowdown in
This is particularly the case for China.
coming quarters. Moreover, valuations in
consumer sectors have got stretched; those in What we don't like
capital goods now look cheap.
Technology
What we like As US consumers curtail spending, end demand is
likely to fall further. This will hurt all areas of
Telecoms
technology, even handsets and notebook PCs which
There are markets we would avoid (for example,
have been strong this year. Inventories are now
China because of the ongoing telecoms
being dramatically purged; this could overshoot in
restructuring, or Korea because of excess
Q1, cutting production even further. The pain will
competition) but we see generally telecoms as a
be felt all along the supply chain, from DRAM
relatively safe bet. Subscriber growth and ARPUs
makers to semiconductor production equipment.
are likely to remain resilient in markets such as
India and southeast Asia. Financials
In a number of Asian financial markets, mini
Capital goods
credit crunches threaten. This is most true in
We see infrastructure spending holding up well,
Korea, India, Australia and Taiwan. NPLs are
and even being increased in markets such as
likely to rise and margins be squeezed for some
China, Korea, Taiwan and Indonesia as politicians
banks by higher funding costs. In China,
try to offset slowing economic growth. This is a
regulators appear to be trying to limit banks’
somewhat more risky sector, particularly since
profit growth to help the broader economy. While
corporate capex will be at risk. But the valuations
Asia’s problems are nothing like as big as those in
for long-cycle capex plays, especially in China
the US or Europe, this is not a sector to have too
and India, are now looking compelling, with the
much exposure to in a cyclical downturn.
sector in Asia ex Japan on only 9x next year’s
earnings. Consumer discretionary
Consumers in the US and Europe are unlikely to
Healthcare
be increasing their spending on the cars and
This is only a small sector but the combination of
electronic gadgets that Asia specialises in.
structural growth (as Asia’s population ages and
Moreover, while not as bad as in the US, Asian
drugs companies get better at developing their
consumers – particularly in Korea, Hong Kong,
own compounds) and defensiveness is an
Singapore and Taiwan – are likely to tighten their
attractive one in the current environment.
belts, too.

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 Equity Strategy
Asia Pacific
Fourth Quarter 2008
Resources
We do not expect metals prices to fall that much
further, but supply is starting to increase for iron
ore and copper, in particular, and this means that
prices are unlikely to rebound either. Analysts
have yet to fully reprice their earnings estimates
to take into account the new world of lower
commodities prices and so true valuations are not
as cheap as the headline numbers suggest.
Real estate
A combination of higher funding costs, balance-
sheet worries and nervous consumers is not a
good environment for property developers.
Chinese house prices have started to fall quite
sharply, and we expect those in Hong Kong to
come down 10% or so over the next 12 months.
Korea faces a mini-crisis in its housing market.
Prices are likely to be weak in Singapore, Taiwan
and Australia. This is a sector to avoid for now.
68
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Quantitative scorecards
The scorecards focus on three broad sector
attributes, which loosely correspond to
momentum, growth and value investing: price
momentum (eg change in share prices over one
and three months), earnings momentum (eg
change in IBES forecasts) and valuation (a DDM
that backs out implied earnings growth). For each
of these three attributes, we rank the 10 MSCI
sectors, and average the ranking to produce an
overall consolidated score. This is a method that is
concise and consistent over time.
We use the scorecards to help formulate our
sector recommendations, although not slavishly:
judgemental considerations are more important.
At the moment, the sector scorecards largely
concur with our qualitative judgements.
Telecoms, energy and healthcare are the three top
scoring sectors for Asia ex Japan; we are
overweight or neutral on all of them. Consumer
discretionary and IT, on both of which we are
underweight, score worst.
Only our bet to lower exposure to consumer
staples and raise exposure to industrials is
contrary to these quantitative indicators. That
points to the fact that we are trying to call a
turning point for these, while the quants
scorecards generally indicate momentum, whether
of share prices or earnings.
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Scorecards
8. Asia ex-Japan
___ Price momentum ______ ___ Earnings momentum ___ ________Valuation ________ _____ Consolidated________
Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg
Telecommunication Services 6 2 -1 1 7 9 1 0 1 1 5 4
Energy 4 -3 0 3 -2 -1 3 0 4 2 -1 0
Health Care 2 2 1 4 2 1 4 2 1 2 2 0
Consumer Staples 3 2 5 1 1 5 7 0 -1 4 -1 5
Financials 5 1 4 7 2 0 1 0 0 5 -1 0
Utilities 1 1 5 9 -6 -1 6 -1 -3 6 -4 -1
Materials 7 -4 -5 6 -1 -3 9 1 1 7 0 -3
Industrials 10 -1 0 8 -1 0 5 -1 -2 8 0 2
Consumer Discretionary 8 2 -1 5 -1 -2 10 -1 -1 8 1 0
Information Technology 9 -2 -8 10 0 -9 8 0 0 10 0 -9
Source: HSBC

9. Australia
___ Price momentum ______ ___ Earnings momentum ___ ________Valuation ________ _____ Consolidated________
Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg
Energy 2 4 -1 1 2 6 7 0 -1 1 5 3
Healthcare 3 3 3 4 1 1 6 -1 3 2 4 6
Information Technology 3 -2 0 2 1 0 10 0 0 3 0 2
Utilities 1 1 1 6 0 2 8 -1 0 3 2 3
Materials 10 -2 -7 3 -2 2 3 2 2 5 -2 -2
Consumer Staples 5 -2 2 6 0 -3 5 -1 -3 5 -3 -3
Telecommunication Services 9 -6 -4 5 -4 -4 2 0 2 5 -4 -4
Consumer Discretionary 6 4 4 10 -1 -1 1 0 1 8 0 2
Financials 7 2 2 8 2 2 3 -1 -2 9 1 -1
Industrials 7 -4 1 8 0 -4 8 1 -2 10 -2 -4
Source: HSBC

10. China
___ Price momentum ______ ___ Earnings momentum ___ ________Valuation ________ _____ Consolidated________
Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg
Consumer Staples 2 1 -1 2 2 2 5 1 0 1 2 0
Financials 4 -1 0 3 -2 5 2 0 -1 1 0 3
Information Technology 3 -2 2 1 0 2 9 0 0 3 -1 4
Utilities 1 0 1 8 1 1 4 -1 -3 3 0 -1
Energy 5 0 -3 3 2 3 7 0 0 5 2 1
Industrials 7 -2 1 8 -1 -4 1 0 0 6 -3 -2
Materials 9 0 -3 6 2 0 3 1 2 7 2 0
Consumer Discretionary 5 3 4 5 -2 -3 8 0 0 7 1 2
Telecommunication Services 7 -2 0 7 -1 -6 5 -1 -1 9 -3 -7
Source: HSBC

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 Equity Strategy
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Fourth Quarter 2008

11. Hong Kong

___ Price momentum ______ ___ Earnings momentum ___ ________Valuation ________ _____ Consolidated________
Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg
Industrials 3 3 0 1 1 3 4 2 2 1 5 3
Financials 4 0 1 1 6 4 3 -1 -1 1 4 2
Utilities 1 0 3 3 -1 0 4 0 0 1 0 1
Consumer Discretionary 5 -1 0 4 0 2 2 0 1 4 -2 2
Telecommunication Services 2 0 0 4 -3 -3 7 0 0 5 -3 -4
Materials 8 -1 -1 6 2 2 1 0 0 6 1 1
Information Technology 5 -3 -4 7 -3 0 6 -2 -1 7 -5 -3
Source: HSBC

12. India
___ Price momentum ______ ___ Earnings momentum ___ ________Valuation ________ _____ Consolidated________
Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg
Health Care 3 0 -2 2 0 0 3 -1 0 1 1 0
Energy 5 -2 1 4 -1 -3 1 0 0 2 0 0
Consumer Discretionary 1 4 3 3 5 2 8 0 -1 3 4 2
Utilities 5 -4 3 6 -5 -1 2 2 3 4 -3 4
Consumer Staples 1 0 2 8 0 -3 5 -1 -3 5 -1 -2
Information Technology 4 4 -3 1 3 2 9 0 0 5 2 -1
Telecommunication Services 9 0 -5 4 1 5 3 -1 1 7 -2 0
Materials 9 1 -3 7 -2 -3 6 0 0 8 -1 -3
Financials 7 -2 2 9 -2 -4 7 0 0 9 -3 0
Industrials 8 -3 1 9 1 1 10 0 0 10 0 0
Source: HSBC

13. Japan
___ Price momentum ______ ___ Earnings momentum ___ ________Valuation ________ _____ Consolidated________
Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg
Telecommunication Services 1 4 8 1 0 5 4 3 3 1 2 7
Health Care 3 -2 2 5 -3 -3 1 0 0 2 -1 1
Industrials 6 -4 -4 2 2 -1 2 2 2 3 -1 -1
Energy 5 -1 -4 3 6 0 3 -1 -1 4 1 -3
Information Technology 4 -1 -1 5 2 -1 6 -1 -1 5 0 -1
Consumer Discretionary 8 0 -2 4 -1 5 4 -2 -2 6 -3 -1
Consumer Staples 2 5 5 9 -4 -2 7 -2 -2 7 0 0
Materials 9 -3 -5 7 -1 -2 8 0 0 8 0 -3
Utilities 7 2 3 10 -1 0 9 0 0 9 0 1
Financials 10 0 -2 8 0 -1 10 0 0 10 0 -1
Source: HSBC

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14. Korea
___ Price momentum ______ ___ Earnings momentum ___ ________Valuation ________ _____ Consolidated________
Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg
Consumer Staples 1 0 2 4 -1 -2 3 0 -1 1 0 0
Materials 5 -2 -4 1 1 3 4 0 1 2 0 0
Energy 7 0 -4 2 4 7 2 0 2 3 2 3
Telecommunication Services 2 3 5 8 0 -1 1 0 0 3 1 2
Consumer Discretionary 6 -3 -3 3 1 2 5 0 -2 5 -2 -2
Financials 4 2 3 4 1 2 6 1 0 5 2 2
Utilities 3 -1 4 9 -2 1 7 -1 -1 7 -2 2
Information Technology 8 1 -5 4 6 -3 8 0 0 8 1 -4
Industrials 9 -1 -7 4 4 4 9 0 0 9 -1 -2
Source: HSBC

15. Singapore
___ Price momentum ______ ___ Earnings momentum ___ ________Valuation ________ _____ Consolidated________
Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg
Financials 3 -2 0 1 0 2 2 0 0 1 0 0
Health Care 4 2 3 5 2 2 1 0 0 2 3 4
Telecommunication Services 1 3 5 2 1 1 7 0 -1 2 3 4
Industrials 4 -2 -2 3 1 0 4 0 1 4 -2 -1
Consumer Discretionary 2 3 1 6 -2 2 6 -2 -3 5 -1 0
Consumer Staples 7 -1 -6 4 -2 -3 4 2 2 6 -1 -5
Information Technology 6 -3 -3 7 -3 -1 3 0 0 7 -5 -3
Source: HSBC

16. Taiwan
___ Price momentum ______ ___ Earnings momentum ___ ________Valuation ________ _____ Consolidated________
Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg Now 1M chg 3M chg
Telecommunication Services 1 0 1 4 -3 0 3 0 0 1 0 2
Materials 6 0 0 2 3 -1 1 0 0 2 1 0
Energy 2 -1 0 1 6 7 7 0 0 3 4 4
Consumer Staples 4 -1 1 5 -4 -4 3 0 0 4 -2 -1
Consumer Discretionary 5 0 2 2 -1 -1 6 0 -1 5 -2 0
Information Technology 3 0 -2 7 -2 -3 5 0 -3 6 -1 -5
Financials 6 2 -4 8 -4 -2 2 0 3 7 -1 -2
Industrials 8 -1 -1 5 3 2 8 0 0 8 0 0
Source: HSBC

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Top stock picks

 We showcase names our analysts have strong views on that fit
with the strategy team’s sector and market preferences
 Our buy list consists mainly of large-cap, blue-chip names
 Top sells concentrated on technology companies and banks

What to buy – and what not
The tables below highlight our highest conviction
buy and sell recommendations in Asia-Pacific.
They were chosen by the strategy team from
among our analysts’ top (in terms of potential
upside or downside to target price) large-cap picks
with reference to the markets or sectors where the
strategy team has overweight or underweight
calls. A short note on each stock, with full
valuation metrics and investment risks, follows.
Favourite buys
We stick to a solid, no-surprises list (Table 1).
The stocks included are all liquid, large-cap
names, with solid balance sheets, good long-term
prospects for earnings growth and quality
managements. We have avoided most cyclical

1. HSBC’s top high-conviction buy ideas

Code Name Country/ Sector HSBC rating Upside to Price Market
region target (local curr) cap
price (%) 27 Jun (USDm)
836 HK CHINA RESOURCES POWER HOLDIN CH Utilities Overweight (V) 51.6 17.02 (HKD) 9,175
857 HK PETROCHINA CO LTD-H CH Energy Overweight (V) 48.4 8.56 (HKD) 197,430
2727 HK SHANGHAI ELECTRIC GRP CO L-H CH Industrials Overweight (V) 66.7 2.40 (HKD) 6,262
823 HK LINK REIT HK Real estate Overweight 27.7 16.84 (HKD) 4,683
19 HK SWIRE PACIFIC LTD 'A' HK Industrials Overweight 45.7 70.00 (HKD) 8,248
BHARTI IN BHARTI AIRTEL LIMITED IN Telecoms Overweight (V) 23.6 810.55 (INR) 33,486
LT IN LARSEN & TOUBRO LIMITED IN Industrials Overweight (V) 29.5 2,550.55 (INR) 16,228
9433 JP KDDI CORP JP Telecoms Overweight 47.2 598,000.00 (JPY) 25,295
033780 KS KT&G CORP KR Consumer Overweight 17.9 89,100.00 (KRW) 10,864
SIA SP SINGAPORE AIRLINES LTD SG Airlines Overweight 28.9 14.74 (SGD) 12,287
Source: HSBC

2. Top sell ideas

Code Name Country/ Sector HSBC rating Upside to Price Market
region target (local curr) cap
price (%) (USDm)
670 HK CHINA EASTERN AIRLINES - H CH Airlines Underweight (V) -62.4 1.33 (HKD) 962
ICICIBC IN ICICI BANK LTD IN Financials Underweight (V) -5.0 600.10 (INR) 14,537
8316 JP SUMITOMO MITSUI FINANCIAL GR JP Financials Underweight (V) -26.9 684,000.00 (JPY) 50,906
8035 JP TOKYO ELECTRON LTD JP IT Underweight (V) -14.0 5,510.00 (JPY) 9,352
017670 KS SK TELECOM KR Telecoms Underweight -15.0 203,500.00 (KRW) 12,963
3009 TT CHI MEI OPTOELECTRONICS CORP TW IT Underweight (V) -20.4 22.60 (TWD) 5,159
Source: HSBC

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sectors, and also stocks in markets such as Taiwan
and south-east Asia, which we see as high risk. In
more cyclical markets such as Korea, we have
stuck to solid, defensive names.
On our high-conviction buy list, we retain five
stocks (Swire Pacific, Larsen & Toubro, KDDI,
KT&G and Link REIT) from previously.
We have dropped the following stocks:
 ICBC (1398 HK, Overweight (V), HKD4.66)
because we downgraded Chinese banks to
neutral on worries that the authorities will try
to limit their profitability.
 Simcere (SCR US, Overweight (V),
USD10.15) which, with a market cap of less
than USD1bn, has got too small.
 Wumart (8277 HK, Overweight (V),
HKD6.44) since we have downgraded the
Chinese consumer staples sector on fears that
consumption might slow.
 Dong-A Pharmaceutical (000640 KS,
Overweight, KRW102,000) because we
ceased coverage of the healthcare sector
 Bharti Airtel, a good example of a long-term
growth story now trading on attractive
valuations.
Sell ideas
Table 2 shows our highest-conviction sell ideas.
These generally reflect our nervousness about (1)
balance sheet risk, (2) funding issues for banks in
certain markets, and (3) the risk of a US consumer
slump hurting the IT sector.
We dropped the one sell idea from last quarter,
coal producer China Shenhua Energy (1088 HK,
Underweight (V), HKD22), which has already
fallen substantially.
We added Tokyo Electron and Chi Mei on
expectations that demand for electronics products
will slow sharply; China Eastern on worries about
its balance sheet and long-term future; ICICI in
India and Sumitomo Mitsui in Japan on concerns
about funding issues and rising NPLs; and
Korea’s SK Telecom, where we see excess
competition for new subscribers denting profits
until the end of 2009.

Our additions this quarter are:

 Singapore Airlines, a blue-chip name which

should additionally benefit from lower oil
prices.

 Petrochina, which we think will benefit from

the falling crude price, relaxation of
government energy price restrictions, and the
buyback plan of its parent.

 China Resources Power to give us exposure

to the defensive utilities sector where we see
profitability rebounding as coal prices fall.

 Shanghai Electric, since we see infrastructure

spending in China being stronger than
consumption. This stock has got very cheap,
and retains excellent long-term potential.

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CR Power (836, OW/V)

 Preferred pick among China IPPs given strong capacity expansion
and track record
 Coal mine investment to prolong earnings growth longer term.
Another tariff hike before 2008 could be the catalyst in short term
 Rating Overweight (V); target price HKD25.80

CR Power’s performance in 1H2008 is the most Valuation and risks Gary Chiu*
Analyst
resilient to surging coal prices among HK-listed Our target price of HKD25.80 is based on a sum- The Hongkong and Shanghai
IPPs (earnings declined 29% yoy compared to - Banking Corporation Limited
of-the-parts DCF valuation (HKD18.72 per share +852 2822 4297
78% for Datang and losses for Huaneng, Huadian for its power projects and HKD7.08 per share for garychiu@hsbc.com.hk
and China Power), mainly due to stronger upstream investments). Given CR Power’s coal Scully Tsoi*
Analyst
management and fuel cost control. Based on its business should start to contribute in 2010 and be The Hongkong and Shanghai
greenfield project development schedule, fully operational in 2013, CR Power is currently Banking Corporation Limited
+852 2996 6620
attributable capacity will increase from 13GW in trading at a 2009e PE premium to its peers. If we scullytsoi@hsbc.com.hk
2007 to 20GW by 2010e. Management is strip out the value of its upstream businesses from *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
confident it will meet the target, and it could be the current price, the PE of its core power assets and is not registered/ qualified
exceeded if more acquisitions are done in future. would be 8x in 2009e, with a high 2008-10e EPS pursuant to NYSE and/ or
NASD regulations
We expect its profit margin to expand once coal CAGR of 26%, which looks attractive compared
mine projects commence operation in 2010e, to its peers (2009e PE of 9-14x and 2008-10e EPS
hence prolonging earnings growth longer term. CAGR of -6% to 18%).

According to management, the government may Key downside risks to our target price and
raise the on-grid tariff once more before end of earnings estimates are: (1) a surge in coal costs,
2008. This could be the share price catalyst for and (2) any delay in commissioning of upstream
CR Power and the other IPPs in the near term. investments or lower-than-expected returns.

Key financials & valuation

Share price: (HKD) 16.58 Market cap: (HKDm) 69,375

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(HKDm) (HKDm) (HKDm) (HKD) (%) (x) (%) (%) (x)
12/2007a 16,830 3,955 3,190 0.81 33.7 20.4 1.5 15.9 2.8
12/2008e 26,749 4,283 2,731 0.66 -18.8 25.1 1.3 10.6 2.6
12/2009e 37,358 6,891 4,656 1.12 70.5 14.7 2.2 16.4 2.3
12/2010e 41,358 10,241 6,764 1.63 45.3 10.1 3.2 20.6 1.9
Notes: Price at close of 01 Oct 2008. * = Based on HSBC EPS (fully diluted) Source: HSBC

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PetroChina (857, OW/V)

 1H08 result in line, we believe 2H08 will be better on lower crude
price and product price hike
 Transfer of upstream assets from parent to drive production growth
 Valuation looks attractive, with 09e PE at 8x and 50% discount to
equity replacement value. Rating Overweight (V); target HKD12.7

1H08 net profit was down 34.5% YoY, largely Valuation and risks Steven Li Hong Xing*
Analyst
due to widened refining loss on rising oil prices in We set our price target of HKD12.7 based on the The Hongkong and Shanghai
1H. We believe PetroChina will be able to Banking Corporation Limited
average of 1) a PE multiple of 12x, which is +852 2996 6941
improve earnings significantly in 2H on lower derived by applying a 25% discount (i.e. average stevenhongxingli@hsbc.com.hk

crude prices and higher product prices after price 1-year P/E differential between PetroChina and *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
hike on June 19th. On our estimates, the refining the MSCI China Index) to HSBC 12-month- and is not registered/ qualified
segment will break even with oil at USD100/bbl. pursuant to NYSE and/ or
forward target PE of 16x for MSCI China; and 2) NASD regulations
DCF per share estimate of HKD12.50 using a
PetroChina announced acquisition of a 51.89%
long-term normalized oil price of USD61/bbl and
interest in CNPC (HK) from its parent, CNPC, in
12% discount rate.
order to gain synergy on upstream and city gas
business. In addition, the chairman confirmed that Key catalysts are M&A activity, reduction of
acquisition of a 50% interest in CNPC E&D is windfall tax, and major discoveries. Key risks
just a matter of time. One of the highlights in the include highly volatile crude oil price, declining
1H08 result is that overseas production grew production growth and slowdown in China oil
2ppts to 7%. We believe asset transfer from the product demand.
parent will make overseas upstream business a
new engine to drive production growth.

Key financials & valuation

Share price: (HKD) 8.14 Market cap: (HKDm) 1,457,231

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(RMBm) (RMBm) (RMBm) (RMB) (%) (x) (%) (%) (x)
12/2006a 688,978 198,050 142,224 0.79 5.3 9.2 4.9 25.8 2.2
12/2007e 835,037 198,989 145,625 0.81 2.0 9.0 4.9 22.1 1.8
12/2008e 1,108,428 191,578 139,438 0.76 -6.0 9.5 4.7 17.8 1.6
12/2009e 896,519 229,602 164,595 0.90 18.0 8.1 5.6 18.5 1.4
Notes: Price at close of 02 Oct 2008 * = Based on HSBC EPS (fully diluted) Source: HSBC

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Shanghai Elec (2727, OW/V)

 Pressure on earnings to subside from 2H09 as commodity prices
retreat from 2008 peaks
 Likely to benefit from investment in domestic infrastructure
 Only HK-listed Chinese conglomerate play with sufficient liquidity.
Rating Overweight (V); target price HKD4.00

Peak commodity prices in mid-2008 will have a believe Shanghai Electric is a defensive long- Steve Man*
Analyst
greater impact in 2H, but we expect incremental cycle domestic infrastructure play in a likely The Hongkong and Shanghai
raw material cost, if any, to be minimal in 2009 worsening economic environment. Banking Corporation Limited
+852 2822 4395
and EBIT margin to recover as material costs steveyfman@hsbc.com.hk
Valuation and risks
ease. Material cost pressure is expected to ease *Employed by a non-US affiliate
Our Overweight (V) rating and price target of of HSBC Securities (USA) Inc,
from 2H09, when y-o-y comparisons will benefit and is not registered/ qualified
HKD4.00 are based on a target MACC of 24%, pursuant to NYSE and/ or
from the difficult FY08 and 1H09 numbers.
ACROIC of 9%, 12.1x our 2009e earnings and NASD regulations
New orders of power generation equipment in 2.0x forward PB. Shares are currently trading at
1H08 totalled cRMB60bn (77% of 2007 orders), 7.1x 2009 earnings and 1.1x forward PB.
boosting backlog to over 90GW. As China looks Historically, the stock has traded at a minimum
towards upgrading its infrastructure as a way to PE of 11.3x and minimum forward PB of 1.4x.
boost the overall economy, Shanghai Electric
Risks to our rating: economic slowdown, stock
stands to benefit from any increased spending on
market decline, greater capacity addition than
domestic alternative power generation capacity,
expected and material cost increases. Margins
rail transportation and heavy machinery. The shift
could be depressed by potential lower pricing for
towards larger power generation equipment is
overseas orders and new products.
another positive catalyst, given the higher pricing
the company can achieve on these large units. We

Key financials & valuation

Share price: (HKD) 2.31 Market cap: (HKDm) 27,470

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(CNYm) (CNYm) (CNYm) (CNY) (%) (x) (%) (%) (x)
12/2007a 56,437 3,338 1,629 0.14 9.3 15.1 2.2 9.2 1.3
12/2008e 63,333 3,820 2,436 0.22 60.6 9.4 2.9 12.3 1.2
12/2009e 74,101 5,061 3,621 0.29 31.6 7.1 3.2 16.2 1.1
12/2010e 73,630 5,585 4,074 0.33 12.5 6.3 5.1 16.0 1.0
Notes: price at close of 01 Oct 2008 * = Based on HSBC EPS (fully diluted) Source: HSBC

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The Link REIT (823, OW)

 Largest retail landlord with diversified and defensive tenant base;
a low risk play amid market uncertainties
 Highest trading liquidity and one of only two clean REITs in Hong
Kong
 Target price of HKD21.5, coupled with DPU yield of 5.2%, imply
potential total return of 40%, Overweight rating

Strategically located, diversified and defensive likely among the sector leaders. Michelle Kwok*
Analyst
retail portfolio. The Link REIT (Link) holds a Valuation and risks The Hongkong and Shanghai
Banking Corporation Limited
diversified portfolio of 180 properties across eight +852 2996 6918
Our TP is based on Link’s historical average
main geographical districts in Hong Kong. The michellekwok@hsbc.com.hk
price/distribution multiple of 26x and is derived
Link’s portfolio is by far the most diversified in *Employed by a non-US affiliate
using our 2008/09e DPU of HKD0.83. This TP, of HSBC Securities (USA) Inc,
Hong Kong and its dominant market presence and is not registered/ qualified
coupled with a dividend yield of 5.2%, implies pursuant to NYSE and/ or
positions it well and helps with leasing both in
potential total return of 40%. We believe Link NASD regulations
terms of volume and economics.
units should be a core holding in any long-term
Furthermore, Link has a defensive tenant base, a REIT portfolio.
key investment attribute in the midst of global
Key risks include high lease expiry over the next
market uncertainties. As of 31 March, Link’s
three years, political/social-economic issues, and
trade-mix comprised 53% F&B, supermarket and
downturn in retail markets where Link has a
foodstuff, and cooked food stalls.
significant presence.
Highest DPU growth among H-REITS. In the
year ending March 2008, Link posted DPU
growth of 10%, 300bp higher than the average 7%
achieved by its peers in FY07. Our HKD0.83/unit
DPU growth reflects 12% y-o-y growth and is

Financial highlights
YE March Revenue (HKDm) NOI (HKDm) DPU p/distribution (x) DPU yield
FY08 4,199 2,537 0.74 21.4 4.7%
FY09e 4,569 2,700 0.83 19.2 5.2%
FY10e 4,871 2,871 0.90 17.6 5.7%
FY11e 5,094 2,980 0.94 17.0 5.9%
Source: Company data, HSBC forecast

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Swire Pacific (0019, OW)

 Swire Properties earnings and valuation remain defensive given
constrained supply and low HK interest rates
 FY08e recurring net profit lowered 19% due to Cathay Pacific. We
expect the airline to return to profit in 2H08
 Valuation compelling. Discount to NAV to contract given decent
HK growth and low interest rates. Rating OW; target HKD102

Swire Properties outlook strong. Forward Valuation and risks Mark Webb*
Analyst
indicators for office property have weakened. Our appraised valuation is HKD120 per share and The Hongkong and Shanghai
However, we expect this cycle to be supported by Banking Corporation Limited
we set our target of HKD102 at a 15% discount; +852 2996 6574
constrained supply, high nominal GDP growth we expect the current discount to contract due to markwebb@hsbc.com.hk
and low interest rates. While we expect office negative real interest rates in Hong Kong. Our *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
property values to slide over the next year, we do valuation is sensitive to property values and and is not registered/ qualified
not expect a significant decline. With only 20% of Cathay Pacific’s target price. We rate Swire pursuant to NYSE and/ or
NASD regulations
space up for renewal in FY09e, the earnings Pacific stock Overweight.
outlook is strong and low risk.
Catalysts are falling Fed Funds rate
Earnings downgrades driven by Cathay expectations and lower aviation risks. HSBC’s
Pacific. While Properties and Marine Services forecast of a Fed Funds rate of 2.0% until 4Q09 is
performed better than we expected in the first c75bps below the level implied by Fed Fund
half, Cathay Pacific was worse and we recently futures. We expect falling interest rate
cut our FY08e recurring net profit by 19%. We expectations to be positive for Swire. In addition,
expect Cathay to return to profitability in 2H08. we expect Cathay’s return to profit will lower the
perceived risk of the aviation division, which
makes up 18% of our appraised valuation.

Key financials & valuation

Share price: (HKD) 67.40 Market cap: (HKDm) 61,642

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(HKDm) (HKDm) (HKDm) (HKD) (%) (x) (%) (%) (x)
12/2007a 21,687 6,055 8,653 5.69 25.9 11.9 4.8 6.9 0.8
12/2008e 24,889 7,418 7,495 4.94 -13.1 13.6 4.8 5.3 0.7
12/2009e 27,145 8,523 10,039 6.62 34.0 10.2 4.9 6.7 0.7
12/2010e 28,594 9,288 12,161 8.02 21.1 8.4 5.9 7.9 0.6
Notes: Price at close of 01 Oct 2008. * = Based on HSBC EPS (fully diluted) Source: HSBC

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Bharti Airtel (BHARTI, O/V)

 Accelerated subscriber growth gives Bharti scale benefits, makes
it eligible for more spectrum and keeps new entrants in check
 Receipt of 3G spectrum will allow Bharti to consolidate market
leadership but regulatory uncertainty remains
 Rating Overweight (V); target price INR1,002

Bharti remains our top pick in the Indian telecom
space. Receipt of 3G spectrum would aid Bharti in
consolidating market leadership. We hold that a
move to 3G will kick start the consolidation
process in India as it will expose financial,
structural and operational weaknesses of smaller
operators in an overcrowded market.
Strategically, Bharti faces two challenges; one is
spectrum and other is the regulatory uncertainty,
created by a host of new entrants. We believe
Bharti’s market share focus addresses spectrum
constraints as it allows being eligible for
additional spectrum. Notably Bharti has managed
spectrum in 8 additional markets and is eligible in
another 6 markets. Net additions for August
highlighted another month of outperformance.
Further the market share focussed approach has
not only enabled it to assume scale, but also has
allowed it get aggressive on pricing (evident from
the price cuts on the NLD side) and make rollout
unattractive for new entrants.
Valuation and risk Rajiv Sharma*
Analyst
We value the stock using DCF-based SOTP. We use HSBC Securities and Capital
Markets (India) Private Limited
a WACC of 11% which includes COE 12%, Cost of +91 22 2268 1239
Debt 9% and Beta 1x. Our bullish investment thesis rajivsharma@hsbc.co.in
is based on a combination of expected sharp growth *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
in the Indian wireless market, outstanding execution and is not registered/ qualified
pursuant to NYSE and/ or
of a low-leverage, low-cost business model with a NASD regulations
high return on invested capital, and a close
alignment of majority and minority shareholder
interests. Bharti continues to post financials that beat
consensus estimates, increase its market share in a
rising market, and successfully monetize tower
assets in difficult market conditions.
Principal risks for the stock would be upward
revision of subscriber-based criteria for additional
spectrum, hikes in spectrum charges, aggressive
international expansion strategy and higher than
estimated capex. While we are confident on
Bharti’s earnings growth, a key concern has been
the government’s policy of squeezing the sector
by raising taxes and micro managing the sector
via frequent revisions to longer term policy.

Key financials
INRm Revenue EBITDA Margin PAT EPS Growth % P/E* EV/EBITDA* RoE %
FY09e 384,838 37.3 83,950 31.1 18.0 10.6 36.0
FY10e 473,164 36.3 106,683 28.0 14.0 8.9 32.9
*Price as at close of 2 Oct 2008 Source: HSBC estimates

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Larsen & Toubro (LT, O/V)

 Still the key beneficiary of infrastructure spending in India
 Vertical diversification into power, railways and shipbuilding along
with international business to mitigate any near-term challenges
 Strong balance sheet and ability to manage interest expense
make it preferred choice; rating OW(V), target INR1,650

L&T is diversifying into sectors such as power
equipment manufacturing, railways, hydrocarbon,
and shipbuilding to offset any near-term
challenges. It has developed a portfolio of assets
across various verticals like roads, ports, airports
and urban infrastructure; these projects could
become an important earnings driver over the next
2-3 years. L&T has also increased its focus on
international business (20% revenue in FY08) to
offset any challenges in the domestic market.
Revenue growth is driven by the strong order
backlog. Management guides to 30-35% revenue
growth and 30% order inflow in FY09, with
sustainable margins and focus on higher margin
business.
Sumeet Agrawal*
500mn earlier, and orders with price variation Analyst
HSBC Securities and Capital
clause (“PVC”, currently 65% of the order book) to Markets (India) Private Limited
sustain its margins in an environment of rising +91 22 2268 1243
sumeetagrawal@hsbc.co.in
commodity prices. L&T plans to use its strong
*Employed by a non-US affiliate
balance sheet to raise funds overseas, which should of HSBC Securities (USA) Inc,
and is not registered/ qualified
help it to offset the impact of rising interest rates. pursuant to NYSE and/ or
NASD regulations
Valuation and risks
Our target of INR1,650 is based on MACC
valuation methodology. We expect L&T to trade
at MACC of 9.5-12.5% and CROIC of 8.4-9.5%.
L&T is trading at 19.5x FY10e EPS of INR62.4
on a standalone basis, without factoring in the
value of any of its other businesses (valued by us
at INR314 per share). At our target, L&T’s core
business would trade at 21.5x FY10e earnings.

Process industries and the oil and gas sector Execution delay is a key risk; rising raw material
contributed 40% of L&T’s new orders in FY08 prices and interest rates will impact profitability.
compared to 29% in FY07. The margin in these
sectors is c13-14% versus 9-10% in power and
infrastructure. L&T is focusing on large orders in
the range of INR1-1.5bn compared to INR200-

Key financials
Revenue EBITDA margin PAT EPS growth PE* EV/EBITDA* RoE
(INRmn) (%) (INRmn) (%) (x) (x) (%)
FY 2009e 323,620 11.10% 26,909 34.90% 26.4 19.1 27.20%
FY 2010e 426,559 11.50% 36,512 35.40% 19.5 13.6 29.40%
Note: * = price as at close of 02 October 2008 Source: HSBC estimates

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KDDI (9433.JP, OW)

 March 09 OP better than guidance on lower commission costs: we
estimate JPY461bn (KDDI at JPY443bn)
 Near-term boost from 1Gbps fibre service launch, but medium-
term trends remain tough
 TP of JPY750k: low capex in mobile and low overall leverage
enhance defensive qualities – relative outperformance to continue

Operating profit to rise in FY Mar-09 remain under pressure. Neale Anderson*

Analyst
The launch of the ‘au purchase plan’ in June 2008 HSBC Securities (Japan)
Valuation: Our DCF based target price is
should reduce commission costs: we forecast FY Limited
JPY750,000. We believe KDDI has strong +813 5203 3826
Mar-09 operating profit at JPY461bn (company neale.anderson@hsbc.co.jp
defensive qualities: it is no more than normally
guidance: JPY443bn). We expect the service to Inder Kalra*
exposed to GDP trends, and net debt is just 0.7x Associate
help reduce churn, but note that profits from Bangalore
FY Mar-09 EBITDA. The EV of 3.6x FY Mar-09
communications will reduce over the medium- *Employed by a non-US affiliate
EBITDA is below the global telecoms aggregate
term as a result of lower line rental charges under of HSBC Securities (USA) Inc,
of 4.6x. and is not registered/ qualified
the au purchase plan. pursuant to NYSE and/ or
Risks: Risks are increased competitive intensity NASD regulations
Cut our long-term margin assumptions on
and price-cutting in the mobile sector (most likely
weaker discretionary spending
driven by SoftBank). Increased investment in
We have reduced our long-term mobile and fixed
WiMAX equity-affiliate UQ Communications
margin assumptions by 2ppt, as a result of weaker
would be a negative, as would a too early move to
discretionary spending in both the consumer and
next generation mobile (LTE) technology, which
corporate segments. KDDI’s new 1Gbps service
would reduce KDDI’s cost advantage.
will increase detached household subscribers in
urban Tokyo, but medium-term margins will

Key financials & valuation

Share price: (JPY) 590,000 Market cap: (JPYb) 2,695

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(JPYbn) (JPYbn) (JPYbn) (JPY) (%) (x) (%) (%) (x)
2008e 3,596 400 218 51,266 14.5 11.5 1.8 15 1.6
2009e 3,599 461 263 60,584 18.6 9.7 1.9 15 1.4
2010e 3,509 495 291 64,808 7.0 9.1 2.0 15 1.3
2011e 3,566 493 291 64,752 0.0 9.1 2.2 13 1.1
Notes: price at close of 3 October 2008. * = Based on HSBC EPS (fully diluted). Source: HSBC

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Fourth Quarter 2008

KT&G (033780, O)
 Defensive stock with a record of solid growth
 Temporary drop in 3Q08 export sales will not hurt fundamentals
 Rating Overweight; target price KRW105,000

The stock’s defensive profile has led it to will cancel 1.9 million shares (1.4% of total Sean Yang*
outstanding shares) in November 2008. We Analyst
outperform the KOSPI by 75% over the last 12 The Hongkong and Shanghai
months. The growth story remains intact, and we anticipate a new shareholder-friendly plan for Banking Corporation Limited
2009 to be released by the end of this year. +852 2822 4342
predict further outperformance over the next 12 seanyang@hsbc.com.hk
months.
Temporary drop in export sales. Over the last *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
Growth drivers. We project that KT&G will month, the stock has dropped by 6%, and we think and is not registered/ qualified
increase its cigarette sales at a CAGR of 8.2% this is due to the slowing export sales. We expect pursuant to NYSE and/ or
NASD regulations
over 2007-09 by raising ASP and aggressively 3Q export sales to grow only by 3% y-o-y as the
expanding its presence in overseas markets. In company controlled volumes to prevent the export
addition, we forecast margin expansion due to agent from stock-piling before renewing ASP on
decreasing use of relatively expensive domestic contract. However, we believe that this temporary
tobacco leaf. We expect the profit margin to rise drop will not hurt the company’s fundamentals
from 33.8% in 2007 to 36.4% in 2009. and future earnings potential.
Furthermore, the Korea Ginseng Company (100%
Valuation and risk
owned subsidiary) should increase its contribution
to group PBT from 14.2% in 2007 to 16.0% in Our 12-month target of KRW105,000 is based on
2009e via equity method gains. Overall, we a target PE of 16.2x applied to 2009e EPS and our
expect a 14.8% EPS CAGR over 2007-09e. sum-of-the-parts valuation, representing 19.6%
potential total return. Key risk is slowing
High shareholder return. Management culture
domestic cigarette consumption and cigarette tax
has improved meaningfully, to the benefit of
hike expected in 2009.
shareholders, in our opinion. The company has
been buying back shares since August 2008 and

Key financials & valuation

Share price: (KRW) 90,300 Market cap: (KRWb) 12,709

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(KRWb) (KRWb) (KRWb) (KRW) (%) (x) (%) (%) (x)
12/2007a 2,413 814 662 4,838 9.0 18.7 2.9 21.4 4.1
12/2008e 2,640 954 802 5,864 21.2 15.4 3.3 25.3 3.9
12/2009e 2,873 1,041 881 6,441 9.8 14.0 3.9 25.7 3.4
12/2010e 3,170 1,168 993 7,259 12.7 12.4 4.3 25.4 3.0
Notes: price at close of 02 Oct 2008 * = Based on HSBC EPS (fully diluted) Source: HSBC

82
 Equity Strategy
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Fourth Quarter 2008

Singapore Airlines (SIA, O)

 Outperformed MSCI Asia ex-Japan by 29% in the past 6 months
 Most defensive and least cyclical Asian airline with best business
model
 Rating Overweight; target SGD19, based on previous downcycles

Outperformer if growth slows. We argue peak, compared to its average in the year before Mark Webb*
Analyst
Singapore Airlines (SIA) tends to outperform the peak. If we apply SIA’s average annual P/BV The Hongkong and Shanghai
when perception of risk rises in Asia. Indeed, its decline to its average P/BV of 1.5x in the year to Banking Corporation Limited
+852 2996 6574
share price has outperformed MSCI Asia ex-Japan the MSCI AEJ peak in October 2007, this implies markwebb@hsbc.com.hk
by 29% in the past six months. SIA should trade at 1.45x P/BV (which is in line *Employed by a non-US affiliate
with its average since 2000); this gives a fair of HSBC Securities (USA) Inc,
and is not registered/ qualified
Defensive business. SIA has a great brand and
value and our target price of SGD19. Meanwhile, pursuant to NYSE and/ or
product, which are key drivers of airline returns in NASD regulations
we estimate replacement value for SIA is near its
Asia. Singapore is the second best hub in Asia in
current share price levels.
terms of frequencies to key destinations. The
airline has a balanced network and lucrative home Fuel price the key risk. SIA’s earnings are
base in terms of traffic mix. It has a flexible staff highly sensitive to small changes in assumptions,
cost structure, with a modern and fuel efficient especially jet fuel prices. Other risks to our rating
fleet. include expansion by the Arabian Gulf airlines on
SIA’s key routes between Australia and Europe –
Valuation and risks although we argue that a high fuel cost
Overweight rating. In the past five market environment reduces this prospect. Over the past
downturns in Asia since 1990 (we exclude the year, SIA’s share price has had a 0.6x negative
downturn from May 2002 due to the distortions of correlation with spot jet fuel prices.
9/11 and SARS), SIA’s P/BV has tended, on
average, to fall 3% in the year after the market

Key financials & valuation

Share price: (SGD) 14.22 Market cap: (SGDm) 16,871

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(SGDm) (SGDm) (SGDm) (SGD) (%) (x) (%) (%) (x)
03/2008a 15,972 2,124 2,049 1.69 42.2 8.4 7.0 13.6 1.1
03/2009e 18,207 1,711 1,523 1.29 -23.6 11.1 7.0 10.0 1.1
03/2010e 18,234 1,546 1,531 1.29 0.5 11.0 7.0 9.8 1.1
03/2011e 19,567 2,185 2,035 1.72 32.9 8.3 7.0 12.5 1.0
Notes: Price at close of 01 Oct 2008 * = Based on HSBC EPS (fully diluted) Source: HSBC

83
 Equity Strategy
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Fourth Quarter 2008

China Eastern (670, UW/V)

 Premium valuation versus other PRC airlines unwarranted, given
loss-making business and over-stretched balance sheet
 Further losses in 2008-09 would likely wipe out remaining
shareholders’ equity, in the absence of major fund-raising
 HKD0.5 target is our end-08e accounting book value, which is
optimistic given negative replacement value; rating Underweight (V)

An overly risky business. China Eastern Airlines Valuation and risks Eric Lin*
Analyst
(CEA) is highly exposed to traffic slowdown, due Negative replacement value. While the reduction The Hongkong and Shanghai
to its brand and product weakness. We argue it Banking Corporation Limited
in the RMB value of dollar debt is reported in the +852 2996 6570
will remain an underperformer even if the sector income statement as FX gain, the fall in the value ericpklin@hsbc.com.hk
recovers. CEA also has a weak balance sheet. We of the dollar aircraft assets implies its book value *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
estimate a 2008e net debt-to-equity ratio of more is overstated. Therefore, even using its accounting and is not registered/ qualified
than 3,000% and contractual obligations in 2009- book value of HKD0.5 implies, we believe, a pursuant to NYSE and/ or
NASD regulations
12 of over RMB30b. relatively optimistic valuation assumption.

Premium valuation unwarranted. At end-1H08, Potential M&A an upside risk. A shortage of

CEA’s post MI book value was only RMB0.57 funds and negative cash flow could trigger equity
per share. It is trading at 3.5x 2008e book value - tie-ups or restructuring, which are the major
a huge premium to its peers. Our target price of upside risks for this event-sensitive stock.
HKD0.5 per share is our end-2008e book value.

Key financials & valuation

Share price: (HKD) 1.33 Market cap: (HKDm) 7,463

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(RMBm) (RMBm) (RMBm) (RMB) (%) (x) (%) (%) (x)
12/2007a 43,009 169 -1,456 -0.30 nm nm 0.0 -49.8 1.9
12/2008e 43,483 -2,570 -3,288 -0.68 nm nm 0.0 -135.3 3.2
12/2009e 47,730 -1,253 -2,484 -0.51 nm nm 0.0 -154.1 4.2
12/2010e 50,246 449 -1,355 -0.28 nm nm 0.0 -85.2 3.2
Notes: Price at close of 01 Oct 2008. * = Based on HSBC EPS (fully diluted) Source: HSBC nm = not meaningful

84
 Equity Strategy
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Fourth Quarter 2008

ICICI Bank (ICICIBC, UW/V)

 Profitability drivers have weakened by shift in asset mix and
sluggish domestic growth; rising credit costs a key risk
 The stock has corrected sharply on concerns of exposure to
global financial markets through its overseas branches
 Rating Underweight (V); target price of INR570

ICICI Bank’s (ICBK) loan growth nearly fell to clarified that only about 20% of the UK subsidiary’s Todd Dunivant*
Analyst
13% at the end of June 2008, after moderating investment book has exposure to the US. As on 30 The Hongkong and Shanghai
through FY08. This was on the back of a sharp June 2008, ICICI Bank UK had an investment book Banking Corporation (HK)
+852 2996 6599
deceleration in retail advances (constituting c60% of USD3.5bn. tdunivant@hsbc.com.hk
of the advances) on the back of a slowdown in Saumya Agarwal*
Valuation and risk Associate
most key segments. HSBC Securities and Capital
We value ICBK using a combination of economic Markets (India) Private
We believe weakening of growth drivers in the profit model (EPM), PE and P/B. We assume a Limited
+91 22 2268 1235
domestic market and increased focus on risk-free rate of 9.5%, beta of 1.0 and cost of saumyaagarwal@hsbc.co.in
international lending when uncertainty persists in equity of 15.5% and we derive a value of INR558 *Employed by a non-US affiliate
global markets could weigh on near-term of HSBC Securities (USA) Inc,
under the EPM method. On P/E and P/B we value and is not registered/ qualified
profitability and sustainability. To add to this, the net the stock at INR624 and INR540. Our target price pursuant to NYSE and/ or
NASD regulations
NPA touched the 1.74% mark at end-June compared of INR570 is a weighted average where the EPM
to 1.55% at end-March, highlighting the risk of is assigned a weight of 50% and the PE and P/B
rising credit costs. With a loan/deposit ratio of 92% derived forecasts are assigned weights of 25%
at end-March 2008 and an inferior funding mix each.
compared to peers (CASA at just 27%), much lower
Key risks to our valuation include: 1) loan growth
than even some of the state-owned peers, ICBK
could be higher than our estimates; 2) provision
looks more vulnerable to margin pressures.
for loan loss could be lower; 3) monetary policy
The stock has corrected by c30% in the last month, might ease the operating environment for banks.
on concerns of ICBK’s exposure to global financial
markets through its UK subsidiary. The Bank has

Key financials
INRm NII Operating profit PAT EPS (INR) P/E* BVPS* P/BV
FY 2009e 91.5 106.8 45.3 40.7 12.3x 436.7 1.2x
FY 2010e 113.5 122.0 52.0 46.7 10.8x 459.6 1.1x
Note: * = price as at close of 04-Oct-2008 Source: HSBC estimates

85
 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

SMFG (8316, UW/V)

 Negligible loan growth, depressed fee income and lower bond
gains to weaken SMFG's top line this year
 At the same time, SME and real estate related credit costs are
likely to rise as the domestic economy slumps
 Rating Underweight (V); target price JPY500,000

Japan’s banks face the double problem of a weak Valuation and risks Brett Hemsley*
Analyst
top line and rapidly deteriorating domestic HSBC forecasts (47% below guidance and 44% HSBC Securities (Japan) Ltd.
corporate credit cycle. Corporate bankruptcies are +81 3 5203 3627
below median consensus) imply SMFG is trading brett.hemsley@hsbc.co.jp
on the rise, particularly among SMEs and in real at 21.0x FY Mar-09 EPS and 18.3x FY Mar-10. *Employed by a non-US affiliate
estate related sectors. As a result, we expect credit This is too high for a bank moving into a cyclical of HSBC Securities (USA) Inc,
and is not registered/ qualified
costs to continue rising throughout FY Mar-09. downturn of unknown length and severity. Our pursuant to NYSE and/ or
This will impact all Japan’s major banks, but we DCF-derived target price of JPY500,000 indicates NASD regulations

think SMFG is most vulnerable, given its greater a more realistic PE of 16.7x this year and 14.6x
exposure to SMEs and its foray into higher-risk next.
unsecured business loans, under its ‘Business
Risks include better-than-expected performance
Select Loan’ product. Indeed, SMFG already
this year, in particular in terms of credit costs,
reported a surge in credit costs in the first quarter.
and/or an improving outlook in the
Heading into a cyclical downturn, with the
domestic/global economy.
domestic economy worsening and credit costs
rising, we maintain our Negative overall view on
the Japanese megabanks, with SMFG as our
bottom pick.

Key financials & valuation

Share price: (JPY) 627,000 Market cap: (JPYtrn) 6.5

Year to Pre-Provision Operating Profit HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB**
(JPY bn) (JPY bn) (JPY) (%) (x) (%) (%) (x)
Mar-09e 1,013.0 253.0 29,867 -47.6 21.0 2.71 4.8 1.4
Mar-10e 1,024.4 287.6 34,170 14.4 18.3 3.51 5.3 1.4
Mar-11e 1,085.6 354.1 42,445 24.2 14.8 4.31 6.4 1.3

Notes: price at close of 3 Oct, 2008. * = Based on HSBC EPS (fully diluted). ** = BPS adjusted for pref stocks. Source: HSBC

86
 Equity Strategy
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Fourth Quarter 2008

Tokyo Electron (8035, U/V)

 SPE order recovery delay may drop sales 40%
 LCD orders still strong, but this is working through backlog –
weakness to follow. Solar unlikely to plug the gap
 Trading on 24x forward EPS appears too expensive.
Rating Underweight (V); target price JPY4,740

With most, if not all, DRAM and NAND flash Valuation and risks Scott Foster*
Analyst
memory makers now in the red, and foundry The collapse of profit margins this year, combined HSBC Securities (Japan) Ltd
capacity utilization falling, a sustained recovery in 813 5203 3821
with a limited recovery next year, leaves scott.foster@hsbc.co.jp
SPE orders may have to wait until the second half valuations extended, in our opinion. Our *Employed by a non-US affiliate
of FY Mar-10, in our estimation. As a result, we JPY237.5 EPS estimate for FY Mar-10 puts the of HSBC Securities (USA) Inc,
and is not registered/ qualified
expect Tokyo Electron (TEL)’s SPE sales to drop shares on a prospective PE multiple of 24x. In pursuant to NYSE and/ or
about 40% in FY Mar-09 and recover by only 5% comparison, our share price target for TEL and NASD regulations

in FY Mar-10. other mainstream SPE vendors is 20x next fiscal

LCD equipment sales should be up nearly 50%
this year as the company works off its backlog,
but orders have dried up and sales are likely to
give up most of that gain in FY Mar-10. However,
solar equipment should make up the difference, in
our estimation, but total sales are still likely to rise
only 6-7% in FY Mar-10 after a drop of about
30% this year.
year’s earnings. These targets are based on the
companies’ historical valuation ranges, industry
comparables and market multiples.
Potential negative catalysts for our Underweight
(V) rating include capital spending cuts by NAND
flash memory and LCD makers, price competition
and a stronger yen.

Key financials & valuation

Share price: (JPY) 4390.00 Market cap: (JPYbn) 793

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(JPYb) (JPYb) (JPYb) (%) (x) (%) (%) (x)
2007 906 168 106 593.92 26.94 7.4 2.8 19.8 1.5
2008e 638 50 32 176.04 -70.36 24.9 0.9 5.7 1.4
2009e 681 68 43 237.52 34.92 18.5 1.0 7.2 1.3
2010e 755 100 62 343.71 44.71 12.8 1.0 9.6 1.2
Notes: Price at close of 3 Oct 2008 * = Based on HSBC EPS (fully diluted) Source: HSBC

87
 Equity Strategy
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Fourth Quarter 2008

SKT (017670, UW/V)

 Sector emerging out of high cost phase but SKT faces challenges
 ARPU decline and dual-n/w running costs to curb RoE rebound.
Potential value-destructive investments to aid WiBro negative
 Rating Underweight; target price KRW173,000

SKT’s stock has been caught in a 2-year forward reduced churn and marketing costs as lock-in Shishir Singh*
Analyst
PE band of 8-10x for the better part of the past six contract penetration increases. However, investors The Hongkong and Shanghai
years. The stock remains underappreciated and must remember that SKT lags behind in 3G Banking Corporation Limited
+852 2822 4292
undervalued despite healthy FCF generation and migration and, consequently, both the upgrade shishirkumarsingh@hsbc.com.hk

an attractive FCFE 09e yield of 13% (at share (2G-to-3G) as well as dual-network (CDMA and *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
price of KRW210,000). The primary reason for HSDPA) running costs limit mid-term RoE and is not registered/ qualified
undervaluation is its value-destructive investment expansion. Moreover, SKT’s ARPU, in both voice pursuant to NYSE and/ or
NASD regulations
strategy, in our view. The company continues to and data, is likely to decline as bundling and on-
destroy FCF by pursuing an investment strategy to net discounts are not offset by positive elasticity.
support home-grown technologies like CDMA This would also limit RoE expansion.
and, lately, WiBro at the expense of shareholders.
Valuation and risks
With WiBro deployments in the US around the SKT is our least preferred stock in the Korean
corner, we believe the probability of another wireless space due to weaker RoE expansion
value-destructive investment is high (see our versus peers and concerns on potential
flashnote Reiterate UW: Negative on potential investments. Thus, we value it at the bottom of its
investments in Sprint published on 18 July 2008). long-term trading range of 8x FY09e EPS. The
Such an investment would be the key negative key risks to our view are a change in investment
catalyst for the stock, in our view. strategy, lower/higher than expected marketing
costs and less/more than expected ARPU decline.
Admittedly, SKT’s RoE is likely to benefit from

Key financials & valuation

Share price: (KRW) 210,000 Market cap: (KRWb) 15,442

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
(KRWb) (KRWb) (KRWb) (KRW) (%) (x) (%) (%) (x)
12/2007a 11,286 2,172 1,307 17887.52 -20.5 11.7 4.5 12.6 1.3
12/2008e 11,557 1,921 1,196 16485.83 -7.8 12.7 4.5 10.5 1.4
12/2009e 11,435 2,387 1,569 21627.11 31.2 9.7 5.5 13.5 1.3
12/2010e 11,442 2,948 1,998 27546.75 27.4 7.6 7.0 15.8 1.1
Notes: price at close of 29 Sep 2008 * = Based on HSBC EPS (fully diluted) Source: HSBC

88
 Equity Strategy
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Fourth Quarter 2008

Chi Mei (3009, UW/V)

 LCD downcycle only midway through
 Bad timing for capacity addition; higher gearing also a concern
 Rating Underweight (V); target price TWD18

Current LCD downcycle likely to continue 14% and 5% from 76% and 49% in the past year. Frank Su*
Analyst
until channel inventory returns to normal. We However, CMO’s gearing stood at 60% at end- HSBC Securities (Taiwan)
believe aggressive inventory build since 2Q07 has 2Q08. With margin under pressure due to falling Corporation Limited
+8862 8725 6025
resulted in 4-5 weeks of excess inventory in the prices, CMO’s high gearing will be an overhang frankkssu@hsbc.com.tw
food chain. We estimate it could take another six to its share prices. *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
months for inventories to normalise and believe
Valuation and risk and is not registered/ qualified
oversupply of LCD panels will last until 2Q09, pursuant to NYSE and/ or
We reiterate our Underweight (V) rating on the NASD regulations
despite panel makers cutting capacity utilisation
stock with a target price of TWD18 based on the
Bad timing of capacity addition. The lead-time stock’s trough P/B valuation of 0.6x since 2002.
for LCD expansion is about 18-24 months, thus all The key upside risk is an unexpected reversal of
the new capacity add in the next 12 months is the LCD cycle and panel prices.
pretty well set. We estimate CMO’s TFT-LCD
capacity will increase by 36% in the coming 12
months vs. that of LGD’s (034220 KS, N(V)) 22%
and AUO’s (2409 TT, N(V)) 5%. CMO should try
to slow down the capacity ramp-up process. It is
still under greater operational pressure than rivals,
especially since almost all panel makers are losing
money at the current price level.

Higher gearing also a concern. CMO’s main

rivals, AUO and LGD, have seen gearing drop to

Key financials & valuation

Share price: (TWD) 20.40 Market cap: (TWDm) 149,050

Year to Net sales HSBC EBIT HSBC net profit HSBC EPS EPS growth PE* Dividend yield ROE PB
Dec (TWDm) (TWDm) (TWDm) (TWD) (%) (x) (%) (%) (x)
12/2007a 302,473 44,236 36,171 5.22 n/m 3.91 6.94 17.58 0.63
12/2008e 316,691 23,298 17,020 2.30 -55.84% 8.85 3.2 7.51 0.66
12/2009e 262,064 (3,543) (8,130) (1.10) n/m n/m 0.00 -3.64 0.70
12/2010e 316,481 18,376 11,457 1.55 n/m 13.15 -2.15 5.15 0.66
Notes: price at close of 06 Oct 2008. Net sales, EBIT, and net profit in TWD....Source: HSBC estimates

89
 Equity Strategy
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Fourth Quarter 2008

Disclosure appendix
Analyst certification
The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject
security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no
part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained
in this research report: Akane Nishizaki, Jacqueline Tse, Vivek Misra, Garry Evans, Steven Sun, Leo Li, Gary Chiu, Steven Li,
Steve Man, Michelle Kwok, Mark Webb, Rajiv Sharma, Sumeet Agrawal, Neale Anderson, Sean Yang, Eric Lin, Todd
Dunivant, Shishir Singh, Frank Su, Brett Hemsley and Scott Foster

Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.

90
 Equity Strategy
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Fourth Quarter 2008

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target
price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and
the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the
analysts' valuation for a stock.

From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which
identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors
should take.

Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of
the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the
stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts.
For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The
target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.

Rating distribution for long-term investment opportunities

As of 06 October 2008, the distribution of all ratings published is as follows:
Overweight (Buy) 51% (19% of these provided with Investment Banking Services)
Neutral (Hold) 34% (18% of these provided with Investment Banking Services)
Underweight (Sell) 15% (7% of these provided with Investment Banking Services)

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

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 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price Date Disclosure
BHARTI AIRTEL BRTI.NS 756.30 03-Oct-2008 6, 7
CHI MEI 3009.TW 21.60 03-Oct-2008 2, 5, 6, 7
CHINA EASTERN AIRLINES 0670.HK 1.43 03-Oct-2008 2, 4, 5, 6, 7
CHINA RESOURCES POWER 0836.HK 15.70 03-Oct-2008 4
ICICI BANK ICBK.NS 504.35 03-Oct-2008 2, 6, 7, 11
LARSEN & TOUBRO LART.BO 1159.00 03-Oct-2008 2, 5, 6, 7
PETROCHINA 0857.HK 7.71 03-Oct-2008 4, 5, 11
SHANGHAI ELECTRIC GROUP 2727.HK 2.42 03-Oct-2008 4, 11
SINGAPORE AIRLINES SIAL.SI 14.14 03-Oct-2008 5, 6, 7
SK TELECOM 017670.KS 218500.00 03-Oct-2008 11
SWIRE PACIFIC 0019.HK 63.10 03-Oct-2008 2, 4, 6, 7, 11
THE LINK REIT 0823.HK 15.60 03-Oct-2008 5
TOKYO ELECTRON, LTD. 8035.T 4390.00 03-Oct-2008 6
Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 31 August 2008 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 August 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 August 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7 As of 31 August 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company.

Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company, please see the most recently published report on that company available at
www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 This report is dated as at 08 October 2008.
2 All market data included in this report are dated as at close 03 October 2008, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
4 As of 31 August 2008, HSBC beneficially owned 2% or more of a class of common equity securities of the following
company(ies) : PETROCHINA, SK TELECOM
5 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company: China
Shenhua Energy

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 Equity Strategy
Asia Pacific abc
Fourth Quarter 2008

Disclaimer
* Legal entities as at 22 August 2007 Issuer of report
'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking The Hongkong and Shanghai
Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' Banking Corporation Limited
HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC
Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities Level 19, 1 Queen’s Road Central
and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Hong Kong SAR
Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Telephone: +852 2843 9111
Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Telex: 75100 CAPEL HX
Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Fax: +852 2596 0200
Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis
Website: www.research.hsbc.com
Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US'
HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC
México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. -
Banco Múltiplo.
This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong
regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to
retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Securities and Futures
Commission. All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If it is received by a customer
of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This
document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.
HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified;
HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness.
Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates
and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment)
and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have
assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to
or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or
relating to those companies.
HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S.
persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC
Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report.
In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a
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304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions
specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in
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Authority of Singapore. In Australia, this publication has been distributed by HSBC Stockbroking (Australia) Pty Limited (ABN 60 007 114
605) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). It makes no representations that the
products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or
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© Copyright. The Hongkong and Shanghai Banking Corporation Limited 2008, ALL RIGHTS RESERVED. No part of this publication may
be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 258/09/2008

227423

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Main contributors Macro
Equity Strategy
Garry Evans* Q4 2008
Pan-Asian Equity Strategist
+852 2996 6916
garryevans@hsbc.com.hk

Garry heads HSBC’s equity strategy team in Asia-Pacific. His previous roles at HSBC include Head of Pan-Asian Equity
Research and Chief Japan Strategist. Garry began his career as a financial journalist and was editor of Euromoney magazine
for eight years before joining HSBC in Tokyo in 1998.

Next problem: growth

Steven Y. Sun, CFA*

Next problem: growth

CFA Regional Equity Strategist
+852 2822 4298
stevensun@hsbc.com.hk

Steven Y. Sun is a strategist on HSBC’s Asia-Pacific equity strategy team. Steven joined HSBC in 2006, prior to which he was a
China specialist for a private macroeconomic consultancy in Washington DC. Steven began his career as a financial analyst
for a state-owned financial institution in Beijing in 1996.

Akane Nishizaki*
It will start to wilt
Strategist
+813 5203 3943
akane.nishizak@hsbc.co.jp

Akane joined HSBC as a graduate trainee in 2001. After training, she worked in the treasury department in Tokyo for more
than a year, selling foreign exchange, mainly options. She joined the equity research department in April 2005 as an associate
in strategy.

Vivek Ranjan Misra*

Equity Strategist
HSBC Bank Plc
+91 80300 13699
vivekmisra@hsbc.co.in

Vivek joined HSBC in May 2005 and works for the equity strategy team. Previously, he worked in the manufacturing sector and
as an M&A analyst in the oil and gas sector. Vivek is a chemical engineer from Indian Institute of Technology (IIT) and has an
MBA from the University of Rochester.

Jacqueline Tse*
Strategist
Risk aversion won’t ease quickly, but it is unlikely to get much worse.

Equity Strategy
+852 2996 6602
jacquelinetse@hsbc.com.hk
The focus now will shift from rising risk to falling growth. As global growth slows,
Jacqueline joined HSBC in February 2008 as an Equity Strategist, Asia Pacific. Her previous experience includes working with
the corporate treasury team of a leading investment bank with particular emphasis on Korea, Thailand and Malaysia, Associate so will Asian exports, GDP growth and earnings. With valuations perhaps 15-20%
Economist for a leading bank, and Senior Financial Analyst for Hewlett Packard. She holds an MSc in Management Science and
Operations Research from Columbia University, and a BA in Economics from the University of California, Berkeley. above rock-bottom levels, Asian stock markets are likely to fall for another quarter or two.
Leo Li* We stay defensive, and favour markets such as China and Singapore,
Strategy Associate
+852 2996 6919 which should have limited downside risk but also the chance of a good bounce
leofli@hsbc.com.hk
when the bottom is reached.
Leo Li joined HSBC as a strategy associate in 2007. He started his career in the finance industry as a marketing executive in
RNC Capital after graduating from UC Irvine with an MBA in 2004. Leo also has a Bachelors degree in Information
Engineering from the Chinese University of Hong Kong.

Devendra Joshi*
Associate
Bangalore

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations.
By Garry Evans

Disclosures and Disclaimer This report must be read with the disclosures and analyst
Q4 2008

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it