CYCLICAL_BIAS;CSI300_TARGET_UP_9%_TO_3_00-2013-02-01.ppt

,ben bei,january 31, 2013 china a-share strategy reaffirm pro-cyclical bias; csi300 target up 9% to 3,000 portfolio strategy research,csi300 target up to 3,000, driven by 11% eps and 5% valuation we reiterate our positive stance on a-shares and raise our csi300 2013 yearend target to 3,000 (prior 2,750), implying 16% potential upside, despite possible higher volatility ahead and the 21% gains since our 2013 strategy outlook report dated nov. 29, 2012. we expect earnings to play a more important role ahead and the 16% implied return will be driven by 11% (prior 9%) eps growth and another 5% p/e expansion to 11.2x (prior,jason sun +86(10)6627-3187 beijing gao hua securities company limited helen zhu +852-2978-0048 goldman sachs (asia) l.l.c.,10.7x), still well below the 13.6x average since the 2008 trough. timothy moe, cfa,macro, earnings, valuation, and liquidity still favorable to equities recent macro indicators (including pmis, ips and exports) have generally trended positively, enhancing our more upbeat than consensus 2013e gdp forecast (8.2% vs. 8.0%). looking ahead, further improvement of gdp yoy growth to 8.1%/8.2%/8.4% in 1q-3q 2013 should continue to translate into incrementally more positive earnings surprises, particularly for selective cyclical sectors. still-reasonable mutual fund positions, a close-to-trough level of retail accounts opening and qfiii/rqfii additions continue to provide liquidity support. in the meantime, cpi concerns should not be imminent given the mild macro recovery with persisting overcapacity. reaffirm pro-cyclical bias; u/g capital goods to replace property we continue to favor pro-cyclical sectors in 1h2013 on a macro recovery and consumption players in 2h2013 given the approaching reform agenda. we suggest a gradual shift from earlier-cyclical sectors to selective later cyclical sectors in 1h2013, and we take profit on property (30% alpha since 2012), replaced with capital goods on potential fundamentals improvement. we now overweight capital goods, construction materials (cement), securities, insurance, media and f&b, and continue to underweight coal, steel, and chemicals due to weaker fundamentals. our forecasted csi300 index path in 2013e,+852-2978-1328 goldman sachs (asia) l.l.c. +852-2978-1220 goldman sachs (asia) l.l.c. chenjie liu +86(10)6627-3324 beijing gao hua securities company limited,3,100,csi300 index path forecasts,2,900 2,700 2,500,2,750 (+6%, 1q13),2,900 (+12%, 1h 2013),3,000 (+16%, end-2013 ),2,300 2,100,dec-11,mar-12,jun-12,sep-12,dec-12,mar-13,jun-13,sep-13,dec-13,source: gao hua securities research, goldman sachs global ecs research goldman sachs does and seeks to do business with companies covered in its research reports. as a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. for reg ac certification and other important disclosures, see the disclosure appendix, or go to /research/hedge.html. analysts employed by non-us affiliates are not registered/qualified as research analysts with finra in the u.s.,the goldman sachs group, inc.,goldman sachs,2,january 31, 2013 stay positive on favorable macro, earnings, valuation, and liquidity overview: csi300 to 3,000, driven by 11% eps and 5% valuation we are raising our csi300 2013 yearend target to 3,000, up 9% from our previous target at 2,750, implying 16% potential upside. we expect 11% eps growth (prior 9%) for the csi300 index in 2013e and our yearend target 3,000 is based on 11.2x 2013e p/e (5% expansion from current 10.7x), well below the average 13.8x since the 2008 trough level. we note the a-share market may have already partially priced in chinas macro recovery and slightly lifted hopes (but the market remains very skeptical as a whole) on chinas potential economic reforms, given the 21% gains for the csi300 index since our 2013 strategy outlook report, recovering mildly, with hopes on reform, dated november 29, 2012. however, we believe the market has not fully priced in the economic recovery and has not been overly bullish on chinas reform process. despite potentially higher index volatility, we expect further upside potential in 2013e, on the back of: 1) continuing improving macro/earnings improvement with more bullish views than consensus; 2) still-attractive valuations; 3) continued favorable liquidity support; and 4) any meaningful progress on economic reforms. we continue to favor pro-cyclical sectors that benefit more from a cyclical recovery than defensive sectors, and we suggest a gradual shift from earlier-cyclical sectors (such as property) to selective later-cyclical sectors (such as mid-stream manufacturing industries like capital goods or construction materials like cement) in 1h2013. here we lock in the alpha generated for property (10% since nov 29, 2012, and 30% since early 2012), and downgrade to market weight. we upgrade capital goods to overweight from market weight given potential improving fundamentals (details on page 10). currently we suggest overweight capital goods (machinery, railway equipment), construction materials (cement), securities, insurance, media and f and 4) lack of reform progress. exhibit 1: we forecast csi300 index yearend target at 3,000, 16% potential upside,csi300 index current index level bull case base case bear case,index target 2013e year-end 2,583 3,330 3,000 2,413,potential upside/downside (%) 2013e year-end as of jan. 24, 2013 29% 16% -7%,earnings growth (%) 2013e year-end 15% 11% 0%,target pe (12-m forward) (x) 2013e year-end 12.0x 11.2x 10.0x,source: wind, gao hua securities research, goldman sachs global ecs research goldman sachs global economics, commodities and strategy research,(%),(%),8.2,8.1,0,3,january 31, 2013 macro: recovery well on track, still favorable to equities we have been holding the view that the macro backdrop is the most critical factor driving the equity markets. since we published our 2013e strategy outlook on september 29, 2012, the key macro indicators (including pmis, cpis, ips, exports, etc) have been generally trending positively, in line or slightly better than previously expected. our china economists slightly upgraded 2013e gdp growth to 8.2% from 8.1% on december 18, 2012, which is more upbeat than current consensus estimates at 8.0%. looking forward, we expect a continued favorable macro backdrop, such as further improvement of quarterly yoy gdp growth from 7.9% in 4q2012 to 8.1%/8.2%/8.4% in 1-3q 2013 per our economists estimates, will continue to provide fundamental support to the equity market in terms of both earnings and valuation. in the meantime, cpi still looks manageable at an estimated c. 3% in 2013e, despite recent cpi acceleration in december 2012 (at 2.5%) on the back of rising vegetable prices due to cold weather. we do not expect inflation to become a major concern in 1h2013 (partially because of the overcapacity issue) as we believe inflation can be contained below the threshold of 3.5%-4%, above which we think it could potentially hurt economic growth and trigger potential policy tightening.,exhibit 2: we expect a modest gdp recovery ahead and more upbeat than consensus china - real gdp (% chg yoy) 14 13.8,exhibit 3: in the meantime, cpi situation seems still under control below 3.5% at 2013 yearend china - cpi (% chg yoy) 9 8.0,8 13 7,12 11,11.9,6 5 4,6.3,gs forecast,10,10.2,3.2,3.4,9 8,7.9,gs forecast 8.4 8.2,3 2 1,1.2,2.0 1.9,2.8 2.5 wind consensus,wind 7.4 consensus 7 -1 6.5,6,-2,-1.5,2005,2006,2007,2008,2009,2010,2011,2012,2013,2005,2006,2007,2008,2009,2010,2011,2012,2013,source: wind, gao hua securities research, goldman sachs global ecs research. goldman sachs global economics, commodities and strategy research,source: wind, gao hua securities research, goldman sachs global ecs research.,gliacceleration,sep-09,sep-10,sep-11,mar-10,mar-11,mar-09,mar-12,nov-09,nov-10,nov-11,sep-12,jan-10,jul-10,jan-11,jan-12,jul-09,jul-11,jan-09,jul-12,may-09,may-10,may-11,mar-05,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,dec-08,mar-09,jun-09,sep-09,dec-09,mar-10,jun-10,sep-10,dec-10,mar-11,jun-11,sep-11,dec-11,mar-12,jun-12,sep-12,dec-12,mar-13,may-12,nov-12,-5,6,4,january 31, 2013,exhibit 4: gs global leading indicator still implies favorable global backdrop,exhibit 5: chinas inventory situation continues to improve,0.15,recovery,expansion,25,rmb bn,upstream,downstream,0.10,july 2012,aug 2012,sept 2012,20,0.05 0.00 -0.05,jun 2012 may 2012,oct 2012 nov 2012 dec 2012,jan 2013,15 10 5,-0.10,april 2012,feb 2012,0 -0.15 march 2012,-0.20,contraction,slowdown,-0.2,-0.1,0.0,0.1,0.2,0.3,0.4,gli growth,source: gao hua securities research, goldman sachs global ecs research. exhibit 6: we expect better export outlook in 2013e, on back of global gdp recovery,source: nbs, ceic, gao hua securities research, goldman sachs global ecs research. exhibit 7: our macro bridge index still points to positive territory, despite a moderating pace,(%) 50 40,china - exports of goods/services (% chg yoy) world - real gdp (% chg yoy, rhs),(%) gs forecast,5,(%) 70,shcomp index return (3-m return) macro bridge index (2-m leadning),correlation coefficient = 77%,30 20,4 3,50 30,2 10,0,1 0,10 -10,-10,-1,-20 -30,2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013,-2 -3,-30 -50,source: wind, gao hua securities research, goldman sachs global ecs research. goldman sachs global economics, commodities and strategy research,source: wind, gao hua securities research, goldman sachs global ecs research.,oct-08,dec-08,feb-09,apr-09,jun-09,aug-09,oct-09,dec-09,feb-10,apr-10,jun-10,aug-10,oct-10,dec-10,feb-11,apr-11,jun-11,aug-11,oct-11,dec-11,feb-12,apr-12,jun-12,aug-12,oct-12,dec-12,feb-13,apr-13,jun-13,aug-13,oct-13,dec-13,oil,gas&petrochemical,textile&apparel,utilities,transportationinfratructure,overall(ex.financials),non-ferrousmetal&others,consumerdurables,constructionmaterials&others,it&equipment/components,auto&parts,food&beverage,shipping&othertransportation,hotel&tourism&others,capitalgoods,securities&others,telecom,construction&otherindustrialservices,insurance,property,banks,overall,coal,healthcare,retailing,airlines,chemical,steel,media,28,35%,30%,5,january 31, 2013 valuation: still attractive vs. historical levels or global peers using 2013e i/b/e/s eps, our csi300 index target of 3,000 implies a p/e of 11.2x (14.3x ex- banks), up from the current level of 10.7x (13.7x), which is a rebound from the december trough of 9.0x (11.8x). however, our target p/e is still well below the average since the 2008 trough of 13.8x (16.5x) and just slightly above the average minus one std level of 9.7x (12.1x). globally, the csi 300 index also looks attractive at a 1.6x 2013e p/b and a 16% roe vs. the global averages of 1.8x and 14%.,exhibit 8: we expect currently undemanding valuations will continue expansion with macro improvement,exhibit 9: global comparison also suggests favorable valuations in china,(x) 30 26 24,ibes csi300 12m fp/e ibes csi300 12m fp/e exl banks ibes csi300 12m fp/b (rhs),(x) 3.5 3.0,2013e p/b 3.0 2.5,philippines india,thailand,22 20,2.5,2.0,malaysia,u.s,australia,18,taiwan,16,+1 stdev,2.0,1.5,singapore europe hong kong,china,14,csi300 avg. 13.6x,13.7x,12,1.6x,1.5,japan,10,-1 stdev,10.7x gs yearend,1.0,korea,target: 11.2x,8,1.0,0.5,attractive,2013e roe (%),5,7,9,11,13,15,17,19,21,23,25,source: ibes, gao hua securities research, goldman sachs global ecs research.,source: ibes, gao hua securities research, goldman sachs global ecs research.,exhibit 10: the csi300 return since november seems mostly driven by valuation reversion rather than earnings csi300 2012 performance decomposition by sector (from outlook publication to date) 25% 20% 15% 10% 5% 0% -5% -10% earnings change valuation change price performance source: wind, gao hua securities research, goldman sachs global ecs research goldman sachs global economics, commodities and strategy research,aug-11,aug-12,nov-10,aug-10,may-11,may-12,sep-12,jan-11,feb-11,sep-11,jan-12,feb-12,dec-10,jun-11,jul-10,apr-11,jun-12,jun-10,sep-10,mar-11,nov-11,dec-11,mar-12,apr-12,oct-10,jul-11,jul-12,nov-12,oct-11,oct-12,80,20,(rmb bn),6,january 31, 2013 earnings: early signs of positive improvement following our economists 2012e/2013e gdp revision to 7.8%/8.2% (from 7.6%/8.1%), we have modestly revised our 2012e/2013e eps growth to 3%/11% (from prior 1%/9%) based on the gs top-down earnings model. the recent more frequent monthly industrial profit data points to a positive direction for the earnings trend in 4q2012. and the past few weeks wind consensus estimates have shown signs of positive earnings revisions. along with quarterly strengthening yoy gdp growth until 3q2013, we expect upcoming earnings revisions are likely to be on the positive side.,exhibit 11: we expect 3.0%/11.0%/12.5% for 2012-14e eps growth from a top-down perspective,exhibit 12: csi300 profit growth may revise up, indicated by soe profit/nbs industrial profit growth,top-down estimates 2011a 2012e,non-financial revenue growth (%) 24.8 6.0,non-financial margin (%) 5.1 4.3,eps growth (%) 14.6 3.0,previous eps growth (nov. 29, 2012) 1.0,70 60,sasac soe profit growth csi300 profit growth exl financials,nbs industrial sectors profit growth,50,2013e 2014e,9.2 9.6,4.7 4.9,11.0 12.5,9.0 12.5,40 30,bottom-up estimates (wind consensus) 10,2011a,24.8,5.1,14.6,0,-10,2012e,4.3,4.4,5.0,-20,2013e 2014e,10.6 8.2,4.9 5.3,13.4 14.9,-30,source: wind, gao hua securities research, goldman sachs global ecs research exhibit 13: csi300 consensus earnings appears to be bottoming out csi300 earnings forecast based on wind consensus,source: wind, gao hua securities research, goldman sachs global ecs research exhibit 14: csi300 earnings forecast revision sentiment just turned positive in january 2013 csi300 index earnings revision sentiment,3,000 csi300 index (rhs),2,500,2006e 2011e,2007e 2012e,2008e 2013e,2009e 2014e,2010e,30%,6,000,20%,5,000,2,000 1,500,10% 0%,4,000,3,000 -10% 1,000 2,000 -20% 500,-30%,1,000,0 jan-06,jan-07,jan-08,jan-09,jan-10,jan-11,jan-12,jan-13,-40% jan-07,jan-08,jan-09,jan-10,jan-11,jan-12,0 jan-13,source: wind, gao hua securities research, goldman sachs global ecs research. goldman sachs global economics, commodities and strategy research,source: wind, gao hua securities research, goldman sachs global ecs research.,jun-07,sep-07,sep-08,sep-09,sep-10,sep-11,mar-07,mar-08,mar-09,jun-09,mar-10,dec-10,mar-11,mar-12,sep-12,dec-12,jun-08,jun-10,jun-11,jun-12,dec-07,dec-08,dec-09,dec-11,120,(%),7,january 31, 2013,exhibit 15: csi300 earnings forecast changes by sector (2013ytd) csi300 index earnings forecast changes (2013e)_wind consensus (2013ytd),exhibit 16: csi300 may record improvement of earnings in 4q2012e per wind consensus earnings growth ytd yoy (%) overall,steel construction materials & others,0.6%,2.6%,100,overall (ex. financials),it&equipment/components,0.6%,banks transportation infratructure overall health care property overall (ex. financials) oil,gas& petrochemical insurance shipping&other transportation,0.4% 0.2% 0.2% 0.2% 0.1% 0.0% 0.0% 0.0% 0.0%,80 60 40,telecom retailing media hotel &tourism&others textile&apparel airlines securities& others chemical,0.0% 0.0%,0.0% 0.0% 0.0% 0.0% 0.0% 0.0%,20 0 -20,2% -16%,5% -7%,food&beverage,0.0%,auto&parts utilities capital goods coal consumer durables non-ferrous metal & others construction&other industrial services,0.0% -0.1% -0.1% -0.1% -0.2% -0.2% -0.2%,-40,-1%,0%,1%,1%,2%,2%,3%,3%,source: wind, gao hua securities research, goldman sachs global ecs research,source: wind, gao hua securities research, goldman sachs global ecs research,liquidity: mutual fund positions lagging; retail inflows just started for domestic mutual funds, equities made up 80.5% of the holdings of active equity funds as of 2012 (namely, equity funds excluding indexed and etf funds), up 2.7 ppt from 3q12s 77.8%, and we expect further upside potential. since 2003, equity holdings of actively managed funds have ranged between 53.9% and 95.7%, and averaged 81%. we note some domestic institutional investors who were pretty skeptical on either a china macro recovery or chinas reform outlook in early 4q2012 have gradually and partially become less negative, along with sustained macro data improvements in the past months and the recently more frequent emphasis on reforms among chinas senior leaders. retail inflows appear to have just started moving back into the equity market, and weekly new investor account openings have shown early signs of a pickup in the past few weeks. current weekly accounts opened remain close to historical trough levels, suggesting further potential upside. for foreign inflows, we have seen increasing quota approval of qfii and rqfii investors, and total quota as of end-2012 reached rmb303bn, 1.7% of china a-share total floatable market cap. moreover, as the csrc may continue to accelerate the qfii investing process (based on csrc chairman guo shuqings comments in a recent speech, as reported by on jan. 14, 2013), we believe there is potential for a sharp increase in qfii/rqfii quotas over the long term. we acknowledge that this is more of a sentiment boost for now since this incremental portion is probably small as the qfii/rqfii quota additions in 2012 accounted for only 0.5% of total market turnover in 2012. additionally, relatively high yields of wealth management products (including trust products) have been regarded as a potential dilution for equity inflows. however, our tracking of wealth management products, such as 3-m wealth management products and goldman sachs global economics, commodities and strategy research,90,8,january 31, 2013 p