Industry Focus

We give insurance, precious metal, auto, coal and oil/natural gas sectors “outperform the market” rating

Mainland Financial Industry: Insurance Benefits from the Capital Market, Jump in Growth

In 2009, Chinese banking system recorded RMB9.2 trillion newly added loans, largely supported the economy under this special time. In 2010, newly added loan is expected to reach RMB8 to10 trillion. As the loan risk is relatively higher in 2010 compared to 2009, the banking system will pay more attention regarding the loan risk management. The CBRC may raise the capital adequacy ratio to 13% for major banks, while by the end of 3Q09 the average CPR for domestic banks was 11.4%. We believe that the downside risk towards the banking system is not severe, yet financing pressure will increase.

We prefer insurance companies to banks mainly due to the bullish signs from the capital market. We believe that China Life Insurance and Ping An will greatly benefit from the sounding returns from their investment, which is expected to grow 50% to 100%. With the growth of GPD, per capita insurance need in China has a great potential, yet in 2010 along, the growth may not be significant.

Metal: Bullish on Gold, Minor Adjustment Inevitable

In 2009, fixed asset investment was the main driving force of China's economic rally; thus steel industry was highly benefited as both production and utilization rate raised significantly. Though fixed asset investment in 2010 may be cut by 300billion RMB, as opposed to the original plan, no structural change is anticipated, thus continuing to support the steel consumption. We expect the steel consumption relative to the total GDP will be 165tons/0.1billion, slightly lower than that of 2009, yet back to the trend built since 2005. Generally speaking, driven by real estate, auto and home appliance, total steel demand is expected to have a 10% increase.

Within the industry, we prefer precious metals. We expect the gold price will continue climbing up. Due to the inflation pressure that might kick in from 2H10，we believe that Jiangxi Copper has the potential to rally back to its historical peak level in 2007 or even higher.

Transportation and Auto: Benefited from Favorable Policy

Auto industry is one of the major driving forces of consumption growth. Both small and environmentally friendly cars will be benefited from the encouraging policies. First, auto to the countryside will last to the end of 2010. Environmentally-friendly models are encouraged by the government and will be promoted to 20 cities among which 5 cities will receive subsidies. The deferral of purchasing tax on low-emission cars and increment of old-for-new subsidy will together cause another jump in terms of auto sales. Among all, we prefer to Geely and BYD.

We are cautious about the aviation industry for it relies on the overall momentum of economy and business. For international airline carriers, freight return is expected to have slight improvement while passenger return may remain relatively low. Global air industry is expected to suffer US$5.6billion loss in 2010. China's air sector is expected to outperform the globe as the government has introduced couple favorable measures. We expect China's air industry to get back onto its stable growth trend; yet we have to understand that it is not easy for the industry to turn profit from loss.

Telecommunication: fierce competition with uncertain cost

There will be fierce competition among the telecom companies as phone service fee and IDD fee are expected to adjust downward. Mainly due to market structure, the business growth has slowed downed. Although the valuation is still comparably low, we keep wait-and-see attitude towards the industry as it lacks of catalyst and the cost of bands remains uncertain.

Coal: Being Stronger

National Development and Reform Commission (NDRC) announced that the government would withdraw from coal negotiations. NDRC recently demanded to change the current collective approach of coal negotiations, leaving the enterprises to resolve among coal-miners and IPPs (Independent Power Producers) within the specified time. This means that coal price controls, which have been lasting for 16 years will end and the government has completely withdrew from negotiations of coal. We slightly adjusted our estimated that contract coal price of next year would not less than 8%.

On January 5, at a press conference about Merger and reorganization of coalmine enterprise in Shanxi Province, Wu Yin, deputy director of National Energy Administration, said that the planning of national coal restructuring has been submitted to the State Department. The experience in Shanxi coal industry is expected to be extended to the whole country. It is foreseeable that the coal supply in 2010 would be slightly tightened.

Because of the unexpected adverse weather condition, shortage in natural gas supply, the inventory of thermal coal in most of the power plants have reached the alert level. Therefore, this would not only increase the contract coal price that is being negotiated between IPP and coal producers, but also stimulating the spot price simultaneously. We prefer China Shuehua as top pick in this sector because of its high coal reserve, railway and port facilities.

Oil and Natural Gas: Oil Price Steadily Increase, Up Stream Companies Benefit

After the rocket in 2009, oil price will be relatively stable in 2010; yet, with the further recovery of the global economy, it is inevitable to go up. We believe that oil price depends more on the fundamentals than financial factors. Fundamentally speaking, demand from the developed countries is expected to be stable in 2010, and the demand growth rate in developing countries will also slow down. Furthermore, OPEC's acceptable price is between US$70/bbl to US$90/bbl for this price both satisfies its national expense and is not too high to discourage the consumers. Therefore, we conservatively expect that the oil price will go back to approximately US$85/bbl. The rise of oil price will benefit up stream companies like CNOOC and COSL. At the same time, down stream companies may face a downside risk due to the refining margin cut

Infrastructure: High Base Number, Hard to Surprise

With the 4trillion RMB stimulus in 2009, domestic infrastructure underwent remarkable development, and thus improved the revenue in the relative companies. Such strong growth helped China step out of its economic trough; however, we believe that room for improvement is limited based on such achievement. On the other hand, part of the profit in 2010 will come from the unrealized profit by the end of 2009, increasing 2010's profit margin. Among the industry, we prefer China Railway for its large oversea market and positive outlook of the fixed asset investment.

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