China Update July 17, 2009

China Weekly Update July 17, 2009

Dan Su Sr. Stock Analyst [email protected] +1 312-384-3781 Iris Tan Stock Analyst [email protected] +86 755-8826-4217 Special Contributor Min Ye Stock Analyst [email protected] +1 312-696-6494

The fourth annual Morningstar Stocks Forum will be held November 5-6, in Chicago. Last year the Forum brought together over 300 institutional clients, registered investment advisors, and high net worth individuals. China TechFaith Wireless (CNTF) was among the international presenters. To RSVP or inquire about one-on-one meetings, please call or email Sam Padrul at +1 (312) 696-6309 or [email protected]. TOP NEWS OF THE WEEK GDP Growth Indicates Chinese Economy on Firmer Ground Economic growth accelerated in the second quarter of 2009, up by 7.9% year over year, compared to 6.1% in the first three months. With an annualized GDP growth of 7.1% for the first six months, China is now visibly closer to posting a full-year growth rate of 8% than just three months ago. The Chinese government has religiously considered an 8% GDP growth rate essential to creating enough jobs and maintaining social stability. As expected, the economic growth has been powered by consumption and investment, while weak export remains a drag. Investment growth is mainly driven by a 33.5% increase in fixed asset investment in the first six months, as the government spends aggressively on infrastructure projects, particularly in the less-developed central and western regions. (more macro data in the Quarterly China Base Metal Watch below) Robust consumer spending remains a pleasant surprise, as tax cuts and subsidy programs have taken effect and encouraged urban and rural residents to spend on household appliances, computers and automobiles. Official statistics show that retails sales totaled CNY 5871 billion ($859 B) in the first half of 2009, up by 15% from last year. The economic recovery in China is largely driven by aggressive government stimulus spending and ready credits from the banks. Since these have proven effective in reviving the economy, we expect little change to these policies for the second half of the year, although some finetuning may become necessary. There are signs that bubbles may have already returned to the housing and stock markets. Residential housing prices have returned to the 2007 peaks in various major cities across the country, and the local stock markets have surged by 75% so far this year while corporate profits fell by 23%. Nonetheless, it is unlikely that China will step on the brake anytime soon, for fear of choking the much-needed growth. MARKET RECAP Despite profit-taking in financial and real estate stocks and worries about the coming mega-IPO of China State Construction in July, strong signs of economic recovery as shown in recent macro economic data pushed the Chinese stock market to its fifth consecutive weekly gain. Over the past five trading days, the Shanghai Composite Index climbed by 2.4% to 3,189, the best level since June 2008, while the Shenzhen Composite Index rose by 3.4% to 13,131.

Morningstar Institutional Equity Research: China Update Weekly

Morningstar Institutional Equity Research: China Update Weekly

MACRO AND INDUSTRY UPDATES Foreign Exchange Reserve Exceeds $2 Trillion The foreign exchange reserve stood at $2.14 trillion at the end of June, according to the Chinese central bank. China became the world's largest holder of foreign exchange reserve in 2006, surpassing Japan. It took the country less than 3 years to double its reserve from the $ 1 trillion mark it hit in October 2006. Compared to the massive reserve held by the government, corporations and individuals in China only hold $ 150 billion in foreign currencies. Tax Revenue Fell by 6% YOY in 1H According to statistics from the Treasury, tax revenue totaled CNY 2953 billion ($432B) for the first six months. After five months of sequential declines, tax revenue grew for the first time in June this year. The decline was attributed to double-digit drop in customs taxes, corporate income tax and import taxes. China Reports 340 Million Internet Users by June According to China Internet Network Information Center (CNNIC), China's total Internet population reached 338 million by end of June 2009, but the penetration rate remains low at 26%. Out of the total internet users, 320 million people (94.3%) use broadband access. The number of mobile subscribers that use handsets to access the internet also rose to 155 million. JV between NetEase and Activision Blizzard under Investigation The investigation has been confirmed by a senior official from the government agency in charge of press and publication, including content on the internet. China currently prohibits foreign companies from operating online games in the country through a joint venture or solely foreign-funded business, and will likely penalize both firms if their JV is found to have violated the rules. The JV was established to support operation of Blizzard games and the affiliated multiplayer service platform in China.

©2009 Morningstar, Inc. All rights reserved. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. For licensing or permission to use this information, call +1 312-6966869.

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Morningstar Institutional Equity Research: China Update Weekly

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IPO AND M&A Here are the major IPOs and M&A activities involving Chinese companies. IPOs

Company Sichuan Expressway

Near China Pacific future Insurance

M&A

Ticker

0107.HK 601601.SH

IPO Details Raised CNY 1.8 billion ($263 million) by pricing IPO at CNY 3.60 per share To raise up to HKD 27 billion ($3.5B) by issuing 1 billion shares

Date

Exchange

17-Jul-09

Shanghai Stock Exchange

NA

Hong Kong Stock Exchange

BYD

1211.HK

To raise capital by issuing 100 million shares

NA

Shenzhen Stock Exchange

Company

Ticker

Other Parties

Deal Details

Date

China Eastern Airlines

CEA 0670.HK

Shanghai Airlines

China Eastern Airlines acquired Shanghai Airlines through a share swap valued at $1.3 billion

12-Jul-09

Sinotruk

3808.HK

German truckmaker MAN SE

Sinotruk sold 25% stake to MAN for euro 560 million ($640 million)

16-Jul-09

NEW RESEARCH HIGHLIGHTS Quarterly China Base Metal Watch (Min Ye) China's raw material imports showed no sign of deceleration in the second quarter. The substitution effect, higher seasonal activities, and the initial effects from the government's stimulus programs have all spurred Chinese metal demand. - Iron Ore and Steel: Chinese iron ore imports from January to May reached a historical high of 243 million tons, up 26% year over year. The substitution effect was particularly salient in iron ore, as domestic mine output declined by 2-3% year over year. Steel production, on the other hand, remains largely stable from last year's levels. - Copper: Imports of copper ingots surged in the second quarter, with year-over-year increases surpassing 100% in May. The spread between Shanghai Futures Exchange (SHFE) copper prices and London Metals Exchange (LME) prices widened since spring, making copper imports more attractive. - Aluminum: Chinese aluminum imports climbed the fastest compared with copper and iron ore. As the government discourages energy-intensive industries, aluminum imports are on track to take up a bigger portion of domestic consumption The full report is available at http://select.morningstar.com

©2009 Morningstar, Inc. All rights reserved. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. For licensing or permission to use this information, call +1 312-6966869.