Hsbc 1710

17 October 2008

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Equity Strategy Pan-Asia

Global Research

AI – Asia Insights When will risk ease?  Asian valuations have hit record lows…  …and investors have clearly capitulated  But equities won’t bottom until all risk issues are resolved It is only 10 days since we published our Q4 Quarterly, but the world has changed dramatically. Banking systems in the US and Europe have been partially nationalised, governments have blanket-guaranteed bank deposits, and Asian equities have fallen 17% since the end of September (the pricing point for the Quarterly). MSCI Asia ex Japan (Chart 1) is now down 56% from its peak, roughly what it fell by in the 2000-1 bear market, and not far from the 66% decline during the Asian Crisis in 1997-8 (Chart 1). Mostly the view we took in the Quarterly still seems valid. We argued that the first phase of the bear market – risk aversion – was not over but was nearing its end. There are still credit risks out there waiting to bite (corporate defaults, the insurance industry, credit default swaps etc.) and we think it unlikely that markets will bottom until they are dealt with. But over the next few months, the market’s attention will shift to worries about slowing growth – of global GDP, Asian exports and earnings. However, that will be easier to deal with, since it will be more like a normal recession, rather than the unprecedented circumstances we have witnessed over the past few weeks. Issue no. 66 Garry Evans* Strategist The Hongkong and Shanghai Banking Corporation Limited (HK) +852 2996 6916 [email protected]

So are we near the bottom? Certainly, some of the conditions are in place. Valuations in Asia have hit historic lows (see, for example, PE in Chart 2). Investors have mostly capitulated: in 30 or so meetings with clients in the past week, we found only one actively looking to buy equities. The likely slowdown in growth is mostly understood and discounted in stock prices. We stick to our view that – like in the 1907 financial crisis – stocks will bottom when the final financial risk issue is resolved.

View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations Issuer of The Hongkong and Shanghai report: Banking Corporation Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

1. MSCI Asia ex Japan in bear markets

2. 12-month forward PE

110 100 90 80 70 60 50 40 30

30 Forw ard PE - Asia ex -Japan 25 20 15 10

-50

0

50 100 150 200 250 300 350 400 450 500 94

97

Source: HSBC (Peak=100. Days from peak)

00

07

5 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: HSBC

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Equity Strategy Pan-Asia Issue no. 66

HSBC strategy recommendations Recommended market weights Market

HSBC recommended weight

Benchmark weight

Weighting

End-08 target

Current index

YTD perf *

12-mth fwd PE

EPS growth forecast 2008

47.5% 13.0% 11.0% 6.5% 5.0% 5.0% 4.0% 4.5% 2.0% 0.5% 0.0%

47.5% 15.1% 9.0% 7.6% 6.0% 4.9% 3.7% 2.8% 1.4% 0.9% 0.7%

Neutral Under Over Under Under Neutral Neutral Over Over Under Under

900 4500 48 1300 5500 18000 12000 2200 1000 1700 550

956 4,300 40 1,340 5,246 15,998 10,809 2,059 950 1,520 482

-30% -46% -52% -46% -39% -49% -60% -42% -39% -47% -45%

11.0 8.9 8.4 9.0 10.4 10.4 9.7 9.4 10.6 7.1 6.4

-6% 14% 13% 0% -23% -26% 9% -4% -13% 17% 113%

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

Source: HSBC (Weights relative to MSCI Asia Pacific) *MSCI index in USD terms

Recommended sector weights Sector

HSBC recommended Benchmark weight weight

Financials Industrials IT Consumer disc Materials Telecoms Energy Consumer staples Utilities Healthcare

23.0% 18.0% 11.0% 9.0% 9.5% 7.0% 5.5% 5.0% 6.0% 6.0%

26.6% 14.6% 12.8% 11.4% 11.4% 5.6% 5.3% 5.1% 3.9% 3.3%

Weighting

Overweights

Under Over Under Under Under Over Neutral Neutral Over Over

CH, HK, IN, KR, SG

CH, TW HK, IN, JP, MY, TW CH, TW

Underweights AU, IN, JP, KR, TW TW HK, JP, KR, TW AU, CH, HK, IN, JP, KR, TW AU, IN KR CH, TW IN

CH, MY JP, KR

Source: HSBC (Weights relative to MSCI Asia Pacific)

Top high-conviction buy ideas Code

Name

836 HK 857 HK 2727 HK 823 HK 19 HK BHARTI IN LT IN 9433 JP 033780 KS SIA SP

China Resources Power PetroChina Shanghai Electric Group The Link REIT Swire Pacific Bharti Airtel Larsen & Toubro KDDI Corp KT&G Singapore Airlines

Country/ region

Sector

CH CH CH HK HK IN IN JP KR SG

Utilities Energy Industrials Real estate Industrials Telecoms Industrials Telecoms Consumer Airlines

HSBC rating Upside to target Price Market cap price (%) (local, 15/10/08) (USDm) Overweight (V) Overweight (V) Overweight (V) Overweight Overweight (V) Overweight Overweight Overweight Overweight (V) Overweight

51.8 17.00 (HKD) 96.9 6.45 (HKD) 105.1 1.95 (HKD) 62.4 13.24 (HKD) 78.0 57.30 (HKD) 40.2 714.85 (INR) 84.3 895.60 (INR) 37.6 545,000.00 (JPY) 16.8 89,900.00 (KRW) 47.1 12.92 (SGD)

9,177 148,820 6,092 3,684 6,754 27,959 10,799 24,119 10,217 10,432

Source: HSBC Note: These stocks are chosen by the strategy team from among HSBC analysts’ top large cap Overweights (in terms of upside to target price) with reference to the markets or sectors where the strategy team has an overweight call. Valuation and risks can be found from p74 of Pan-Asian Equity Strategy: Next problem: growth. It will start to wilt, pub. 8 Oct. 2008.

Top sell ideas Code

Name

670 HK ICICIBC IN 8035 JP 017670 KS 3009 TT

China Eastern Airlines Co ICICI Bank Tokyo Electron, Ltd. SK Telecom Chi Mei

Country/ region

Sector

HSBC rating

CH IN JP KR TW

Airlines Financials IT Telecoms IT

Underweight (V) Underweight (V) Underweight (V) Underweight Underweight (V)

Downside to target price (%)

Price (local, 15/10/08)

Market cap (USDm)

-57.3 1.17 (HKD) 37.6 414.15 (INR) -17.5 3,600.00 (JPY) -19.2 214,000.00 (KRW) -4.0 18.75 (TWD)

930 9,498 6,416 12,706 4,228

Source: HSBC Note: These stocks are chosen by the strategy team from among HSBC analysts’ top large cap Underweights (in terms of downside to target price) with reference to the markets or sectors where the strategy team has an underweight call. Valuation and risks can be found from p74 of Pan-Asian Equity Strategy: Next problem: growth. It will start to wilt, pub. 8 Oct. 2008.

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Equity Strategy Pan-Asia Issue no. 66

What are investors thinking? They are capitulating

Our discussions with fund managers over the past week found most, unsurprisingly, dazed and depressed (there were some exceptions: long volatility funds, for example). Few were even thinking about when the market might bottom; only one (on Friday last week) planned increasing exposure on the view that the market could not have far to fall. Virtually all the investors we met had maximum bearish positions. Mutual funds held cash close to the maximum permitted, and were overweight in blue-chip, defensive stocks. Most hedge funds were 60-70% in cash; many were active only in index futures (not being able to short in most markets does not make things easy for them). Everyone we met understood that growth is going to decline: no one, for example, believes the consensus forecast of 13% EPS growth in Asia ex Japan for 2009. All have started to look very carefully at balance sheets, and to worry about companies getting into difficulties rolling over their debt. The bleak mood is partly driven by the fact that most funds have seen withdrawals and redemptions. Emerging Portfolio Fund Research data shows USD60bn of outflows from global mutual funds in September. One fund we met was seeing redemptions of 1% of funds a day. Hedge funds worry about fund-of-funds withdrawing their money at short notice. Some hedge funds, which have eked out decent performance this year (for which read only a small negative return), are closing their books to keep it that way until the end of the year. Some hedge funds are even wondering whether they should not just close down – given that they are so far below their watermarks that they are unlikely to make their 20% performance fees again for years – and set up a new fund later.

High net worth individuals are being hit by margin calls, which some are unable to meet. The bounce in stocks in Hong Kong on Monday this week was met by a flood of sell orders from private banking clients. All in all, capitulation. That is a necessary – but not sufficient – condition for stocks to bottom.

Valuations at record lows At the time we published our Quarterly, we wrote that valuations were 15-20% above rock-bottom levels. With the decline in the market since then, they are now there. Price/earnings

Forward PE (see Chart 2 on page 1) hit 8.4x last Friday, the lowest level in the entire period for which we have data (which goes back to 1991). Singapore and Japan hit record lows; only Philippines and Indonesia were still a way above it (Table 3). 3. 12-month forward PE by market

TH ID CH KR AU SG IN TW MY HK JP PH AEJ AP

PE now

Low 2007-8

Low 2000-3

Low 1997-8

Hist low

6.7 7.3 8.9 9.2 9.4 9.8 10.2 10.5 10.7 10.8 10.9 11.1 9.5 10.1

5.9 6.6 7.6 8.4 8.5 9.0 9.4 9.9 10.3 9.7 9.5 10.1 8.4 9.0

8.4 3.5 7.0 5.3 12.9 11.9 7.9 9.8 11.7 11.8 15.9 11.7 9.0 13.3

9.4 7.3 4.9 7.2 13.8 10.0 7.2 15.8 6.7 6.5 29.5 8.0 10.8 24.6

5.4 3.5 4.9 5.3 7.8 9.0 7.2 9.2 6.7 6.5 9.5 3.7 8.4 9.0

Source: HSBC, IBES, Datastream

PE, however, may not help much in an environment where analysts are still forecasting 13% EPS growth next year (although, note that they have cut this forecast from 16% over the past month), but we have pencilled in a 15% decline, based on the pattern of previous recessions. If -15% turns out to be right, that means forward PE

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Equity Strategy Pan-Asia Issue no. 66

at the low last week was 9.7x – cheap, certainly, but not a historic low.

5. Prospective PB by country

Price/book

JP HK KR TW TH SG MY PH CH AU IN ID AP AEJ

PB is a more reliable measure in bear markets. Last Friday, it got down to 1.4x. That is not quite back at the low of 1.2x it bounced off both in the 1997-8 and 2000-1 bear markets (Chart 4). 4. Prospective price/book ratio – MSCI Asia ex Japan

3.5 AEJ 3.0

Current Low 2007- Average Low 2000PBR 8 20033

1.1 1.1 1.2 1.3 1.3 1.4 1.5 1.8 1.8 2.0 2.2 2.5 1.4 1.5

0.9 1.0 1.1 1.2 1.1 1.3 1.5 1.6 1.6 1.8 2.1 2.3 1.2 1.4

1.7 1.6 1.4 1.9 2.2 1.8 1.9 2.0 2.4 2.6 3.2 3.0 1.9 2.0

Hist low

1.2 1.0 0.8 1.2 1.3 1.1 1.4 0.9 0.6 1.7 1.6 1.3 1.3 1.2

0.9 0.9 0.4 1.2 0.5 0.9 0.6 0.9 0.4 1.7 1.6 1.1 1.2 1.2

Source: HSBC, IBES, Datastream

2.5

Dividend yield

2.0 1.5 1.0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: HSBC, IBES, Datastream

There are two reasons why it might not get that low, however. First, ROE has trended up over the past few years: in 1998 it bottomed at 9%, in 2002 at 11%. We think this time it is likely to bottom at around 13-15%. This, we have argued for some months, would justify a PB of 1.4-1.5x at the bottom. We have got there now.

Dividend yield is the clearest example of how low valuations have got. Last week, it reached 4.0% for MSCI Asia ex Japan, compared to a high in previous bear markets of 3.7% (Chart 6). 6. Prospective dividend yield – MSCI Asia ex Japan

4.0 3.0 2.0 1.0 0.0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Second, MSCI China (Table 5) is still on a PB of 1.6x versus an historical low of 0.4x. However, the components of the MSCI index have changed significantly since the 1990s, and Chinese companies have recently been making ROE consistently over 15% (compared to an average of 7.5% in the late 1990s). It seems highly unlikely that China’s PB will fall below 1.0x.

Div idend Yield - Asia ex Japan Source: HSBC, IBES, Datastream

Many markets are at record high dividend yields (most dramatically Taiwan, where a dividend yield of 7.1% last Friday compares to a local bond yield of 2.1%). Moreover, the risk to dividends should be fairly small. We found that even in the Asia Crisis and aftermath of the TMT bubble, dividends were cut very little. Payout ratios are also generally quite low, ranging from 7% in the case of Korea, to 20% in India, 27% in Japan, 34% in China and 68% in

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Taiwan. Only in Taiwan does the high payout ratio perhaps presage some cuts in dividends. 7. Forecast dividend yield by market DY now

TW TH AU MY ID SG PH HK CN JP IN KR AP AEJ

6.7 6.4 5.5 5.2 5.1 4.9 4.7 4.2 3.5 2.5 1.9 0.7 3.3 3.6

High Ave 20012007-8 3

7.1 7.3 6.0 5.4 5.6 5.3 5.1 4.8 4.1 2.8 2.1 1.9 3.7 4.0

High 1997-8

High 2000-3

1.6 6.3 4.0 4.2 2.5 2.8 1.8 6.2 5.1 1.1 2.3 2.4 1.8 3.7

3.3 4.0 4.6 2.8 6.7 3.2 2.3 4.8 4.8 1.3 3.1 2.9 2.3 3.6

3.5 3.5 4.1 3.0 4.0 2.9 2.2 3.4 3.0 1.2 1.9 2.0 2.0 2.8

Source: HSBC, IBES, Datastream

banks globally, the signs so far are not good. The spread between three-month interest rate swaps and Libor (i.e. how much banks price the risk of lending to other banks) jumped to 3.64% on October 10 from 2.32% at the end of September (and 0.09% before mid-2007). But this week it has narrowed by 19bps (Chart 8). Libor has come down a little, which suggests banks are becoming marginally more willing to lend to each other, but so far almost imperceptibly so. 8. Three-month OIS-Libor spread (%)

4.0 3.5 3.0 2.5 2.0

We would accept that historic low valuations are not a perfect guide to market bottoms. There is only about 15 years of “history” in Asia. Current events are unprecedented and so history may not be a good guide (although, in this region at least, we would be hard pressed to argue that events are nastier than during the Asia Crisis). Valuations everywhere are low: PE, based on (overoptimistic) 2009 earnings forecasts, in the US is 9.2x, in Germany 7.5x and in the UK 6.8x. Asia remains on a premium to global PE. But the fact that we have reached the level that we have been describing for months as rock-bottom must give at least a little comfort.

How much risk is there left?

1.5 1.0 0.5 0.0 02

03

04

05

06

07

08

Source: HSBC, Bloomberg

But corporate risk pricing continues to rise, suggesting that while banks may be slightly more willing to lend to each other they still do not want to lend to companies. For example, the spread over US treasuries of five-year BB+ rated Asian corporate bonds has risen to 10.7% from 7.7% at the end of September (Chart 9). Spreads have continued to widen every day this week.

So, on our bottom-spotting check-list, it comes down to risk. Investors have capitulated, valuations are at rock-bottom, but have the financial system risks been cleared up? The fixed income markets are better at pinpointing this than equities (fixed income investors are much better at judging risk; equity investors focus more on growth). Despite bank recapitalisation packages in the US and Europe and massive injections of liquidity by central

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9. Spread over treasuries of 5-year Asian corporate bonds

10. Credit rating: upgrade/downgrade ratio

2000

100% 90% 80% 70% 60% 50% 40% 98 99 00 01 02 03 04 05 06 07 08 30% 20% 10% 0%

1500 1000 500

May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08

0

AAA BB+

A B+

BBB

Source: HSBC

What else could go wrong? If banks are now all nationalised or guaranteed, why have credit markets continued to price in an extraordinarily high degree of risk? The problem is that there are still a lot of risks out there which have not been dealt with – or even recognised. For example:  Corporate default risk. Asian companies have started to go bust, four last Friday alone. With the credit market frozen, companies are almost completely unable to raise, or roll over, debt. Singapore-listed FerroChina, for instance, announced last week it was unable to repay its debt: this was seemingly because it was unable to raise working capital to finance payables. Credit rating agencies have only just started to downgrade Asian companies, with upgrades:downgrades this quarter so far running at 1:4 (Chart 10). As worries about debt refinancing rise, downgrades are increasingly likely. If companies can’t raise money, any with high debt/equity ratios or a large chunk of debt maturing over the next six to 12 months will be at risk.

6

Source: HSBC, Bloomberg

 The impact of currency movements. With risk aversion likely to remain high, selected Asian currencies will be under pressure. Korea – with external debt of 45% of GDP and a currency that has depreciated by 30% in the past three months – looks particularly vulnerable. Issuers of foreign currency debt could struggle to repay it. Moreover, many borrowers and exporters hedged via complicated derivatives such as knock-in knock-out (KIKO) structures, which could produce large losses. One example from Korea: Sungjin Geotech, a maker of industrial equipment, announced derivatives losses of KRW153bn this week, almost equal to its shareholders’ equity of KRW161bn.  Credit default swaps. When corporates start to default, buyers of protection via CDSs will ask for payment. Will their counterparties be able to pay up? The disruption in the CDS market caused by Lehman Brothers’ defaulting on its debt (and on CDSs it had sold) has been tremendous. But the size of the market is unknown: most estimates put it at USD60150trn. Even at the lowest end of the estimate range, that is almost five times US GDP. In a recession, the default rate on US sub-investment grade debt typically rises to 10% (it was only 1% at the start of this year). Given that this recession could be nastier than usual, the default

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rate may be 15-20%. The impact of that on the CDS market is impossible to quantify, but surely will be nasty.  Non-bank financial institutions. US and European governments might have recapitalised their major banks, but what about insurance companies, auto loan providers, hedge funds, small banks and other financial institutions? They face the same problems with toxic assets and the freezingup of funding markets. Will governments have to bail these out, too? In the end, probably. But when the problems surface, they will scare markets again.  Asian banks. While we agree that Asian banking systems look considerably healthier than those in Europe and the US, it does not mean that they are without problems. Loan/deposit ratios in both Korea and India are over 100% – a problem when wholesale funding has dried up. The problems with Korean banks have been widely discussed, but our banking team’s report Asia banks: Dodging doomsday?, published yesterday reveals weaknesses in Taiwan, too. Taiwanese financial holding companies are at risk of seeing profits turn negative and capital adequacy ratios fall below minimum limits if their credit costs rise and treasury assets devalue further.  Countries getting into trouble. Countries with banking systems dependent on foreign currency funding will not be able to bail them out without foreign help. We have seen this already in Iceland. Other countries and regions that could be vulnerable to the credit crunch include Pakistan, Hungary, Ukraine, Dubai, Macau and the Baltic States. Expect the IMF to have to come to the rescue. This will also be an excellent opportunity for China to use its USD1.9trn of FX reserves in

a way that boosts its strategic power. (The geopolitical ramifications of the last few weeks’ events are clearly huge, too.)

Conclusion: wait until risk eases We are happy, then, to reiterate the conclusion from our Quarterly: “once the problems at the last troubled financial institution are resolved…this should mark the bottom for the stock market”. The lesson of the 1907 financial crisis (read the recently published The Panic of 1907 by Robert Bruner and Sean Carr to understand why this is the best historical analogy for the present) is that the stock market is likely to bottom once the last problem institution has been rescued, even if economic growth subsequently tanks as a result of the crisis. But we cannot say we have reached that point yet.

Change to top stock picks We are generally happy with our current top buy and sell ideas (see table on p2), which emphasise liquid, no-surprises names on the buy side, and balance sheet risk on the sell side. However, we are removing from the top sell ideas list Sumitomo Mitsui Financial (8316 JP, JPY528,000) since our analysts have raised the rating to Neutral (V). They argue that, while earnings are still likely to miss forecasts massively this year, the sharp decline in the share price in recent days now reflects this. Valuation-wise the stock is on 16x HSBC’s March 2010 forecast; our target price of JPY600,000 is based on DCF analysis. The main upside risks to the Neutral (V) rating are better than expected performance this year or recovery in sentiment towards financials. Main downside risks are larger than expected loan losses, further large bankruptcies and continued poor performance of equities.

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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: Garry Evans, 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.

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*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 16 October 2008, the distribution of all ratings published is as follows: Overweight (Buy) 51% (31% of these provided with Investment Banking Services) Neutral (Hold)

33%

(33% of these provided with Investment Banking Services)

Underweight (Sell)

16%

(23% 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 longterm investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

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HSBC & Analyst disclosures Disclosure checklist Company

BHARTI AIRTEL CHI MEI CHINA EASTERN AIRLINES CHINA RESOURCES POWER ICICI BANK LARSEN & TOUBRO PETROCHINA SINGAPORE AIRLINES SK TELECOM SUMITOMO MITSUI FINANCIAL SWIRE PACIFIC THE LINK REIT TOKYO ELECTRON, LTD.

Ticker

Recent price

Price Date

Disclosure

BRTI.NS 3009.TW 0670.HK 0836.HK ICBK.NS LART.BO 0857.HK SIAL.SI 017670.KS 8316.T 0019.HK 0823.HK 8035.T

714.85 18.75 1.17 17.00 414.15 895.60 6.45 12.92 214000.00 622000.00 57.30 13.24 3600.00

15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008 15-Oct-2008

6, 7 2, 5, 6, 7 2, 5, 6, 7 4 2, 5, 6, 7, 11 2, 5, 6, 7 4, 5 5, 6, 7 11 11 2, 4, 5, 6, 7, 11 5 6

Source: HSBC

1 2 3 4 5 6 7 8 9 10 11

HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 30 September 2008 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 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. 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. 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. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 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. 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 2 3

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This report is dated as at 17 October 2008. All market data included in this report are dated as at close 15 October 2008, unless otherwise indicated in the report. 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. As of 30 September 2008, HSBC beneficially owned 2% or more of a class of common equity securities of the following company(ies) : PETROCHINA

Equity Strategy Pan-Asia Issue no. 66

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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 Level 19, 1 Queen’s Road Central Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities Hong Kong SAR and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Telephone: +852 2843 9111 Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, 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, HSBC Bank Australia Limited. 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 representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 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 whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make 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 appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for any purpose. © 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

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Global Equity Strategy Research Team Global

Asia

Kevin Gardiner Global Sector Head +44 20 7991 6714 [email protected]

Garry Evans +852 2996 6916

[email protected]

Leo Li +852 2996 6919

[email protected]

[email protected]

Akane Nishizaki +81 3 5203 3943

[email protected]

[email protected]

Steven Sun +852 2822 4298

[email protected]

Jacqueline Tse +852 2996 6602

[email protected]

Europe Robert Parkes +44 20 7991 6716 Vivek Misra +91 80 3001 3699

CEMEA John Lomax +44 20 7992 3712

[email protected]