+ + = vs TARGET OUTLOOK vs HSCEI SELL 3 INPUT 1: GOVERNMENT - PowerPoint PPT Presentation

P OLICY I NVESTMENT M ODEL Generating Alpha from Chinese Policy How Government Action Drives Returns

NSBO C HINA P OLICY I NVESTMENT M ODEL INTRODUCTION The Model: • INPUT 1: CHINA’S INDUSTRY TARGETS Use sectors based on government FYP and targets • INPUT 2: CHINESE GOVERNMENT POLICY OUTLOOK Assess whether positive, neutral or negative towards sector based on Beijing analyst and advisor analysis • INPUT 3: HS SECTOR STOCK MARKET PERFORMANCE Indicates under/overperformance and potential reversals • OUTPUT: 2011-14 PERFORMANCE Generates above-market returns on a consistent basis, identifying key reversal points • OUTPUT: SECTOR EXAMPLES Current sector performance and recommendations • OUTPUT: MARCH RECOMMENDATIONS Individual sectors NSBO’s Expertise: • GOVERNMENT INFLUENCE: Decisive factor for investment Government owns the major companies in strategic sectors and controls economy and industry targets and performance. • KEY STRENGTHS: Chinese focus and expertise Experienced executive team with growing pool of Chinese analysts and industry advisors. • NSBO’s BEIJING BUILD-OUT: Five-year development Beijing office provides on-the-ground insight and contact with policy decision-making arena. 2

NSBO C HINA P OLICY I NVESTMENT M ODEL • Chinese government policy is a decisive factor in investment in China. – Can be viewed as a market leading indicator for key sector up and downturns • NSBO has been tracking Chinese government policy for 5 years and we understand its influence, timing and importance for key sectors – In-depth knowledge and insight into sector moves and government shifts • Our Chinese Government Policy Model integrates three elements to generate key sector recommendations: – industry performance – policy outlook – stock market performance • This generates key BUY and SELL signals for main China sectors – Long-only can use it to overweight/underweight sectors – Hedge funds can long/short key sectors • Consistent outperformance vs the HSCEI over time – Over the past year, our selection of sectors would have outperformed by an average of 4.63% INDUSTRY NSBO POLICY SECTOR BUY/ + + = vs TARGET OUTLOOK vs HSCEI SELL 3

INPUT 1: GOVERNMENT TARGETS BY SECTOR Market Cap 1. Identify sectors and annual targets according to NSBO Sector FYP Target (HK$) China’s Five Year Plan Banks 5,742 Money supply – eg: rail, roads, power generation, autos, rather Insurance 1,277 Premium target than MSCI or FTSE sectors Oil 3,265 Production target 2. Identify key monthly sector targets: Coal 757 Production target – need to be on a monthly basis with regular Power Generation 103 FAI updates Thermal Power 296 Production target – one target per sector at present Wind Power 58 FAI 3. Use key sector targets as overall industry Steel 71 Consumption target forecasts Copper 81 Production target – Monthly targets calculated for each sector Aluminium 89 Production target based on 5-year previous seasonality (where Autos 258 Sales target applicable) Railways 211 Rail FAI 4. Measure over or underperformance of actual vs Airlines 150 Freight Ton km target on a monthly basis Property development 615 Real estate Investment Construction 201 Real estate and infrastructure Investment Telco Equipment 97 FAI • Sector constituents chosen to correspond with Telco Operators 2,346 Revenue target Hang Seng China Index Gas Distribution 77 FAI – Above US$1bn market cap Water conservancy 46 FAI – Liquid Healthcare 50 Individual healthcare spending • PURELY QUANTITATIVE ELEMENT NSBO Sectors based on Chinese government FYP. 4

INPUT 2: POLICY OUTLOOK • Identify whether government policy is supportive, neutral or negative towards the sector – Conclusion derived through in-house research in Beijing and contact with local policy advisors – Not just from a propaganda angle • QUALITATIVE ELEMENT • Banks had little support over past two years, but monetary loosening, greater KEY CONSIDERATIONS financial diversification and management of defaults has removed negatives • Timing of policy? • Property had positive policy from May 2012, but this changed in Dec 2012 and • Which department/ministry? was tightened in certain cities owing to overheating. Now taking hands-off • Superseded by other policy? approach in order to provide economic stability during reform. • Financial support for policy? • Autos was neutral post consumer subsidies in Dec 2010, but this reversed in Q2 12 with need to boost consumption. Beneficiary of focus on consumer credit. Key Sector Outlooks Sector Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sept 13 Aug 13 Sept 13 Oct 13 Nov 13 Dec13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Large Banks Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Positive Positive Small Banks Neutral Neutral Neutral Negative Negative Negative Negative Negative Negative Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Positive Positive Oil Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Positive Positive Coal Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Power Equipment Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral IPPs Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Negative Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Telco Equipment Neutral Neutral Neutral Neutral Neutral Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Steel Neutral Positive Positive Positive Positive Positive Positive Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Copper Positive Neutral Neutral Neutral Neutral Neutral Negative Negative Negative Neutral Negative Negative Negative Negative Neutral Neutral Neutral Positive Positive Positive Aluminum Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Negative Negative Negative Negative Neutral Neutral Neutral Neutral Auto Positive Positive Positive Positive Neutral Neutral Positive Positive Positive Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Railways Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Positive Neutral Neutral Positive Positive Neutral Neutral Neutral Positive Positive Positive Positive Property Developer Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Positive Positive Positive Positive Construction Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Neutral Neutral Neutral Negative Negative Negative Neutral Neutral Neutral Neutral Water Neutral Neutral Neutral Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Gas Distribution n/a Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Pharma n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Positive Positive Positive Positive 5

INPUT 3: MARKET PERFORMANCE • Assess relative sector performance to HSCEI on a monthly basis • Use this in tandem with industry and policy positions to give investment outlook for each sector. • PURELY QUANTITATIVE ELEMENT • If a sector is • a) underinvested/underachieving its targets and • b) the policy is positive (an increase in support) and • c) the market performance is underperforming, then this is likely to lead to a turnaround in the sector and the investment outlook is a STRONG BUY (indicates turning point) . • If the same situation applies, but the industry has outperformed , then this is a BUY (indicates continuing trend) . • If the sector is • a) overinvested/overachieving and • b) the policy is negative , with • c) the market performance is outperforming , then this is likely to lead to a turnaround in the sector and the investment outlook is a STRONG SELL (indicates turning point) . • If the same situation applies, but the sector is underperforming , then this is a SELL (indicates continuing trend) • All other outcomes are NEUTRAL . Industry Actual vs Target Policy Support Sector Performance Outcome Underinvested/ Positive Underperform Strong Buy underachieving Outperform Hold Negative Underperform Hold Outperform Sell Overinvested/ Positive Underperform Buy overachieving Outperform Hold Negative Underperform Hold Outperform Strong Sell 6