Yum Cha 飲茶. May 8, 2013 TALKING POINTS CHART OF THE DAY CREDIT CONTROL RATHER THAN CREDIT TIGHTENING AHEAD. INDICIES Closing DoD% Hang Seng Index

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1 Yum Cha 飲茶 May 8, 2013 CHART OF THE DAY CREDIT CONTROL RATHER THAN CREDIT TIGHTENING AHEAD INDICIES Closing DoD% Hang Seng Index HSCEI Shanghai COMP Shenzhen COMP Gold BDIY 23, , , , Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) HIBOR, 3-M SHIBOR, 3-M RMB/USD DIARY NOTES FOR THIS WEEK May 08 May 08 May 09 May 09 Source: Bloomberg April export YoY% [previous 10.0%] April import YoY% [previous 14.1%] April consumer price index YoY% [previous 2.1%] April producer price index YoY% [previous -1.9%] China s new bank lending for April is likely to be around RMB800bn, after the big four banks were reported to have increased lending by RMB260bn for the month. Bank lending has been growing at ~15% year-on-year, and is likely to continue seeing this pace of growth. The credit picture in China has been a key concern for some time, and there are indications now that the central government intends tightening controls over credit, especially for local governments. One of the reforms announced by the State Council this week was to improve risk control measures on local government debt, and it seems the National Development and Reform Commission (NDRC), which is responsible for approving local government bond issues, will pay particular attention to local government financing vehicles (LGFV) which have debt:asset ratios exceeding 65%. It is likely the domestic bond market will benefit, as the NDRC will be providing a layer of credit approval prior to issue. The increased vigilance of the NDRC will mitigate some of the credit risks banks face due to their exposure to LGFVs, and as such should enhance their outlook. The perceived risk of increased nonperforming loans has led to the low valuations 5.5x to 6x PERs for China s major banks. TALKING POINTS Analyst: John Mulcahy AUTO SECTOR: A visit to the Shanghai auto show revealed intensifying competition in the mid-high end and SUV sectors. Hybrid cars also appear to be winning out over electric models. Yen depreciation not expected to have a major impact as most have majority of production already in China. Guangzhou Auto Group (GAC) [2238.HK, HK$6.61] and Dongfeng [0489.HK, HK$12.26] will suffer from slower Japanese-brand sales, and seem fully valued. We prefer Great Wall Motor [2333.HK, HK$35.85] and Geely Auto [0175.HK, HK$4.09]. HENGAN INT L [1044.HK, HK$80.20]: Company visit The potential for a return to singledigit earnings growth seems high to us, considering existing weakness in the snack and diaper sectors and looming overcapacity in the tissues segment. Sanitary napkins (26% of revenue) are potentially the remaining growth driver by 2014, leaving the stock appearing overvalued at 26x PER with 40% downside risk.

2 AUTO SECTOR 2013 SHANGHAI AUTO SHOW Analyst: Cecilia Chen The 2013 Shanghai Auto Show, China s largest auto fair, revealed the auto industry s competitive landscape in the coming years. For Japanese brands, we believe it is unlikely that they will regain their previous market share. Guangzhou Auto Group (GAC) [2238.HK, HK$6.61] is trading at 13.2x FY13 PE and we believe the current valuation is unattractive. With strong product pipeline, after capacity increases from Q3 13, Great Wall Motor s [2333.HK, HK$35.85] will continue to ride the SUV boom. Highlights: Intensifying competition in mid-to-high-end market Localization of broader product lines have been accelerating among joint venture (JV) brands offering more localized car models, while proprietary brands are offering new models in the higher price range. We expect intensifying competition, mainly in the mid-to-high-end market. We are cautious on the sales performance of Japanese JVs, such as Guangzhou Auto Group (GAC) [2238.HK, HK$6.61], given a large exposure to Japanese brands and with emphasize on the mid-to-high-end market but no encouraging sales and marketing strategies emerging from our meeting with management during the show. Fierce SUV war The SUV segment in China has been outpacing the overall auto market; out of 111 new models globally, roughly 20 SUV models were shown at the Shanghai event. Newly launched SUVs emphasize the daily commute with grand touring (highperformance) functions and off-road capabilities as pluses. Great Wall Motor s [2333.HK, HK$35.85] good brand image in the SUV market and strong product pipeline (H2, H6 sport, H7 and H8), after capacity increases from Q3 13, will continue to ride the SUV boom. Hybrid cars win over electric cars as next practical technology trend Major car manufacturers, such as BMW, Porsche, Mercedes Benz and Toyota, presented their ready-for-sale hybrid cars. Although many other manufacturers presented electric cars, they were typically concept rather than production vehicles. If energy subsidies are extended to hybrid cars, potential beneficiaries are GAC and Dongfeng [0489.HK, HK$12.26]. Observations from visitors: price is vital, followed by style; SUV fever remains we conducted a vox-pop survey among 20 randomly selected visitors and found that price is still the most important consideration. As price gaps between proprietary vehicles and JV/imported cars have narrowed but are still not negligible, quality proprietary manufacturers such as Great Wall and Geely Auto [0175.HK, HK$4.09], will continue to enjoy price advantages. We also attended an investor event held by our A-share Auto team, meeting Mr. Wei Liu, vice president of GAC. Highlights from the meeting: Japanese brand turn around? Not simply related to Sino-Japanese issues... Japanese car makers have been suffering from Sino-Japanese issues resulting in declining year-on-year (YoY) growth and market share. Given current sales and marketing strategies, we believe it is unlikely that Japanese brands will regain their previous market share. Little impact on earnings from Japanese yen depreciation As some models have been made in China for years resulting in more than 90% domestic production, yen depreciation has had little impact on these models. For new models, since over 60% localization is applicable once production starts, we see limited benefits for GAC from the yen depreciation. Competitiveness of Hybrid cars? Unclear outlook in China market Toyota has been testing its hybrid cars in the Guangzhou market. However, only 842 units have been sold in the first three months. Lack of price competitiveness and marketing are key issues. GAC is trading at 13.2x FY13 PE. Given the discouraging outlook for this year, we believe the current valuation is unattractive.

3 HENGAN INT L [1044.HK; HK$80.20] COMPANY VISIT: POTENTIALLY FLYING ON ONE OF FOUR ENGINES NEXT YEAR Analyst: Eric Tomter, CFA We visited the management of Hengan last week. The company is the largest producer of household tissue paper (49% of revenue) in China, with capacity of 900,000 tons. The company is also a leading producer of sanitary napkins and diapers. Major competitors include Vinda (3331.HK), Asia Pulp & Paper (APP) and Kimberley Clark. Tissue capacity expansion: no price war, yet. As with Vinda, (adding 210,000 tons capacity this year to 750,000) Hengan added 120,000 tons last year and plans another 360,000 tons in The +15% CAGR of capacity expansion by Vinda and Hengan over is double the GDP growth rate in China and well above the company s own projection of 3.5% annual volume growth. Yet the company reports no expectation of irrational price competition, unless APP, with its own pulp supply, were to start a price war. But with double Vinda s profit margin, due to toilet rolls accounting for about 30% of tissue revenue vs Vinda s 60%, and a diversified line of higher margin products, Hengan is in a position to squeeze Vinda should consolidation not proceed as expected (Case in point - Fufeng and the MSG industry). Consolidation is often cited as a growth driver by large industry players, but we think favourite companies province by province that hire a lot of people have a way of continuing to operate indefinitely. Hengan does not yet regard Vinda s latest foray into diapers and napkins as a threat, but it does indicate the potential for an intensifying rivalry. Poor consumer sentiment in diaper & food segments. Diaper revenue fell 1.4% last year on both international brand and low-end domestic price pressure. Domestic consumer s safety concerns over baby products generally has created an opportunity for Proctor & Gamble (Pampers) and napkin/tissue rival Kimberly Clark (Huggies) in our view. The diaper sector was already comparatively slow at a 13.3% revenue CAGR over , as Hengan s Anerle and Q-Mo brands have appeared stuck between international and low cost alternatives. Food revenue crumbled 10% on a food scare over gelatin products affecting their QinQin snack. The potential to turnaround and successfully differentiate its food and baby products in the near term seems low in the face of skeptical consumer sentiment and strong foreign brands. Bottom line: The company is in a strong position in the domestic personal products market but competitive pressures in three of four product lines (71% of revenue) will lead to singledigit EBITDA growth this year in our view. With sanitary napkins (26% of revenue) as the remaining growth driver, and margins likely to contract somewhat on higher wood pulp costs, (cont d next column) HENGAN INT L [1044.HK] (HK$) (HK$ million) 0 0 May12 Jul12 Sep12 Nov12 Jan13 Mar13 May13 Turnover (RHS) Price (LHS) Market cap: US$12,726m Free float: 58.9% HK$ (m) E 2014E Revenue Gross Profit GM (%) EBITDA Net Profit Profit margin (%) EPS (HK$) YoY (%) Capex Free Cash Flow Net Cash per share (HK$) Working Capital % of revenue Equity ROE (%) Yield (%) PER (x) PBR (x) Source: Company, CGIHK Research estimates the stock appears vulnerable to earnings disappointment. Government subsidies accounting for 9.6% of earnings last year also add an element of uncertainty. We think the stock has 40% downside risk over the next months from a lofty 26.5x 2013E PER and 6.3x PBR given a return to singledigit earnings growth this year

4 HENGAN INT L [1044.HK; HK$80.20] COMPANY VISIT: POTENTIALLY FLYING ON ONE OF FOUR ENGINES NEXT YEAR Income Statement (HK$ m) E 2014E Total Revenue Gross profit Gross margin 39.9% 44.9% 44.3% 44.0% EBITDA EBITDA margin 19.2% 25.6% 25.0% 24.6% D & A EBIT EBIT margin 16.6% 22.5% 22.1% 21.9% Net interest Expense Interest Exp Cover (x) #DIV/0! #DIV/0! Non-operating income Non recurring (EOI) Profit before Tax Tax / Minority Interest Net Income (before EOI) Net margin 22.4% 29.9% 29.3% 29.0% Shares Outstanding (m) EPS (HK$) Dividend Payout ratio 62.6% 59.4% 60.0% 60.0% DPS (HK$) NOPAT year CAGR 23.2% 16.7% 15.5% 16.1% Cash Flow (HK$ m) E 2014E Net income D & A Change in working capital Cash from Operations Capital expenditure % of revenue 17.7% 14.0% 9.1% 10.2% Cash before Financing Free Operating Cash Flow Change in Cash Cash Flow Adequacy 62.3% 62.5% 68.7% 69.1% Balance Sheet (HK$ m) E 2014E Cash Accounts Receivable % of revenue 12.9% 13.2% 13.0% 13.0% Inventory % of revenue 16.2% 19.6% 19.5% 19.5% Other current Total Current Assets Non-current Assets Total Assets Accounts Payable % of revenue 16.7% 16.3% 17.0% 16.5% Short term debt Other current liabilities Total Current Liabilities Long term debt Deferreds Total Liabilities Retained Earnings Net Equity Issue Other Total Equity Book Value/share (HK$) Net Cash Working Capital Enterprise Value (HK$) Valuation Metrics E 2014E Price / Sales Price / Earnings PER / Growth Dividend Yield 1.7% 2.1% 2.3% 2.5% Sustainable Growth 8.0% 10.2% 9.6% 9.4% EV / Free Cash Flow EV / Book Net Cash / share Source: CGIHK Research estimates

5 DISCLAIMER For private perusal only. This report (including any information attached) is issued by China Galaxy International Securities (Hong Kong) Co., Limited, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to individual addressee whether they are professional, institutional client or otherwise, in good faith from sources believed to be reliable but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analysts who prepared this report, such views and opinions may not correspond to the published view of China Galaxy International Financial Holdings Limited and any of its subsidiaries. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company or companies referred to herein. All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. Please take note that member companies of China Galaxy International Financial Holdings Limited (including but not limited to China Galaxy International Securities (Hong Kong) Co., Ltd) and/or their directors, officers, agents and employees ( the Relevant Parties ) may have an interest in securities of the company or companies referred to in this report. The Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. COPYRIGHT RESERVED China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459, Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: CONTACT US John Mulcahy Wong Chi Man, CFA Eric Tomter, CFA Wayne Fung, CFA Angela Han Lee Vicky Lai Cecilia Chen johnmul@chinastock.com.hk cmwong@chinastock.com.hk erictomter@chinastock.com.hk waynefung@chinastock.com.hk angelahanlee@chinastock.com.hk vickylai@chinastock.com.hk ceciliachen@chinastock.com.hk