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1 December 2, 2014 Northbound: Acceptable initial response for a new product. As of December 1, total net northbound quota used was RMB42.2bn. This is not bad, in our view, as the amount is already equivalent to 69% of the market cap of ishares A50 [2823.HK]. Preference of northbound investors: financials and value stocks. Based on the data released by the HKEX (Figure 1), the most preferred stocks of northbound investors are financials, such as Ping An Insurance [ CH], China Pacific Insurance [ CH] and ICBC [ CH]. Meanwhile, high-yield big caps such as SAIC Motor [ CH] and Daqin Railway [ CH] are also major targets for northbound investors. Southbound: Investors preference much more diverse. Total southbound trading volume (buy and sell) since inception was HK$8.2bn, an uninspiring start to the pilot programme. Although southbound investors actively traded stocks look much more diverse (Figure 2), it seems that they prefer stocks with deep H-share discount (>40%) and reasonable size in terms of market cap, such as Shanghai Petrochem [0338.HK], China Molybdenum [3993.HK] and Shanghai Electric [2727.HK]. They also bought some well-known tech names, including Tencent [0700.HK] and SMIC [0981.HK]. A-H spread widened after the launch of the Stock Connect. Due to the much stronger trading volume of the A-share market, especially after the unexpected rate cut last week, the H-share discount vs. Shanghai-listed counterparts widened from 16% (the last trading day before the launch of the Stock Connect) to 25.6% yesterday. We have seen some over-excitement in the A-share market. For instance, PetroChina-A [ CH] gained 4.3% in the past two months despite a sharp fall in the oil price while PetroChina-H [0857.HK] lost 7.4% in the corresponding period. Meanwhile, the A-H spread of the four major banks is less than 10% now, which leaves little room for arbitrage (Figure 3). Northbound investors began to take profit yesterday. Traded value from sell orders accounted for 39.5% of total northbound traded value yesterday, much higher than the average of 11.3% last week, which may suggest foreign investors began to take profit after an impressive A-share rally in the past two weeks. Trading ideas: New China Life Insurance [1336.HK]: H-share discount widened from 14.3% to 34.5% in the past two weeks, much wider than the average discount of 10% in the past few months. China Everbright Bank [6818.HK]: The H-share has maintained a price premium over its A-share in the past few months but it changed to a 21.85% discount yesterday, due to the rally of A-share banks last Friday. There should be scope for catch-up after such a drastic change in the A-H spread. Investors may also pay attention to CITIC Bank [0998.HK], which saw its H-share discount increase from 15% to 29.9% within two weeks. Long H-share Index ETF [2828.HK] or H-share futures and short ishares A50: As a result of the much more positive market sentiment in the A-share market, the H-share discount of big caps (Top 20 largest A-H dual listing companies in the Stock Connect universe) widened from 0.4% two weeks ago to 9.4% yesterday. For investors who believe the A-share market is running too fast, there is a long-short opportunity, in our view. For investors who can short A-shares, we believe it s a good opportunity to short PetroChina-A, as the share price was up 4.3% in the past two weeks despite a sharp drop in the crude oil price. 1

2 Figure 1: Northbound actively traded stocks Stock Code Company # of days in Top 10 most active traded stocks Total buy trade value (RMB)# Total sell trade value (RMB)# PING AN INSURANCE 11 4,116,676, ,639, SAIC MOTOR 10 3,313,977, ,772, DAQIN RAILWAY 9 4,672,035, ,459, KWEICHOW MOUTAI 8 2,467,399, ,331, CHINA PACIFIC INSURANCE 8 1,532,589,068 73,533, INDUSTRIAL AND COMMERCIAL BANK OF CHINA 8 1,530,213, ,571, CITIC SECURITIES 8 945,450, ,845, CHINA MERCHANTS BANK 7 1,700,730, ,489, SHANGHAI PUDONG DEVELOPMENT BANK 6 1,176,410, ,927, ANHUI CONCH CEMENT 4 760,479,595 18,292, CHINA LIFE INSURANCE 4 507,014,284 97,772, CHINA CONSTRUCTION BANK 3 187,218, ,559, AGRICULTURAL BANK OF CHINA 3 558,275,407 6,550, INNER MONGOLIA YILI INDUSTRIAL 2 745,054, , CHINA INTERNATIONNAL TRAVEL SERVICE 2 178,900,948 62,106, SHANGHAI INTERNATIONAL AIRPORT 2 152,411,145 2,978, CHINA MINSHENG BANKING 2 308,757,224 98,623, INDUSTRIAL BANK 2 435,157,920 62,553, SDIC POWER HOLDINGS 1 166,318, NORTH NAVIGATION CONTROL TECHNOLOGY 1 121,818, QINGDAO HAIER 1 288,817, , ZHENGZHOU YUTONG BUS 1 206,029, , HUATAI SECURITIES 1 332,391, BANK OF COMMUNICATIONS 1 118,505,362 55,505,747 #Only trade value in the days listed in Top 10 is counted. Sources: HKEX, CGIHK Research 2

3 Figure 2: Southbound actively traded stocks Stock Code Company # of days in Top 10 most active traded stocks Total buy trade value (HK$)# Total sell trade value (HK$)# 700 TENCENT ,246,670 36,180, CMOC 6 78,740,780 35,983, SHANGHAI ELECTRIC GROUP CO. LTD. 6 61,654,400 37,518, SMIC 5 142,912,040 25,806, SHANGHAI PECHEM 5 83,095,720 13,706, CHINA OILFIELD 4 57,765,560 9,622, HAITONG SEC 4 36,868,440 37,154, BOSIDENG 3 45,292,980 27,398, HENGDELI 3 60,505,760 19,096, FIRST TRACTOR 3 25,683,380 22,885, RENHE COMM 3 54,111,380 25,897, KUNMING MACHINE 3 25,288,400 14,293, NCI 3 73,591,045 6,598, PHOENIX TV 2 91,774,640 6,432, CHINA MOBILE 2 111,766, , AIA 2 96,085, , DALIAN PORT (PDA) CO. LTD. 2 17,930,600 11,118, DIGITAL CHINA 2 15,920,050 8,659, CH MODERN D 2 22,166,480 8,927, CNOOC 2 11,320,940 17,647, COUNTRY GARDEN 2 55,510,640 1,384, YANZHOU COAL 2 18,949,180 9,818, CEB BANK 2 35,719,330 14,567, GOLDEN EAGLE 2 53,667,280 9, CHINA COSCO 2 20,317,105 17,073, BBMG 2 19,342,595 11,564, ICBC 1 59,140, ANHUIEXPRESSWAY 1 24,845, , CHINA EASTERN AIRLINES CORPORATION LTD. 1 10,190,200 4,358,920 3 HONG KONG AND CHINA GAS CO. LTD., THE 1 14,114, CHEUNG KONG (HOLDINGS) LTD. 1 13,071, , SINOPEC KANTONS HOLDINGS LTD. 1 10,829, , WEIGAO GROUP 1 8,190,600 4,224, CITIC 1 7,772,660 51, HUABAO INTL 1 4,706,860 2,987, DONGFANG ELEC 1 15,455, , HANERGY TFP 1 12,416,000 1,107, CHINA RAIL CONS 1 5,464,705 4,571, EVERGRANDE 1 17,763,950 6,304, GOME 1 10,824,920 3,249, ZIJIN MINING 1 11,917,040 7,082, YURUN FOOD 1 4,370,980 7,810, CITIC BANK 1 16,061,860 4,264, CHINA CINDA 1 18,659, , CHINASOUTHCITY 1 11,535, , SINOPEC CORP 1 19,896, , PETROCHINA 1 13,386,320 4,043,340 #Only trade value in the days listed in Top 10 is counted. Sources: HKEX, CGIHK Research 3

4 Figure 3: H-share discount relative to A-share (ranked by market cap) Company name Market cap (US$m) 14-Nov-14 1-Dec-14 Group A CH Equity 857 HK Equity PetroChina Co Ltd 235,538 (12.02) (21.90) CH Equity 1398 HK Equity Industrial & Commercial Bank of China Ltd 228, CH Equity 939 HK Equity China Construction Bank Corp 184, (5.06) CH Equity 3988 HK Equity Bank of China Ltd 148,932 (1.11) (8.19) CH Equity 1288 HK Equity Agricultural Bank of China Ltd 148, CH Equity 386 HK Equity China Petroleum & Chemical Corp 99,727 (3.67) (10.66) CH Equity 2628 HK Equity China Life Insurance Co Ltd 97, (6.58) CH Equity 2318 HK Equity Ping An Insurance Group Co of China Ltd 65, CH Equity 3328 HK Equity Bank of Communications Co Ltd 62, (7.90) CH Equity 1088 HK Equity China Shenhua Energy Co Ltd 52, CH Equity 3968 HK Equity China Merchants Bank Co Ltd 49, CH Equity 998 HK Equity China CITIC Bank Corp Ltd 43,040 (15.00) (29.85) CH Equity 1988 HK Equity China Minsheng Banking Corp Ltd 38,830 (5.63) (8.93) CH Equity 2601 HK Equity China Pacific Insurance Group Co Ltd 35, CH Equity 6030 HK Equity CITIC Securities Co Ltd 31, CH Equity 6818 HK Equity China Everbright Bank Co Ltd 28, (21.85) CH Equity 6837 HK Equity Haitong Securities Co Ltd 22,595 (5.94) (13.87) CH Equity 1336 HK Equity New China Life Insurance Co Ltd 18,262 (14.26) (34.53) CH Equity 1800 HK Equity China Communications Construction Co Ltd 17,900 (11.96) (18.32) CH Equity 2333 HK Equity Great Wall Motor Co Ltd 16,717 (8.31) (15.87) Average (0.39) (9.39) Group B CH Equity 390 HK Equity China Railw ay Group Ltd 16,569 (4.61) (12.92) CH Equity 1186 HK Equity China Railw ay Construction Corp Ltd 16,377 (3.92) (19.98) CH Equity 914 HK Equity Anhui Conch Cement Co Ltd 15, CH Equity 902 HK Equity Huaneng Pow er International Inc 15, CH Equity 753 HK Equity Air China Ltd 12,009 (12.83) (23.20) CH Equity 2727 HK Equity Shanghai Electric Group Co Ltd 11,590 (39.30) (43.47) CH Equity 2883 HK Equity China Oilfield Services Ltd 11,368 (29.71) (41.25) CH Equity 1898 HK Equity China Coal Energy Co Ltd 10,800 (20.96) (31.71) CH Equity 670 HK Equity China Eastern Airlines Corp Ltd 10,041 (37.87) (46.77) CH Equity 991 HK Equity Datang International Pow er Generation Co Ltd 9,220 (19.90) (26.51) CH Equity 168 HK Equity Tsingtao Brew ery Co Ltd 8, CH Equity 2899 HK Equity Zijin Mining Group Co Ltd 8,642 (34.41) (43.59) CH Equity 2600 HK Equity Aluminum Corp of China Ltd 8,497 (29.72) (41.28) CH Equity 1618 HK Equity Metallurgical Corp of China Ltd 8,354 (30.63) (42.60) CH Equity 1919 HK Equity China COSCO Holdings Co Ltd 8,018 (34.75) (46.32) CH Equity 2196 HK Equity Shanghai Fosun Pharmaceutical Group Co Ltd 7, CH Equity 2238 HK Equity Guangzhou Automobile Group Co Ltd 7,698 (22.55) (31.71) CH Equity 358 HK Equity Jiangxi Copper Co Ltd 7,515 (22.80) (32.60) CH Equity 1171 HK Equity Yanzhou Coal Mining Co Ltd 7,216 (40.46) (54.92) CH Equity 1071 HK Equity Huadian Pow er International Corp Ltd 6, Average (16.93) (24.87) Group C CH Equity 2607 HK Equity Shanghai Pharmaceuticals Holding Co Ltd 6, (6.00) CH Equity 1055 HK Equity China Southern Airlines Co Ltd 6,454 (28.27) (37.21) CH Equity 3993 HK Equity China Molybdenum Co Ltd 6,400 (41.74) (58.85) CH Equity 2009 HK Equity BBMG Corp 6,301 (30.13) (43.93) CH Equity 338 HK Equity Sinopec Shanghai Petrochemical Co Ltd 5,787 (42.20) (53.49) CH Equity 2866 HK Equity China Shipping Container Lines Co Ltd 5,727 (40.78) (50.45) CH Equity 177 HK Equity Jiangsu Expressw ay Co Ltd 5, CH Equity 874 HK Equity Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd 5,248 (17.66) (30.95) CH Equity 1072 HK Equity Dongfang Electric Corp Ltd 4,941 (26.13) (34.25) CH Equity 525 HK Equity Guangshen Railw ay Co Ltd 3,848 (19.46) (27.55) CH Equity 317 HK Equity Guangzhou Shipyard International Co Ltd 3,606 (29.13) (39.78) CH Equity 323 HK Equity Maanshan Iron & Steel Co Ltd 3,266 (36.45) (47.63) CH Equity 1138 HK Equity China Shipping Development Co Ltd 3,266 (32.46) (44.91) CH Equity 2880 HK Equity Dalian Port PDA Co Ltd 2,838 (37.99) (53.25) CH Equity 1053 HK Equity Chongqing Iron & Steel Co Ltd 2,167 (43.75) (57.51) CH Equity 548 HK Equity Shenzhen Expressw ay Co Ltd 2,038 (21.17) (36.15) CH Equity 588 HK Equity Beijing North Star Co Ltd 1,821 (39.63) (50.13) CH Equity 1065 HK Equity Tianjin Capital Environmental Protection Group Co Ltd 1,800 (38.96) (54.21) CH Equity 564 HK Equity Zhengzhou Coal Mining Machinery Group Co Ltd 1,740 (33.82) (42.99) CH Equity 107 HK Equity Sichuan Expressw ay Co Ltd 1,718 (28.05) (41.68) CH Equity 553 HK Equity Nanjing Panda Electronics Co Ltd 1,491 (39.99) (53.61) CH Equity 38 HK Equity First Tractor Co Ltd 1,398 (41.87) (60.66) CH Equity 995 HK Equity Anhui Expressw ay Co Ltd 1,375 (23.17) (25.92) CH Equity 300 HK Equity Shenji Group Kunming Machine Tool Co Ltd 563 (39.10) (60.11) CH Equity 187 HK Equity Beijing Jingcheng Machinery Electric Co Ltd 421 (45.24) (59.88) Average (30.80) (42.51) Note 1: Negative figures mean H-share is cheaper than A-share. Note 2: Three stocks are excluded from the calculation due to trading suspension, including CSR (1766.HK), Sinopec Yizheng (1033.HK) and Luoyang Glass (1108.HK). Sources: Bloomberg, CGIHK Research 4

5 Figure 4: Valuation of actively traded stocks Company Northbound Ticker Price (Local currency) Market cap (US$m) PER (x) PBR (x) Dividend yield (%) 2014E 2015E 2014E 2015E 2014E 2015E Ping An Insurance Group Co of China Ltd CH Equity , SAIC Motor Corp Ltd CH Equity , Daqin Railw ay Co Ltd CH Equity , Kw eichow Moutai Co Ltd CH Equity , China Pacific Insurance Group Co Ltd CH Equity , Industrial & Commercial Bank of China Ltd CH Equity , CITIC Securities Co Ltd CH Equity , China Merchants Bank Co Ltd CH Equity , Shanghai Pudong Development Bank CH Equity , Southbound Tencent Holdings Ltd 700 HK Equity , China Molybdenum Co Ltd 3993 HK Equity , Shanghai Electric Group Co Ltd 2727 HK Equity , Semiconductor Manufacturing International Corp 981 HK Equity , Sinopec Shanghai Petrochemical Co Ltd 338 HK Equity , China Oilfield Services Ltd 2883 HK Equity , Haitong Securities Co Ltd 6837 HK Equity , Sources: Bloomberg, CGIHK Research 5

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. 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: