July 25, 2005

This week .
Banks have drastically underperformed property stocks this year despite growing loan books and margin stabilization. Victor Tsang weighs up the best opportunities in the sector. See page

Table of contents
Broker Roundup What we hear Weekly Outlook Featured research Earnings tables Appendix 2 2 3 6 11 16

Page 2 Highlights
The Fed outsources its monetary policy to China? (What we hear ..) ''As we predicted'' .. brokers all pile in to say they called the yuan (Broker roundup )

Pop Quiz
Which regional market hit a 10 high last week? a) New Zealand b) Malaysia c) Korea
See page 2 for answer

Headline of the Week

$711 bln forex reserves, is that big?, A headline in
the People's Daily, referring to the size of China's foreign reserves. Hmmm perhaps just a little big. .

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Insult of the Week

It [the revaluation] is smaller than we hoped, but to

Brokers Roundup
HSBC recommended investors play the yuan revaluation theme by purchasing Asian currencies. At any rate going long US$ or euro would not be a great idea at this point, the bank argued. ''The RMB news is perceived as being USD negative initially as its refocuses attention back on the need for exchange rate to align against current account imbalances. The broker also said the move is positive for Hong Kong, especially if speculative funds start rolling in again, driving down interest rates as they bet that this yuan appreciation was the first step in a series. ING Financial Markets wrote in a similar vein: it thinks the greatest impact appreciation on the Hong Kongs currency, followed in order by: Singapore, Korea, Thailand and Taiwan. The broker also patted itself on the back for predicting a switch to a basket system in May: however we note that ING got cold feet just two days before the big event. It told clients that the strong 9.5% jump in Chinas 2Q GDP could lead Beijing to ditch plans to revalue. Morgan Stanley economist Andy Xie, meanwhile, said the revaluation would have a minimal impact on other countries. Oil or the euro an move by 2% in a day. It is hard to see how a 2% move of Chinas currency could have a significant impact on others.

paraphrase the Chinese philosophers, a trip of a thousand miles can well begin with the first baby step, US Senator Charles Schumer.
Was it really very complimentary of a leading US legislator to compare China's historic move on its currency as a ''baby step''? Alan Greenspan proved much more diplomatic: It is certainly a good first step. It is the kind of step you want to make when you have had a decade-long fixed structure. Nevertheless, China might not have been as diplomatic as it could be either, choosing the number 8.11 as its new peg to the US dollar sounds a bit too close to the 9-11 anniversary in the US.

The Egg Heads

So what did the academics have to say about this historic event? Nouriel Roubini, economist at NYU's Stern School of Business: If a modest 2.1% currency move increases U.S. long rates by 0.07 percentage points, consider the implications of a 15%20% move in currency values in China and Asia over time A tongue-in-cheek account from economist Barry Ritholtz: The Chinese Central Bankers announced that, effective immediately, they are beginning a series of incremental rate hikes in the United States. The first rate hike was for 10 basis points on the 30 year. The Feds inability to significantly impact long rates anymore is what led to the outsourcing. From Brad Setser: The currency of a major creditor (China) should not be pegged to the currency of the world's biggest debtor (the US).

Answer to pop quiz

Answer (c).

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HSI Sub-indices:

Results Preview
Tuesday, July 26
0.83% 0.44% 3.16% 2.87% 5.62% 3.39%

HSI:Finance HSI:Utilities HSI:Prop. HSI:Comm China Ent Idx China Affil Idx

27,259.64 30,906.07 19,082.47 6,814.47 5,139.10 1,731.52

ASM (522), a leading global semiconductor equipment manufacturer, will be announcing its first half results ended June 30, 2005. We expect ASM's clients to order at a measured pace as new plants come online in FY05. The new capacity in FY04 could mean FY05 could be modest before a splurge of new capacity in FY06. The share price has zoomed in recent months on Intel's bullish semiconductor forecasts. This share has been one of our star performers and has met our share price target of $40. At the moment it is trading at $38.90 on a prospective PE of 17.1x. We have a medium-risk hold rating on the share. We await insight on the semiconductor industry on the group's announcement. Automated Systems (771) a Hong Kong based IT solutions provider, will be announcing its first quarter results ended June 30, 2005. Automated Systems (AS) reported positive fiscal year ended March 31, 2005 results that saw its net profit increase 86% YOY to $34M. The earnings growth was achieved on aggressive management of its direct costs (e.g. cost of goods sold; billable hours, etc.). Over 51% of the group's total revenues come from the public sector, mainly Hong Kong government entities and educational institutions. The group had major contract wins in FY05 including projects for 82 primary and secondary schools, The Open University of Hong Kong, the Hong Kong Housing Authority and Social Welfare Department. We suspect that these contract wins should bring in modest profits in 1Q06. At $1.87, AS is trading on a prospective FY06 PE of around 15.2x. Thursday, July 28

Results Announcements: Mon HK Price/volume Trade Stats US existing home sales Tue HK External Trade Stats US consumer confidence ASM Pacific (522) results Wed Thu SMIC (981) results HK & Shanghai Hotels Fri HK Business Tendency Survey US GDP-Adv 1H05 FY05 3Q05 May June June July 1H05

HK & Shanghai Hotels (45) will announce on the 28th July final results for the fiscal year ended March 2005. Due to the disposal of Kowloon Hotel, group sales & 2Q05 recurring profit probably remained flat last year, but reported profit was probably boosted by the one-off profit on disposal of the Kowloon Hotel last year. This fiscal year, recurring profit should continue to improve, subject to competition from the soon to open Four Seasons Hotel, & higher administrative expenses. Just like other asset plays, this counter probably experienced an upward revaluation of its equity, for at current share price, both historic & prospective valuations are now very demanding. Given the low return on equity, share price is still at a considerable discount to book value, but speculative interest could bid up share price & narrow the discount. AV Concept (595, AVC), a manufacturer of MP3 players, assembler of printed circuit boards and distributor of semiconductor products for Samsung Electronics and Fairchild Semiconductor, will
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unveil its fiscal year results ended March 31, 2005. Back in May, AVC announced that it plans to sell its manufacturing arm for at least US$20M ($156M) to Canadian EMS (electronic manufacturing services) manufacturer BreconRidge (BR). AVC will swap a 50% stake in its manufacturing arm for an 8.45% stake in BR. The manufacturing unit will be a joint venture between AVC and BR until BR can list on a North American stock exchange within two years of the agreement. Earnings prospects have paled recently on poor semiconductor trading profits. We have a high-risk hold rating on the share. Semiconductor Manufacturing International Corporation (981, SMIC), a leading global manufacturer of semiconductors, will unveil its first half results ended June 30, 2005. Q105 results ended March 31, 2005 were abysmal on DRAM pricing declines and industry softness. Net profit plummeted to a net loss of US$30M on decreased chip shipments and lower average selling prices (ASPs). Based on its published guidance, SMIC believes its shipments will decline 16-18% QoQ. Blended ASP is expected to decline in the single digits and there will be further pressure on its margins. As such, we believe SMIC will have a difficult FY05. We have been telling investors to avoid the share since its IPO and we reiterate our rating.

Changes in Earnings and Recommendations

We have made the following changes last week: 1) HSBC (5): We modified the earnings under the new IFRS system. Yet we also revised downward its earnings projection in light of deterioration in asset quality in the U.K.. Accordingly, we also lowered our DPS forecast. BEA (23): We upgraded BEA to Buy from Hold amid the recovery of the earnings cycle. Given its scale and the expansion in the PRC, BEA deserves a higher PB. CIFH (183): We downgraded the PRC-affiliated banks to High-risk in light of concerns on advancing to privately-owned shares. WHB (302): We upgraded earnings for WHB as loan growth picks up especially outside HK. Sun Hing (125): We downgraded its risk rating from MEDIUM to HIGH as the earning volatility is estimated to be higher in face of inflated raw material costs and other operating expenses. Chen Hsong (57): We downgraded its rating from BUY to HOLD as we worry that the weak order in the 2nd half may extend to the coming year and the accumulation of working capital may give further pressure to its cashflow. Herald (114): We downgraded its rating from BUY to HOLD as we believe that the timepiece division may have some business consolidations and its toy and gift division may suffer from higher raw material costs. Dynasty (828): We revised downward the earnings projection to $162 million on rising grape costs. Texwinca (321): Forecast revised following results announcement

2) 3) 4) 5) 6)

7)

8) 9)

10) Victory City (539): Forecast revised following results announcement

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Hong Kong Banks - The Laggards

Property counters were stars in the first half. Riding on solid economic recovery, the property market, one of the pillars of the local economy, has shown its strength against rising interest rates. According to the Centaline property index, property prices have already rebounded by over 50% from their trough, and some luxury units have even doubled. We expect property prices to continue to rise together with transaction volume, at least for the primary market sales. Banks have lagged the market. Being also one of the pillars of Hong Kong, the performance of banks was disappointing in the first half. Although the Hang Seng Index was relatively resilient, banks were the neglected laggards when compared with property developers. Index constituents BEA (23) fell 2% in the first half, against stellar performances by Sino Land (83) and New World Development (17). With lower unemployment rates and higher wages, it is interesting that banks underperformed most sectors in the economy. The story in 2004 was credit-driven. The sharp increases in profits were mainly due to substantial write-backs and asset revaluations, as exemplified by BOCHK (2388). Operating results were disappointing -- pre-provisioning operating profit retreated 11% for the local arm of Bank of China. Yet BOCHK wrote back $1.6 billion in provisions, against provisions of $1.7 billion in 2003. Additionally, realized and unrealized gains on fixed assets were $2.1 billion, against losses of $1.1 billion in 2003. This helped boost BOCHK's pre-tax profit by 64%. This, however, is unlikely to repeat. The picture in 2005 will be loan growth and margins stabilization. Despite softening growth for trade finance, one can expect mortgage lending to continue to advance on the back of the revival of the property market. Since mortgages accounted for around a third of total advances, bottoming mortgage loans are essential for banks to boost their income. This is especially true that banks have started cutting, or even ceding, cash rebates since February this year. Valuations are inexpensive, and re-rating in the sector is possible. Most banks are currently trading at 20% below the upper PB bands for the past five years. We believe using the PB bands for the past five years is conservative in a depressed environment. As long as the economy continues to improve, banks deserve to trade at higher PBs in particular for those having superior management quality. We like HSBC (5), BEA, and WHB (302). Adventurous investors may also find PRC-affiliated banks such as CIFH (183) and ICBC (Asia) (349) attractive.

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Exhibit 1: Sluggish performance in 1H05 31/12/2004 30/06/2005 % change HSBC (5) HSB (11) BEA (23) WLB (96) CIFH (183) WHB (302) ICBC (349) LCHB (1111) DSBG (2356) BOCHK (2388) StanChart (2888) Average Hang Seng Source: Quam Stock Library Loan Growth: Gearing Up Negatively impacted by the continual fading property market and the sluggish economy, total loans and advances retreated 17% between 2000 and 2003. The multiplying effect further amplified the decline. Fortunately, the economy has started to pick up since 2003, and loan growth has returned to the positive territory. Total loans and advances grew 6% year-on-year in 2004. What is more encouraging is that with respect to the end of 2004 it expanded 2.9% to $2,218 billion for the first five months of 2005, or 7% annually. From our angle, loan growth is one of the most important factors driving the profitability for banks. Exhibit 2: Domestic loans by economic sectors
40 30 20 10 0
Q3 Q3 Q3 Q3 Q3 Q3 Q3 2 3 8 9 0 1 4 20 0 20 0 19 9 19 9 20 0 20 0 20 0 20 0 5

129.8 105 23.35 61.02 3.375 53.07 10.79 11.3 15.72 14.455 140.85

125 106 22.95 58.5 3.3 50.75 9.55 11.75 14.45 14.7 144.5

-3.7% 1.0% -1.7% -4.1% -2.2% -4.4% -11.5% 4.0% -8.1% 1.7% 2.6% -2.4% 0.2%

(%)

Manufacturing Wholesale and retail

Property Trade financing

-10 -20 -30 -40

Source: HKMA Over the past few years, trade financing has been the catalysts; growth, however, decelerated in the past two quarters. Loans for manufacturing has also grew admirably since the second quarter of 2003. Nevertheless, the combine of trade financing, manufacturing, and wholesale and retailing accounted for merely a third of property lending. As such, what really matters is the property market.
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Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

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Exhibit 3: Expanding property lending

545 billion 540 535 530 525 520 515 510 20

outstanidng mortgages

new mortgage loans

18 16 14 12 10 8 6 4 2 0

Source: HKMA

While new mortgage loans bottomed in February 2003, the crucial figure should be the total amount of outstanding mortgage lendings. Yet the outstanding mortgage amount was relatively stagnant between August 2003 and October 2004 despite the revival of the property market. This was because the preternaturally low interest rates caused homeowners to refinance their mortgages at lower rates, and the new mortgages lending were priced mostly at low mortgage rates. The existing homeowners were also repaying faster than the new mortgage lending. As such, banks rely heavily on mortgages were hurt. BOCHK and HSB, two of the biggest property lenders, posted 13% and 5% declines in net interest income respectively in 2004. Fortunately, the outstanding mortgage lendings rose 3% year-on-year to $540 billion in May 2005, and the recovery also helped lifted construction and related loans. We expect a continual improvement in this area. Austerity measures: Opportunities or challenges? In order to cool economic growth, the PRC government implemented austerity measures last year. This hammered PRC property developers and constructors. They could not easily obtain loans from PRC banks. This, however, is a golden chance for local banks to extent their footstep into the PRC. After transfer of risk, the PRC business accounted for 9% of BEA's loan book compared with only 5% in 2003. Despite dull loan growth in HK, BEA's loan portfolio in the PRC expanded 50% in 2004. Growth for the PRC market is likely to remain strong in 2005. Are rising interest rates a threat? As we emphasized in the past, a low interest rates environment is not necessarily a positive to the economy. History tells us that a robust economy is accompanied with high interest rates. This is because the movements of interest rates should be a result of supply and demand for funds. Abnormally low interest rates in the past year were mainly due to the influx of capital betting on the potential revaluation of the yuan. Yet interest rates have begun normalizing since late 2004. The 3-month HIBOR has surged from nearly 0% to around 3.4% recently, resulting in a significant squeeze in the loan spread (prime rate minus 3-month HIBOR). This will undoubtedly pressure banks' margins in the short-run, especially for small banks relying on the interbank market for loans.

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-0 Au 2 g0 Oc 2 t-0 De 2 c02 Fe b0 Ap 3 r-0 3 Ju n03 Au g0 Oc 3 t-0 De 3 c03 Fe b04 Ap r-0 4 Ju n04 Au g0 Oc 4 t-0 De 4 c04 Fe b05 Ap r-0 5

Ju n

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Exhibit 4: 3-month HIBOR has surged since late 2004

4 3.5 3 2.5 2 1.5 1 0.5 0
Nov-02 Nov-03 Nov-04 Mar-02 Mar-03 Mar-04 Mar-05 Jul-02 Jul-03 Jul-04 May-02 May-03 May-04 May-05 Apr-05 Jan-02 Jan-03 Jan-04 Sep-02 Sep-03 Sep-04 Jan-05 Jul-05 Jul-05

(%)

Source: HKAB

Exhibit 5: Normalizing HIBOR/LIBOR spread

1 (%) 0.5 0
Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Jul-00 Jul-01 Jul-02 Jul-03 Oct-00 Oct-01 Oct-02 Oct-03 Jul-04 Oct-04 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

-0.5 -1 -1.5 -2 -2.5

Source: HKAB, QuamResearch

Additionally, given the low interest rates environment, banks may find it difficult to gain higher yields on securities. In 2004, HSB's net interest margin declined 24 basis points; yet 10 basis points were related to the re-pricing of higher yielding securities. Yields for these securities rise much more slowly than HIBOR rises. Banks with a relatively high exposure in debt securities may face more pressure.

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Exhibit 6: Proportion of securities to total assets % CIFH DSBG 2004 31.4 29.9 % BOCHK WHB WLB 2004 23.8 21.3 18 % BEA LCHB ICBC 2004 11.8 9.5 9.3

25.5 HSB Source: Company

Nonetheless, on top of directly increasing the prime rates, Hong Kong banks had lifted their mortgage rates by adjusting the pricing formula from prime minus 2.75%-3% to prime minus 2%2.25%. Mortgage rates for new homeowners are now essentially 75 basis points higher than in the past. This helps compensate for the upsurge in HIBOR. Additionally, prime at 6.5% is now up 1.5% points. Credit enhancement is not the spotlight in 2005 Banks were hammered by escalating bad debts during the economic downturn. HSB is one of the most prudent banks in the Hong Kong universe. However, its bad debt charges quadrupled to $792 million in 2003 within four years, offsetting most of the increase in operating profit. In 2004, property prices rebounded and unemployment rates peaked. Simultaneously, banks also tightened their credit card approval procedures. The credit card charge-off rate improved to only 3.18% in 1Q05 from 4.7% in 2004 and 10% in 2003; the delinquency ratio for mortgage lending had been declining from 1.32% since 2000 to 0.24% in May 2005. As such, banks benefited from material write-backs last year. We expect bad debt charges to normalize in 2005. Although some banks are still able to write back some of the bad debts in 2005, the amount of write-backs are unlikely to be material. Over the next few years, we should focus on operating income growth. Exhibit 7: Improving NPL ratios % WLB HSBC HK HSB DSBG BEA ICBCA LCHB WHB BOCHK CIFH Source: Company 2003 2.49 1.6 2.3 1.5 245 1.7 2.14 2.98 5.78 6.51 2004 0.83 0.87 0.9 0.96 1.16 1.3 1.49 1.68 2.95 4.41

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Declaring higher dividends to cheer investors Having said that, banks are still thriving to boost their net profit. Even though they may be able to improve their operating income, net profit growth could be subdued due to the absences of material write-backs. Under the new risk-assessment systems, banks can free up more capital for dividend payments due to their high capital adequacy ratios. With razor-thin deposit rates and limited imminent growing opportunities, they have increased dividend payouts. Some banks are not offering 4.5%-plus dividend yields, making them the new utilities. Overall, we remain upbeat on the banking sector. Exhibit 8: Higher dividend payouts 2004 HSB LCHB BEA BOCHK HSBC ICBC WLB CIFH WHB StanChart DSBG 87.2% 71.3% 65.8% 63.2% 52.8% 56.3% 55.4% 50.0% 49.4% 47.5% 47.1% 2005 88.0% 67.7% 66.3% 75.3% 55.1% 56.0% 56.9% 59.3% 49.8% 48.7% 53.5% 2005 DPS (E) $5.91 $0.65 $1.08 $0.72 $5.46 $0.46 $2.46 $0.16 $2.10 $4.84 $0.61 payout (A) payout (E)

Source: Company, QuamResearch

HSBC: Remains an excellent long-term investment ($126.7; Buy, Low-risk) No one will probably argue that HSBC is a wonderful long-term investment. The bank achieved its target to double shareholders' value in 5 years between 1998 and 2003. The global banking giant has set another ambitious 5-year plan: from value to growth. The new crowns will be the emerging markets, and HSBC will apply the Household model in these markets in order to strengthen its consumer finance business. On an ex-dividend basis, the share price of HSBC was approximately $19 each in mid 1996. Compared to the current price, this represents a 10-year compound annual growth rate of 20.8%. In the mean time, we encountered a number of crises including the Asian economic turmoil, the bursting of the IT bubble, and the SARS epidemic. HSBC has not only been able to weather the storm but also to ride on the wave. In late June, a brokerage house downgraded HSBC in light of deteriorating asset quality in the U.K, falling margins, and stronger dollar. We share some of these worries, and we adjusted downward the bank's earnings due to slower economic growth in Europe in particular the U.K.. A change in bankruptcy laws also lifted credit costs, which we originally underestimated it. Earnings growth is likely to slow this year -- we expect cash EPS to advance only 1% in 2005 due to rising credit costs. Nevertheless, the prospects will be the emerging markets: Mexico, Brazil,
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India, and the PRC. These markets should be the future drivers for HSBC, although imminent profit contributions are immaterial. HSBC owns 19.9% of Bank of Communications (3328) and Ping An Insurance (2318). Pre-tax profit from the PRC was only US$44M in 2004. As such, investing in HSBC should take a longer-term perspective. As we explained earlier, the change in accounting standards should have limited impact on the bank. Priced at 12.8x FY05 cash PE and 4.3% dividend yield, HSBC remains an attractive Buy. Exhibit 9: HSBC's results summary PPOP* Cash EPS (US$mil) Profit (US$) 2002 2003 2004 1H05E 2005E 11641 7102 0.76 0.99 1.25 0.66 1.27 18540 10359 22898 13658 13609 7376 27250 14208 yoy (%) 20.6 30.3 26.3 0.3 1.2 12.8 4.3 PE (x) 21.3 16.5 13 Dividend yield (%) 3.3 3.7 4.1

Source: Company, QuamResearch; *-pre-provisioning operating profit

BEA: A high-yield PRC play ($23.65; Buy, Low-risk) Management quality has long been a concern for BEA. However, BEA appears to be positioned for growth in the future. The drivers are: 1) lower cost:income ratio after relocating its back office at Millennium City 5, 2) a high exposure in the PRC, and 3) robust fee income from its corporate services and securities and asset management. BEA's expensive purchase of First Pacific Bank in 2000 was ill-timed. The acquisition was priced at a demanding 1.5x PB, given First Pacific Bank's inferior asset quality. Nevertheless, it also gave BEA the platform and to diversify into the PRC market, after fulfilling the requirements to step into the PRC. Despite that, the acquisition has started to pay off. The PRC is likely to become a meaningful profit contributor to the group. On the cost side, the 8% increase in operating expenses for 2004 was disappointing. This represented a cost:income ratio of 49.5%, a relatively high ratio for banks (HSB: 26.3%; BOCHK: 34.7%; WHB: 42.2%). The bank expected higher operating expenses to be only temporary, and the cost savings of the migration would be gradually reflected this year. We expect the cost:income ratio to drop to 45% this year. Chairman Dr. Li expected to reach a 40% cost:income ratio within two to three years. We upgrade BEA to Buy from Hold to Buy in light of the undemanding valuation and solid growth in the PRC. Over the past five years, BEA has been trading at 1.03x to 2.05x PB. The current PB is a fair 1.6x. Yet if the economy continues to improve, BEA could deserve a higher PB. The risk is that BEA fails to lower its cost:income ratio in the future. Additionally, the slow down of the PRC economy will result in tepid growth of its PRC business.

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Exhibit 10: BEA's results summary PPOP ($ mil) 2002 2003 2004 1H05E 2005E 11641 18540 22898 1523 3141 Profit ($) 1270 1922 2424 1207 2431 EPS ($) 0.895 1.322 1.639 0.8 1.62 yoy (%) -20 47.7 24.0 18.1 -1.4 14.6 4.6 PE (x) 26.4 17.9 14.4 Dividend yield (%) 2.4 3.6 4.6

Source: Company, QuamResearch

WHB: Diversifying outside HK ($55.05; Buy, Medium-risk) We applaud management's vision to diversify outside HK. WHB was the pioneer of expanding into Macau and the PRC. These two markets are expected generate meaningful returns to the bank. Gross advances for use in Macau and others, probably the PRC, rose 2% and 25% respectively for 2004. Net profit for Banco Weng Hang in Macau rose 9% to 146 million Macau patacas, or 12% of total profit last year. Leveraging on the booming Macau market, profit this year could be even more promising. The timely acquisition of Chekiang First Bank also helped lift WHB's profitability. Synergistic effects have been gradually reflected in the bank's results. The group posted $80 million synergy gains last year -- half from the cost side and half from the revenue side. Despite that, its cost:income ratio changed to 42.2% from 35.1% before the acquisition due to poor cost/income of Chekiang. In 2005, the bank expects further synergy gains of $80 million. This can likely to cut its cost:income ratio to below 40%. A risk is that the group may face continual margin pressure when interest rates rise. The net interest margin was squeezed 32 basis points to 1.99% last year, principally due to mortgage repricing. Additionally, we wonder whether the interest rate hike may put pressure on its securities portfolio. From a positive angle, as WHB focuses mainly on the relatively riskier clientele, it will benefit more when the economy perks up. As such, it is a preferred banking play for those who are positive on the banking sector. At $55.05, WHB is priced at 13x PE with a 3.8% dividend yield. The current PB of 2.1x is not particularly attractive, but it could be re-rated given superior management quality. Exhibit 11: WHB's results summary PPOP ($ mil) 2002 2003 2004 1H05E 1242.1 1319.3 1406.3 735 Profit ($) 669 863.9 1168 602 EPS ($) 2.28 2.94 3.97 2.05 yoy (%) -14.2 29 35.1 13.7 6 13 3.8 PE (x) 24.1 18.7 13.9 Dividend yield (%) 3.3 2.6 3.6

1526 1235 4.21 2005E Source: Company, QuamResearch

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ICBC (Asia): Leveraging on the parent ($10.35; Buy, Medium-risk) ICBC (Asia) is the local subsidiary of ICBC, one of the "Big-Fours" in the PRC. We originally expected the bank to deliver decent growth after the acquisition of Belgian Bank; however, while a one-off $44 million disposal loss partially negatively impacted its results, operating profit last year was far below our expectations. The culprit was higher operating costs. Before the acquisition, ICBC (Asia) principally focused solely on syndicated loans. Considering the competitiveness of the business, the margins for syndicated loans have been marginal. Therefore, the expansion into the retail business through the acquisition of Belgian Bank appeared to be a sensible move. Yet, it seems that ICBC (Asia) needs more time to integrate Belgian Bank, and thus lowering its growth rate in the meantime. Another growth driver could be the acquisition of China Mercantile Bank, a subsidiary of its parent. After the purchase, ICBC (Asia) could tap into the lucrative RMB business in the PRC. They could be able to get a RMB license this year. A swing factor, however, is its 25% investment in Tai Ping Insurance. This is because Tai Ping Insurance and Tai Ping Life (held under CIIH (966)) are both at the initial investment stages. At $10.35, ICBC (Asia) is capitalized at $10.9 billion for 12.6x forward PE. The 4.4% dividend yield could compensate for the slower growth. If there are positive surprises, the group should be a bargain among second-tier banks. Exhibit 12: ICBC (Asia)'s results summary PPOP ($ mil) 2002 2003 2004 1H05E 737.2 794.8 900.9 542.6 Profit ($) 474.6 522.1 760.4 451.6 EPS ($) 0.69 0.71 0.8 0.43 yoy (%) 25 2.9 12.7 2.6 2.4 12.6 4.4 PE (x) 15.1 14.5 12.9 Dividend yield (%) 3.4 3.7 4.4

1105 859 0.82 2005E Source: Company, QuamResearch

CIFH: The worst is over ($3.15; Hold, High risk) Thanks to an 85% decline in provisions for bad and doubtful debts, the 2004 results for CIFH were above our expectations. Despite the absence of $125 million gains on the disposal of heldto-maturity securities, net profit jumped 37% to $901 million. As such, the asset quality for PRCrelated loans might not be as bad as we originally expected. Nevertheless, CIFH faces another challenge: interest rates hike. Exhibit 6 shows that CIFH had the highest exposure to debt securities. As such, rising interest rates should hurt its profitability. Although most of them are intended to held-to-maturity, CIFH still has some volatile treasury operations. We also expect net interest income to decline in the year -- loan growth is unable to offset narrowing net interest margins. The bad news, however, may have been already reflected in the share price. The risk remains its asset quality. Clouded by uncertainties with advances to P-shares such as Wah Sang Gas (8035) and Far East Pharmaceuticals (399), provisions could rise again in the future. Despite an improving NPL ratio, the figure was far higher than the less than 2% for most local banks. Therefore, its low valuation is justifiable.
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At $3.15, CIFH is trading at 11.7x PE and 1.21x PB. Its recurring profit is likely to fall 5% to $856 million. This could partly explain its undemanding valuations. We have Hold and Medium-risk ratings on the PRC-affiliated play, considering the risk incurred. Investors may find that the performance of CIFH is closely related to the HSCCI over the past year. CIFH rose 23% against a 28% increase for the HSCCI. For those who are upbeat on the index, and are willing to take risk, CIFH could be a nice alternative. Exhibit 13: CIFH's results summary PPOP ($ mil) 2002 2003 2004 *1H05E 1134 1005.4 1038.9 537.5 Profit ($) 538.6 656.6 901.3 626.9 EPS ($) 0.178 0.21 0.282 0.196 yoy (%) -23.6 17.9 34.5 47.4 PE (x) 17.7 15 11.2 Dividend yield (%) 5.1 2.9 4.5

1100 856 0.27 -5.1 11.7 5.1 #2005E Source: Company, QuamResearch *including a $227 million disposal gain of Ka Wah Bank Centre #excluding the disposal gain Exhibit 14: Comparative PBs (X) HSBC HSB BOCHK* ICBCA BEA WLB WHB DSBG* CIFH PB between 2001 and 2004 1.83-2.72 3-5.38 1.41-2.97 0.81-1.84 1-1.97 0.83-1.7 1.09-2.61 1.92 0.82-1.89 current 2.1 4.7 2.4 1.27 1.62 1.49 2.18 1.81 1.21 0.84

0.43-0.97 LCHB Source: Bloomberg, Quam Stock Library

Disclosure : Victor Tsang (SFC CE Number: AGI780) , the author of this document declares that as at the date of the publication of this report, he doesn't hold an interest in the companies mentioned in this report.
QuamResearch Weekly 14

Earnings Forecasts
Company Finance and banking 5 HSBC 11 Hang Seng Bank 23 Bank of East Asia 53 Guoco 96 Wing Lung Bank 183 CIFH 302 Wing Hang Bank 349 ICBC (Asia) 388 HKEX 440 Dah Sing Financial 626 JCG 665 Tai Fook 1111 LCH Bank 2356 Dah Sing Banking Group 2388 BOCHK 2888 Standard Chartered 3328 Bank of Communications Insurance 945 Manulife 2318 Ping An Insurance 2328 PICC 2628 China Life Properties 1 Cheung Kong 10 Hang Lung Group 12 Henderson Land 14 Hysan 16 Sun Hung Kai 17 New World 34 Kowloon Development 41 Great Eagle 49 Wheelock Properties 83 Sino Land 101 Hang Lung Properties 173 K. Wah 194 LCH Investment 289 Wing On 683 Kerry Properties 1200 Midland China Properties 688 China Overseas 983 Shui On 1109 CR Land 2777 Guangzhou R&F Construction 27 K.Wah Construction 712 CR Cement 914 Anhui Conch Hotels, Travel 45 HK & S Hotels 51 Harbour Centre 69 Shangri-la 71 Miramar 105 Associated Hotels 308 China Travel HK Power 2 CLP 3 HK Gas 6 HK Electric 1038 CKI China Power 836 CR Power 902 Huaneng 991 BJ Datang 1071 Huadian 2380 China Power HK Telecom 8 PCCW 13 Hutchison 142 First Pacific Price (22/07/05) 126.7 107.2 23.65 80.8 61.5 3.15 55.05 10.35 23.2 54.85 8.05 1 11.95 15.2 15.55 159.5 2.875 Rating Risk levels Market cap (HK$M) 1,417,773 204,945 35,307 26,543 14,280 10,073 16,174 10,846 24,592 13,636 5,698 585 5,198 13,981 164,407 206,872 129,161 Profit A (HK$M) 106,501 11,395 2,424 2,440 1,032 901.3 1,168 760.4 1,057 2,033 412.9 70 349 1,120 11,963 11,536 1,513 Profit E (HK$M) 110,822 11,307 2,431 3,000 1,004 856 1,235 859 1,063 1,088 425 80 418 1,045 10,012 12,893 7,428 EPS E (HK$) 9.90 5.91 1.63 9.13 4.32 0.27 4.20 0.82 1.00 4.38 0.60 0.14 0.96 1.14 0.95 9.94 0.17 EPS growth (%) 16.5% -0.8% -0.7% 22.9% -2.6% -5.1% 5.9% 2.5% 0.3% -46.8% 3.0% 7.9% 20.1% -12.0% -16.2% 5.3% N.A.

QuamResearch Weekly
DPS E (HK$) 5.46 5.2 1.08 3.63 2.46 0.16 2.1 0.46 0.91 2.08 0.24 0.06 0.65 0.61 0.715 4.84 N.A. PB A (x)** 2.1 4.7 1.6 0.9 1.5 1.2 2.2 1.3 5.8 1.7 2.6 0.6 0.8 1.8 2.4 3.1 2.0 ROE A (%) 14.4 27.6 11.9 8.2 11.4 11.2 16.6 10.2 26.1 24.6 15.1 7.1 5.8 10.8 18.6 20.1 4.5 PE E (x) Yield E (%) 4.3% 4.9% 4.6% 4.5% 4.0% 5.1% 3.8% 4.4% 3.9% 3.8% 3.0% 6.0% 5.4% 4.0% 4.6% 3.0% N.A.

Buy Hold Buy Buy Hold Hold Buy Buy Hold Hold Hold Buy Buy Hold Hold Buy Hold

Low Low Low Med Low High Med Med High Med High High High Med Med Med High

12.8 18.1 14.5 8.8 14.2 11.8 13.1 12.6 23.1 12.5 13.4 7.3 12.4 13.4 16.4 16.0 17.4

391.6 12.9 1.95 5.65

Buy Hold N.R. Buy

Low Med High High

312,418 79,916 21,807 151,719

16,204 2,940 208 6,765

21,362 3,679 1,810 7,830

26.78 0.59 0.16 0.29

16.1% 0.1% 751.9% 14.5%

7.58 0.156 0 0.045

1.8 2.3 N.A. 1.8

16.1 15.1 1.3 11.1

14.6 21.7 12.0 19.4

1.9% 1.2% 0.0% 0.8%

84.35 15.4 39.3 17.85 80.95 10.2 9 23.3 5.05 9.5 12.65 2.35 7.7 11.2 20.2 4.95

Hold Hold Hold Sell Hold Sell Buy Sell Buy Sell Hold Hold Buy Buy Hold Sell

High Med Med High Med High High High Med High Med High Med Med Med High

195,371 20,447 71,314 18,743 194,353 35,265 5,101 13,747 10,451 40,907 46,590 5,177 2,915 3,307 24,462 3,487

9,815 987 3,059 609 6,923 (976) 303 312 1,743 1,409 2,065 234 104 311 1,955 357

11,600 1,910 4,000 600 11,000 2,300 535 500 570 1,808 3,600 4,800 200 292 1,700 370

5.01 1.44 2.20 0.57 4.58 0.67 0.94 0.85 0.28 0.42 0.98 2.18 0.53 0.99 1.40 0.53

-6.4% 93.4% 28.9% -1.8% 59.1% N.A. 74.8% 59.9% -67.3% 28.4% 42.7% 1762.3% 88.7% -5.8% -14.0% 3.6%

1.8 0.56 1.00 0.40 1.8 0.14 0.47 0.47 0.08 0.47 0.47 0.1 0.2 0.56 0.5 0.19

1.1 1.1 1.2 1.0 1.4 0.6 1.2 1.0 0.7 1.3 1.3 U.R. 0.5 0.7 1.1 4.2

7.0 5.5 5.4 3.0 5.4 (2.0) 8.0 2.0 11.6 5.0 7.5 8.9 1.8 6.2 9.1 50.9

16.8 10.7 17.8 31.2 17.7 15.3 9.5 27.5 18.3 22.6 12.9 1.1 14.6 11.3 14.4 9.4

2.1% 3.6% 2.5% 2.2% 2.2% 1.4% 5.2% 2.0% 1.6% 4.9% 3.7% 4.3% 2.6% 5.0% 2.5% 3.9%

1.78 9.2 1.66 11.55

Hold Hold N.R. Sell

High High High High

11,330 2,478 2,505 8,497

1,075 148 103 514

786 480 167 981

0.12 1.78 0.11 1.33

-27.8% 221.1% 10.8% N.A.

0.06 0.48 0.03 0.52

1.1 1.8 0.6 2.0

11.6 11.4 3.7 27.1

14.4 5.2 15.0 8.7

3.4% 5.2% 1.8% 4.5%

5.4 1.65 7.3

Sell Sell Sell

High High High

16,927 619 9,169

33 89 961

U.R. 63 500

U.R. 0.16 0.38

U.R. -32.4% -48.1%

U.R. 0.040 0.057

U.R. 0.6 1.8

2.3 8.3 19.9

N.A. 10.0 19.3

N.A. 2.2% 0.8%

8.5 13.35 13.25 12.45 7.5 2.4

Sell U.R. Sell Hold Hold Hold

High U.R. High Med Low Med

11,920 4,205 31,853 7,186 2,700 10,205

574 251 1,104 321 155 902

508 U.R. 1,350 326 120 770

0.36 U.R. 0.56 0.56 0.33 0.18

-11.4% U.R. 19.2% 1.6% -22.5% -14.6%

0.12 U.R. 0.21 0.37 0.08 0.11

0.7 0.8 1.4 1.0 0.6 2.6

2.8 4.6 4.9 4.4 2.8 10.8

23.5 N.A. 23.6 22.0 22.5 13.3

1.4% N.A. 1.6% 3.0% 1.1% 4.6%

44.7 16.05 36.05 24.1

Buy Hold Hold Hold

Low Low Low Low

107,647 90,971 76,942 54,321

7,687 3,052 6,280 3,556

8,634 5,246 6,286 3,784

3.59 0.93 2.95 1.68

0.1% 71.4% 0.2% 6.3%

2.230 0.590 1.710 0.840

2.4 5.2 2.0 1.7

20.4 18.0 17.2 11.8

12.5 17.3 12.2 14.4

5.0% 3.7% 4.7% 3.5%

4.325 5.65 6.05 2.3 2.6

Buy Hold Hold Sell Sell

High Med Med High High

16,470 68,116 31,236 13,848 8,151

590 5,324 1,810 1,045 607

1,462 5,352 2,431 1,148 552

0.38 0.44 0.47 0.19 0.18

11.8% 5.7% 34.5% 33.3% -32.8%

0.090 0.250 0.210 0.046 0.020

1.6 2.0 2.1 1.3 1.4

13.7 15.2 14.0 11.0 10.3

11.3 12.7 12.8 12.1 14.8

2.0% 4.2% 3.5% 2.0% 0.8%

5.15 76.1 2.775

Hold Buy Buy

High High Med

34,608 324,445 8,841

1,638 16,128 1,053

1,250 16,500 1,100

0.19 3.87 0.35

N.A. 2.4% 10.6%

0.15 1.73 0.05

N.A. 1.1 3.9

N.A 6.2 45.7

27.7 19.7 8.0

2.9% 2.3% 1.8%

Earnings Forecasts
Company 315 Smartone 1063 SunCorp 1137 CTI China Telecom 728 China Telecom 762 China Unicom 906 China Netcom 941 China Mobile 2342 Comba Conglomerates 4 Wharf 19 Swire A 20 Wheelock 25 Chevalier 87 Swire B 97 Henderson Investment 267 CITIC Pacific 291 China Resources 363 Shanghai Industrial 392 Beijing Enterprises 659 NWS 882 Tianjin Development Energy 386 Sinopec 857 PetroChina 883 CNOOC 1088 Shenhua 1171 Yanzhou 2883 China Oilfield Petrochemical 338 Shanghai Pet 408 Yip's Chemical 1128 Zhenhai Water and Sewage 270 Guangdong Investment 1065 Tianjin Capital Automobiles 203 Denway 1114 Brilliance 2333 GW Auto 2338 Weichai Metals 323 Maanshan 347 Angang 358 Jiangxi Copper 1053 Chongqing Iron 2600 Chalco China Foods 124 Kingway Brew 168 Tsingtao 322 Tingyi 506 COFCO 708 People's Food 809 Global Bio-chem 828 Dynasty 1044 Hengan International 2317 Vedan 2319 Mengniu Logistics 560 Chu Kong Shipping 562 Baltrans 598 Sinotrans Airlines 44 HAECO 293 Cathay 670 China Eastern 753 Air China 1055 China Southern 1110 CNAC Price (22/07/05) 8.7 2.125 0.9 Rating Hold Buy Hold Risk levels Med High High Market cap (HK$M) 5,072 691 553 Profit A (HK$M) 467 96 50 Profit E (HK$M) 290 120 (75) EPS E (HK$) 0.50 0.37 (0.12) EPS growth (%) -37.8% 23.1% N.A.

QuamResearch Weekly
DPS E (HK$) 0.31 0.09 0.00 PB A (x)** 1.5 3.8 0.5 ROE A (%) 10.6 52.5 4.2 PE E (x) 17.5 5.8 N.A. Yield E (%) 3.6% 4.2% 0.0%

2.925 6.7 12.05 30.95 2.95

Buy Hold Hold Buy Buy

Med High High Low High

238,388 84,165 79,458 609,777 2,457

28,023 4,387 9,248 39,626 255

28,585 4,340 9,434 45,283 280

0.35 0.35 1.43 2.30 0.34

3.2% 5.0% N.A. 14.1% 12.0%

0.071 0.096 0.29 0.75 0.10

1.6 1.2 1.9 2.8 2.2

18.1 6.2 18.8 19.5 23.2

8.3 19.4 8.4 13.5 8.8

2.3% 1.4% 2.4% 2.4% 3.4%

30.25 77.1 13.65 9 13.95 11.25 22.8 12.5 16.4 10.75 12.4 3.025

Hold Hold Buy Buy Hold Hold Hold Buy Buy Hold U.R. Buy

Med Med Med Med Med Med Med Med Med High U.R. High

74,037 118,048 27,737 2,481 106,794 31,695 49,934 26,738 15,721 6,692 22,407 2,753

3,767 6,544 4,167 282 6,544 1,825 3,581 1,603 1,383 503 1,538 564

3,890 6,544 2,100 230 6,544 1,956 3,500 1,700 1,079 500 2,498 280

1.59 4.27 1.03 0.83 0.85 0.69 1.60 0.79 1.13 0.80 1.38 0.31

3.3% 0.0% -49.6% -17.5% 0.0% 6.8% -2.3% 4.6% -22.4% -0.8% 60.4% -61.6%

0.70 2.00 0.11 0.42 0.40 0.24 1.2 0.28 0.57 0.3 0.4 0.08

1.1 1.6 0.8 0.9 1.4 1.5 1.2 1.7 1.0 0.8 2.3 0.6

5.8 7.5 11.5 9.9 7.5 9.1 9.5 10.2 8.9 6.4 16.1 10.8

19.0 18.0 13.2 10.8 16.3 16.2 14.3 15.7 14.6 13.4 9.0 9.8

2.3% 2.6% 0.8% 4.7% 2.9% 2.1% 5.3% 2.2% 3.5% 2.8% 3.2% 2.6%

3.25 6.45 4.75 7.9 6.45 2.75

Sell Hold Sell Sell Sell N.R.

High Med High High High N.R.

281,785 1,134,039 195,011 140,502 19,827 10,986

33,911 97,101 15,270 8,429 2,975 662

34,621 115,521 16,499 16,499 3,443 579

0.40 0.66 0.40 0.93 1.12 0.14

2.0% 11.4% 8.6% 65.1% 12.0% U.R.

0.193 0.310 0.190 N.A. 0.160 U.R.

1.5 2.8 3.6 4.0 1.4 1.6

18.7 24.2 28.5 35.2 23.7 9.9

8.1 9.8 11.8 8.5 5.8 N.A.

5.9% 4.8% 4.0% N.A. 2.5% N.A.

2.675 2.1 7.5

Sell Hold Sell

High Med High

19,260 993 18,929

3,971 96 2,465

3,585 132 1,447

0.50 0.28 0.57

-4.3% 37.9% -41.5%

0.186 0.140 0.170

1.1 1.4 1.8

21.6 14.2 22.9

5.4 7.4 13.1

7.0% 6.7% 2.3%

2.375 2.55

Hold Hold

High High

13,229 3,392

1,150 305

1,150 326

0.21 0.25

0.6% 6.6%

0.06 0.100

1.4 1.8

11.5 14.5

11.5 10.4

2.5% 3.9%

2.95 1.39 2.75 18.35

Hold Sell Hold Hold

Med High High Med

22,143 5,096 2,597 6,083

2,062 936 403 508

2,070 U.R. 430 640

0.28 U.R. 0.46 1.93

-4.2% N.A. 13.0% 16.8%

0.08 U.R. 0.10 0.330

4.0 0.8 0.9 N/A

29.6 0.7 12.8 25.0

10.7 N.A. 6.0 9.5

2.6% N.A. 3.8% 1.8%

2.65 3.9 4.075 2.625 4.625

Sell Sell Sell Sell U.R.

High Med High High U.R.

17,106 11,556 10,856 2,793 51,037

3,374 1,696 1,045 796 5,872

3,202 1,817 1,442 468 7,220

0.50 0.61 0.54 0.44 0.65

-5.2% 0.5% 30.1% -52.1% 92.4%

0.310 0.300 0.166 0.080 0.196

1.2 1.2 1.9 0.8 2.7

21.1 17.9 18.6 22.0 22.9

5.3 6.4 7.5 6.0 7.1

11.7% 7.7% 4.1% 3.0% 4.2%

2.8 8.7 2.35 3.6 4 4.325 2.85 6 0.96 5.4

Hold Sell Hold Hold Hold Sell Hold Hold N.R. Sell

High High High Med High High Med Med High Med

3,905 9,222 13,134 6,332 4,533 9,186 3,548 6,486 1,454 6,506

166 269 2,226 301 1,133 815 166 298 190 301

194 331 663 411 654 800 162 331 116 313

0.14 0.31 0.12 0.23 0.58 0.38 0.13 0.31 0.08 0.26

15.9% 22.9% -70.2% 37.4% 6.9% -3.4% -31.2% 9.4% -39.0% -22.9%

0.03 0.160 0.000 0.089 0.208 0.208 0.07 0.240 0.076 0.050

2.4 2.8 2.1 1.5 1.5 2.3 N.A. 3.1 0.8 N/A

10.1 8.0 35.9 7.0 19.2 19.6 19.6 14.3 10.4 16.3

20.1 27.9 19.8 15.4 6.9 11.5 21.9 19.6 12.6 20.8

1.1% 1.8% 0.0% 2.5% 5.2% 4.8% 2.5% 4.0% 7.9% 0.9%

1 3.2 2.375

Buy Buy Hold

Med Med High

750 965 10,091

84 53 758

90 102 790

0.12 0.34 0.19

31.9% 93.3% 4.5%

0.03 0.13 0.063

0.8 1.8 1.6

8.2 10.1 11.8

8.3 9.5 12.8

3.2% 4.2% 2.7%

50.25 14.6 1.36 2.725 2.475 1.97

Sell Hold Sell U.R. Sell Sell

Low High High U.R. High High

8,357 49,231 6,619 25,705 10,826 6,527

438 4,417 485 2,250 (338) 367

470 4,295 550 U.R. 532 440

2.83 1.27 0.11 U.R. 0.12 0.13

7.3% -2.5% 13.0% U.R. N.A, 19.6%

1.13 0.64 0.02 U.R. 0.023 0.019

2.6 1.5 1.1 1.6 1.1 2.2

14.1 13.4 7.5 14.4 N.A. 12.4

17.8 11.5 12.0 N.A. 20.3 14.8

2.2% 4.4% 1.5% N.A. 0.9% 0.9%

Earnings Forecasts
Company Airports 357 Meilan Airport 694 BCIA 696 TravelSky Highways & Railways 54 Hopewell 62 KMB 66 MTRC 177 Jiangsu Expressway 525 Guangshen Rail 548 Shenzhen Expressway 576 Zhejiang Expressway 737 HHI 995 Anhui Expessway 1052 GZI Transport 1098 Roadking Ports and Containers 144 China Merchants 716 Singamas 1199 COSCO Pacific Shipping 316 OOIL 1138 China Shipping Dev 2866 CSCL Retailers 116 Chow Sang Sang 178 Sa Sa 330 Esprit 393 Glorious Sun 533 Goldlion 590 Luk Fook 653 Bonjour 709 Giordano 980 Lianhua 984 Aeon Stores 1173 Veeko 1179 Mirabell 8052 CRA 8277 Wumart Textile and Garment 321 Texwinca 333 Top Form 350 Jingwei Textile Machinery 420 Fountain Set 518 Tungtex 539 Victory City 551 Yue Yuen 608 High Fashion 641 Fong's 928 Tack Fat 1170 Kingmaker 1223 Symphony 2698 Weiqiao Culinary 52 Fairwood 192 Saint Honore 341 Cafe de Coral 345 Vitasoy Optical 125 Sun Hing 1120 Arts Optical Electronics 148 Kingboard 167 IDT 303 Vtech 328 Alco 332 Ngai Lik 522 ASM 595 AV Concept 710 Varitronix 732 Truly 903 TPV Price (22/07/05) 4.525 3.375 7.05 Rating Risk levels Market cap (HK$M) 2,140 12,980 6,260 Profit A (HK$M) 175 707 424 Profit E (HK$M) 170 874 470 EPS E (HK$) 0.36 0.23 0.53 EPS growth (%) -2.9% 23.5% 11.0%

QuamResearch Weekly
DPS E (HK$) 0.171 0.22 PB A (x)** 1.6 1.8 2.1 ROE A (%) 12.7 9.8 13.9 PE E (x) Yield E (%) 3.8% 2.9%

Hold Hold Hold

High Med Med

12.6 14.1

20 45.7 16.15 4.175 2.725 3.025 5.7 5.45 5.45 2.925 6.2

Hold Sell Hold Hold Sell Hold Sell Hold Sell Buy Buy

Med Low Low Med Med Med Med Med Med High High

17,980 18,445 87,065 21,034 11,816 6,597 24,755 15,723 9,042 3,259 3,649

1,454 731 4,496 941 535 395 1,157 735 459 276 369

1,730 600 4,489 971 864 448 1,403 944 563 300 439

1.92 1.49 0.83 0.19 N.A. 0.21 0.32 0.33 0.34 0.27 0.75

16.6% -17.9% -0.9% 2.0% N.A. 7.0% 21.4% 24.9% 22.5% 8.6% 18.4%

0.577 1.49 0.42 0.137 N.A. 0.10 0.22 0.25 12% 0.092 0.413

1.2 4.3 1.4 1.7 1.2 1.1 2.4 1.7 2.0 0.9 0.7

10.2 17.2 7.1 7.5 5.5 6.9 11.4 8.0 10.1 7.9 7.4

10.4 30.7 19.4 21.7 N.A. 15.6 17.6 16.7 16.1 10.9 8.3

2.9% 3.3% 2.6% 3.3% N.A. 3.2% 3.9% 4.5% 2.1% 3.0% 6.3%

15.5 4.975 15.6

Hold N.R. Hold

Med Med Med

33,248 3,040 34,180

2,057 312 1,607

2,350 406 2,254

1.10 0.66 1.03

14.1% 16.0% 38.6%

0.49 0.19 0.59

2.4 2.2 3.0

14.8 21.9 14.0

14.1 7.5 15.2

3.2% 3.7% 3.8%

34.1 5.9 3.325

Hold Hold Hold

High High High

21,347 19,623 20,050

5,229 1,742 3,794

5,398 2,453 4,717

8.62 0.74 0.78

2.3% 41.0% 3.6%

2.16 0.20 0.23

1.5 2.4 1.5

37.1 21.3 28.1

4.0 8.0 4.3

6.3% 3.4% 7.1%

5.3 3.95 55.7 3.4 1.2 2.375 3.575 5.95 8.5 8.4 0.31 2.35 2.65 12.5

Hold Hold Hold Buy Buy Buy Hold Hold U.R. Hold Sell Hold Sell U.R.

Med Med Med High High Med High Med U.R. Med Med Med Med U.R.

2,658 5,158 66,712 3,407 1,125 1,142 783 8,610 5,287 2,184 513 598 1,778 3,550

200 216 2,003 220 69 77 58 393 203 80 75 76 67 102

199 243 3,264 225 98 125 55 421 U.R. 106 69 76 69 U.R.

0.40 0.19 2.73 0.23 0.10 0.26 0.25 0.29 U.R. 0.41 0.04 0.30 0.10 U.R.

-0.6% 0.218 12.2% 0.18541 62.1% 1.75 3.8% 0.137 117.9% 0.079 61.4% 0.09 14.7% 0.099 4.7% 0.272 U.R. U.R. N.A. 0.168 18.0% 0.0145 -0.5% 0.091 13.7% 0.08 U.R. U.R.

1.4 6.0 12.3 2.5 0.8 2.0 7.8 4.8 3.2 4.4 2.2 1.6 4.0 3.2

10.2 24.7 37.0 14.9 4.6 13.2 42.3 20.1 12.5 14.9 25.2 17.7 15.1 9.3

13.4 21.2 20.4 14.9 11.5 9.1 14.2 20.5 N.A. 20.6 7.4 7.9 25.6 N.A.

3.9% 4.7% 3.1% 4.0% 6.6% 3.8% 2.8% 4.6% N.A. 2.0% 4.7% 3.9% 3.0% N.A.

5.7 2.35 1.94 3.825 2.925 2.425 24.15 1.72 5.7 0.94 2.05 1.68 10.15

Hold Hold Sell Buy Hold N.R. Sell Hold Sell Buy Sell Hold Buy

Med Med High High Med -Med High High High Med Med High

7,551 2,530 1,171 3,037 1,030 1,353 39,268 563 3,192 1,395 1,342 1,864 8,885

468 157 143 180 71 204 2,366 72 235 121 82 164 779

556 173 115 230 82 231 2,365 66 253 155 74 184 988

0.42 0.16 0.19 0.29 0.23 0.39 1.45 0.20 0.45 0.10 0.11 0.17 1.13

18.8% 10.1% -23.8% 27.0% 15.9% 7.8% -0.2% -8.4% 7.9% 18.7% -15.8% 12.0% 23.3%

0.259 0.07 0.04 0.1859 0.208 0.0978 0.69 0.07 0.26 0.032 0.1049 0.111 0.3

3.1 7.6 2.3 1.1 1.8 1.5 2.8 0.9 4.5 2.5 2.0 2.0 1.6

17.2 47.4 5.9 6.7 13.8 17.1 17.2 11.1 29.7 22.3 15.6 17.6 13.6

13.6 14.6 10.2 13.2 12.6 6.2 16.6 8.5 12.6 9.0 18.1 10.1 9.0

4.5% 3.0% 2.1% 4.9% 7.1% 4.0% 2.9% 4.1% 4.6% 3.4% 5.1% 6.6% 3.0%

4.05 2.575 8.85 2.75

Sell Hold Hold Hold

High High Low Low

502 546 4,744 2,744

38 59 285 124

26 38 302 161

0.21 0.18 0.56 0.16

-31.6% -35.4% 7.7% 29.1%

0.121 0.09 0.288 0.185

2.1 2.9 2.9 2.2

15.7 24.3 16.7 9.3

19.6 14.4 15.7 17.0

3.0% 3.5% 3.3% 6.7%

2.65 2.6

Hold Buy

High Med

655 980

71 102

62 100

0.25 0.27

-32.0% 21.2%

0.142 0.16

1.4 1.7

19.8 17.3

10.5 9.8

5.4% 6.2%

22.2 1.03 20.4 3.15 1.46 38.9 0.93 6.55 9.65 5.1

Hold Sell Hold Hold Sell Hold Hold Buy Buy Buy

High High High High High Med High High High High

15,973 2,148 4,631 1,758 1,157 14,988 377 2,070 4,391 7,150

1,104 130 444 239 60 1,003 126 193 527 845

1,400 73 473 250 50 880 35 210 620 858

1.95 0.04 2.08 0.45 0.06 2.28 0.09 0.66 1.36 0.61

16.5% -43.5% 7.5% 4.2% -17.0% 64.3% -74.0% 8.9% 15.5% 56.9%

0.39 0.08 1.023 0.23 0.045 1.6 0.06 0.41 0.48 0.16

2.9 1.8 2.9 1.4 1.1 6.9 1.1 1.3 2.9 3.1

20.1 10.9 28.5 13.6 22.3 46.0 41.1 12.4 37.4 26.6

11.4 29.4 9.8 7.0 23.1 17.0 10.8 9.9 7.1 8.3

1.8% 7.8% 5.0% 7.3% 3.1% 4.1% 6.5% 6.3% 5.0% 3.1%

Earnings Forecasts
Company 981 SMIC 1070 TCL 2633 Nam Tai Electrical & Mechanical 57 Chen Hsong 179 Johnson Electric 229 Raymond 255 Lung Kee 387 Leeport 669 Techtronic 1050 Karrie International 1198 Chitaly Toys 114 Herald 348 Lung Cheong 566 RBI Trading 494 Li & Fung 752 Pico Far East 915 Linmark 2387 IDS Computers 861 Digital China 992 Lenovo Printing 55 Chung Tai 403 Starlite 450 Hung Hing 2320 Hop Fung Paper 731 Samson Paper 2314 L & M Paper Media 18 Oriental Press 100 Clear Media 282 Next Media 511 TVB 583 SCMP 1000 BJ Youth Media 2383 Tom Group Pharmaceuticals 874 Guangzhou Phar 1093 China Pharmaceutical 1177 Sino Biopharmaceutical 8069 Tong Ren Tang Price (22/07/05) 1.64 1.45 2.4 Rating Sell Sell Buy Risk levels High High Med Market cap (HK$M) 2,990 4,118 2,117 Profit A (HK$M) 700 317 180 Profit E (HK$M) 733 N.A. 218 EPS E (HK$) 0.40 N.A. 0.25 EPS growth (%) 931.0% N.A. 7.5%

QuamResearch Weekly
DPS E (HK$) N.A. NA 0.13 PB A (x)** 1.2 0.9 2.2 ROE A (%) 2.9 10.8 20.7 PE E (x) 4.1 N.A. 9.7 Yield E (%) N.A. N.A. 5.4%

4.5 7.3 2.325 5.65 2.15 18.7 3.1 5.75

Hold Hold Sell Buy U.R. Hold Buy Hold

High Med High High U.R. High High High

2,786 26,820 863 3,497 439 25,339 1,268 1,415

261 1,105 123 220 43 938 150 108

249 1,219 51 256 U.R. 1,291 165 139

0.40 0.33 0.14 0.41 U.R. 0.95 0.40 0.57

-3.2% 10.2% -58.8% 15.5% U.R. 36.1% 8.5% 25.3%

0.178 0.171 0.16 0.18 U.R. 0.17 0.24 0.28

1.7 4.2 1.2 3.5 2.5 9.8 3.1 6.0

15.6 17.3 16.3 22.2 25.3 27.3 24.1 47.0

11.2 22.0 16.9 13.7 N.A. 19.6 7.7 10.2

4.0% 2.3% 6.9% 3.2% N.A. 0.9% 7.7% 4.9%

0.89 0.445 1.4

Hold Hold Sell

High High High

546 215 521

96 37 54

78 35 50

0.13 0.07 0.13

-19.1% -12.9% -7.3%

0.065 0.01 0.07

1.0 0.5 0.9

17.1 9.5 9.2

7.0 6.2 10.4

7.3% 2.2% 5.0%

16 1.56 2.025 5.4

Hold Buy Buy U.R.

Med High High U.R.

46,640 879 1,328 1,669

1,530 45 115 82

1,750 66 120 U.R.

0.60 0.12 0.18 U.R.

14.1% 45.1% 5.8% U.R.

0.67 0.05 0.074 U.R.

9.6 1.9 2.7 2.7

31.6 9.6 22.6 13.1

26.7 13.3 11.1 N.A.

4.2% 3.2% 3.7% N.A.

2.7 2.525

Buy Hold

Med High

2,327 23,273

210 1,120

230 (325)

0.27 (0.04)

9.2% -125.0%

0.093 0

1.5 N.A.

2.5 23.5

10.1 (71.6)

3.4% 0.0%

1.27 0.82 5.55 1.4

Hold Buy Hold Hold

High High Med High

422 349 3,175 515

49 63 240 67

51 72 247 74

0.15 0.17 0.43 0.20

-8.1% 13.4% 2.8% 9.9%

0.088 0.046 0.305 0.06

0.9 1.1 1.8 1.8

9.8 20.6 13.3 23.5

8.3 4.9 12.9 7.0

6.9% 5.6% 5.5% 4.3%

0.73 6.9

Sell U.R

High U.R.

313 6,645

57 418

48 U.R.

0.11 U.R.

-14.9% U.R.

0.04 U.R.

0.5 N.A.

9.2 15.0

6.5 N.A.

5.5% N.A.

2.1 7 3.4 45.5 3.5 18.15 1.43

Hold Hold Buy Hold Buy Hold Hold

Med Med Med Med Med Med High

5,036 3,514 8,194 19,929 5,464 3,576 5,563

301 104 104 719 317 183 860

350 420 420 820 255 198 200

0.15 0.84 0.17 1.87 0.16 1.01 0.05

16.8% 349.8% 149.0% 14.2% -18.3% -18.9% -76.6%

0.1 N.A. 0 1 0.13 0.4 N.A.

1.9 2.5 2.4 5.4 3.2 9.1 2.2

16.3 6.7 N.A. 19.6 18.8 62.0 34.7

14.4 8.4 19.5 24.3 21.4 18.1 27.8

4.8% N.A. 0.0% 2.2% 3.7% 2.2% N.A.

3.075 1.52 1.51 13.85

Hold Buy Hold Buy

High High High High

2,494 2,338 3,419 2,532

138 245 168 194

80 240 220 205

0.10 0.16 0.10 1.12

-45.5% -52.7% -22.9% 18.0%

0.06 N.A. 0.08 0.43

1.1 1.2 6.0 3.7

1.7 10.9 36.8 26.4

31.2 9.7 15.5 12.4

2.0% N.A. 5.3% 3.1%

1 HKD = 1.06 RMB 1 USD = 7.8 HKD 1 CAD = 6.32 HKD P/embedded value for 945, 2318, 2628

**

Change in ratings:

Upgrade, change Downgrad New

Rating Scale:

Buy Hold Sell N.R. U.R. N.A.

The share is underpriced and represents long-term growth potential The share is fairly priced and investors could continue to hold the share unless the share price changes substantially The share is overpriced and investors should sell it Not rated Under revision Not available

QuamResearch Weekly

Weekly Outlook

Appendix I: Results Highlights

Oriental Watch (398) Watch retailer Oriental Watch announced final results for the fiscal year ended March 2005. Net profit was $74.0M, up 7.9% YOY, or $0.2688 per share, on sales of $2,042M, up 8.8% YOY. A final dividend of $0.045 per share was declared, total dividends declared for the year were $0.065 per share, up 8.3% YOY. It is not known if profit included securities trading profit or not. Gross margin was 9.6%, up 0.8% points YOY. Operating profit was $90.9M, up 11.7% YOY. Interest charge was $2.4M, up 107% YOY but was still very low. Sales growth accelerated during second half to 14% YOY, so was growth in operating profit. HK was still the dominant market, contributing 90% of total sales, but was stagnant as expected, while China contributed $305M of sales, up 48% YOY. Oriental opened 10 retail shops across China. Financials worsened somewhat but were still solid, cash on hand was $147M, down 27% YOY, investment securities was $29.2M, up 132% YOY, total debt was $82.3M, up 279% YOY, inventory was $543M, up 27% YOY. Oriental probably borrowed more debt to finance its inventory & China expansion. It obtained approval to set up regional headquarters in Luwan, Shanghai. Oriental warned that higher rents & operating expenses related to further China expansion could dampen profit growth. Current share price of $1.55 implies a historic P/E of only 5.8 times & a historic dividend yield of 4.2%. Under-valuation is obvious but management quality is an important concern. Digital China (861): Solid Turnaround Digital China, the PRC's largest IT distributor, posted admirable fiscal year ended March 31, 2005 results which stamped its comeback as a profitable concern after it shed itself of its loss-making mobile handset market last year. The group increased net profit by 520% YOY to $210M. Revenue increased 8.3% YOY to $15.5B. The group declared a final and full year dividend of $0.0853 (FY04: none). The positive results were driven by its distribution business, which thrived in the sustained recovery in the consumer electronics and IT industries. Consumer electronics, data projectors, PC servers and accessories were all the rave in FY05. Gross margin rebounded to 5.57% from 3.34% last year. The recovery in the aforementioned sectors should also sustain the group's prospects in FY3/2006. Digital China is currently trading at $2.55 on a historical P/E of 10.5x. Detailed analysis will follow. Chen Hsong Holdings (57) Plastic injection machine manufacturer Chen Hsong announced stable FY 3/2005 results. Due to acquisition of minority interests in subsidiaries, net profit for the year was $260M, up 22% YOY, or $0.35 per share. The group declared the payment of a final dividend of 14 cents, making a total distribution of 19 cents for the whole year. Turnover increased to $1,867.5M, up 14.2% YOY. During the period, the demand of plastic injection machines was curbed by the austerity measures and inflated oil prices. Internally, production costs increased as a result of rising steel prices. Therefore, gross profit margin was squeezed from 34.3% to 32.2%. Due to the lower gross profit, operating profit only increased a marginal 1.2% YOY to $292M. Current share price of $4.475 implies a historic P/E of a very full & fair 12.8 times. Detailed analysis will follow. Texwinca (321): The Struggle Continues VTurnover rose 17.74% to $7.3B VGross profit rose a higher 19.97% to $2.17B due to margin expansion in yarn VOperating profit rose 11% to $525.1M: culprit was higher costs for the China retail VEPS up 10.7% to $0.353, for a historical P/E of 17.8x at $6.3 per share VDPS grew only 5% to $0.21, for a yield of 3.3% Texwinca's enjoyed a considerable operating margin expansion in the 2H on its yarn and garment
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Weekly Outlook

exporting, to 11.1% from 9.8% in the hard-hit 1H and 10.7% in 2H04. However sales growth was negligible, at 2.14% YOY in the 2H. This pales to the average 23% sales growth over the previous four half-year periods. The performance of the retail division went from bad to worse: operating margins, at 2.06% is similar to that of fast-food vendors. Yet we are not convinced Baleno can sell as many T-shirts as McDonald's can burgers. Texwinca explained that the problem was the costs of adding another 1,000 stores/selling points in China, which should bring the total to about 2,750, making it one of the biggest fashion chains. Yet this 57% expansion in number of outlets gained them just a 19% growth in sales derived from China last year. (The entire retail division enjoyed 24% YOY growth in sales for FY05.) Texwinca avers that the chickens will finally come home to roost in the coming year: ''Only about 100 new stores will be opened in the coming fiscal year. As the business has established a strong foundation, a remarkable improved performance is expected in the next year.'' The firm also offered a favorable forecast for the yarn business, saying that the textile trade wars have not hurt order flow and that the stabilization in cotton prices has helped margins. Nevertheless, sales growth did falter in the 2H. Still, we should all heave a big sigh of relief for the margin expansion. Detailed analysis will follow. Chung Tai Printing (55) Chung Tai announced stable FY 3/2005 results. Net profit for the year was $54.3M, up 11.9% YOY, or $0.1635 per share. The group declared the payment of a final dividend of 6 cents, making a total distribution of 8.8 cents for the whole year. Turnover increased to $572.6M, up 13.9% YOY. Due to the general rising of material costs, gross profit margin was squeezed to 23.8%, down 1.4% YOY. But the group had prudent control over its distribution and administrative expenses which partially offset the impact of margin squeeze. Operating profit grew moderately to $62.1M, up 11% YOY. We see even more improvements of operating profit margin in the 2nd half. Current share price of $1.28 implies a historic P/E of 7.8 times. Detailed analysis will follow. Alco Holdings (328): Robust Results A Cut Above The Rest Alco, a manufacturer of audio/ visual consumer electronic products, reported robust earnings during the fiscal year period ended March 31, 2005 that outperformed peers such as Ngai Lik (332). Alco saw net profit surge 60% YOY to $239M. Sales similarly climbed 41% YOY to $5.4B. The group declared a final dividend of $0.12 and a special dividend of $0.04, bringing the full year dividend to $0.21 (FY04: $0.14). The strong results were driven by continued shipments of the group's next generation higher value portable DVD players with TFT-LCD screens. The group has also widened its product offering by making new products to cover home-use TFT-LCD TV and CVD recorder products. Alco said that its traditional audio products, such as its 20-CD home audio systems, micro audio systems and personal CD players, continued to generate stable orders despite severe pricing pressure. The group anticipates that its traditional low-end products will eventually be all phased out. As such, we believe gross margins will erode for its line of traditional products in FY3/2006. At $3.175 per share, Alco is valued at a historic P/E of 7.3x. Detailed analysis will follow. Ngai Lik (332): Continues to Lag Behind Alco Ngai Lik, a manufacturer of audio/ visual consumer electronic products, reported earnings during the fiscal year period ended March 31, 2005 that looked paled compared to Alco's. Ngai Lik saw net profit plunge 76% YOY to $60M. Sales grew a slight 3.6% YOY to $3.4B. The group lowered its final dividend to $0.01 (FY04: $0.085), bringing its full year dividend to $0.045 (FY04: $0.155). The poor results were expected because NL issued a profit warning in mid-June saying that it expected profit to erode on 1) sales decline from intense competition, 2) insignificant contribution
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Weekly Outlook

of its higher value added products and 3) higher raw material costs. The comparison between NL and Alco is like night and day. NL lacks innovative products that it can command a higher gross margin. Its products are mainly run-of-the-mill "me-too" commodity audio-visual products. NL lacks a competitive advantage and economies of scale. We don't believe it can come up with hit new products in time to stem its profit erosion into FY3/2006. At $1.40 per share, Ngai Lik is valued at a prospective P/E of a very dear 22.2x. Detailed analysis will follow. Shui On Construction (983) The results for PRC Property developer and cement operator Shui On were in-line with expectations. Net profit was $483M, or $1.8 per share, UP 224% YOY, on consolidated sales of $3,088M, down 28% YOY.. DPS was $0.6. Nevertheless, most of the profits were exceptional gains. The group booked gains of $346M from the disposal of Rui Hong Xin Cheng (Rainbow City) and $221M from venture capital investments. The group's property development business is principally under Shui On Group, which has over 8 M.m2 in gross floor area in the PRC. ShuiOn had net debt of $1.2 B as at 31 March, 2005, and its gearing ratio deteriorated slightly to 61% from 56% a year ago. Net assets amounted to $1.96 B, or $7.3 per share. Current price of $8.95 represents a P/B of 1.2x.

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