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Regional Equity Strategy Q4 2007 Strategy Overview: Asian Equity Indonesia (Maintain Benchmark weight) We maintain our Benchmark weight recommendation on Indonesia. IDR/USD at 9400 is on the higher side of Bank Indonesia's (BI) acceptable range of 8500 - 9500 and hence bears less risk of sharp depreciation. Our previously more cautious stance on Indonesia despite a strong growth outlook is due to its large bond holdings. Recall that bond flows were attracted into Indonesia in 2006 due to a series of rate cuts, and this has helped to keep the rupiah strong and stable. The risks of bond outflows threatening rupiah stability are high in our view and we believe the recent correction in rupiah was mainly due to bond outflows. This also keeps the BI vigilant in its interest rate policy. As such, we believe that it will be lose-lose situation, regardless of the direction of interest rates. We believe current rupiah stability can be maintained as spreads between US and Indonesian rates remain still attractive to bond holders. Growth wise, Indonesia has not disappointed so far. FDI flows remain short of target but we don't see that as a risk for Indonesia not achieving its potential growth. Keeping in mind that Indonesia has already been one of the top performing markets in Asia for the last 5 years, we are keeping our Benchmark weight in Indonesia. We like the resource and energy related sectors, as they are the main focus of government infrastructure spending efforts in Indonesia. Private consumption has picked up but higher inflation is threatening margins in consumer staples. Consumer discretionary, should however, outperform. India (Maintain Benchmark weight) We believe Indian valuations are supported by India's growth story, just like China. Real GDP in 2Q07 increased 9.3% YoY, close to China's 11.9% growth. Our full year economic growth forecast for 2008 now stands at 9% and 10% for India and China respectively. While inflation and interest rates have gone up considerably in the past six months, growth has not fallen. Besides GDP, earnings growth also had a strong showing of 20% for the second quarter. Although this pales against China's earnings growth of 56%, at least India is cheaper in valuations than China, and Sensex is up 20% for the year versus 98% for SSE. To be sure, India was not spared in the latest global equities sell down but the Sensex has since risen back to within 1% of its all-time high. In fact, the selldown may have been caused more by political gridlock within the coalition government over the India - US bilateral civilian nuclear deal. The communist parties, which had reservations about the agreement, had threatened to resign, putting the coalition government at risk. Although tensions have eased, uncertainty remains. Turning points in India's political cycle usually result in short-term volatility in the market, but sentiments are quick to recover. Importantly political volatility does not derail the growth story. We believe in India's growth story and are maintaining our Benchmark weight for India. Korea (Downgrade to Underweight) Korea was one of our favoured markets and we had liked it for two reasons: P/E rerating in the making and a bottoming of the economic cycle. Foreign investors had shunned this market for two reasons: poor corporate governance and North Korea. The recent court verdict of a top executive person in one of the chaebols didn't help much; and the upcoming verdict on the legality of the previous sale of a local Korean bank to a foreign investor group will have the final verdict. At the same time, many investors like to compare North / South Korea with East / West Germany. Until we can be convinced of a better corporate governance environment, and have a clearer understanding of the differences between the Berlin wall and the Freedom Bridge, we are downgrading the market to underweight. 24
Strategy Overview: Asian Equity Regional Equity Strategy Q4 2007 Our downgrade is also prompted by increasing US growth uncertainty where Korea is exposed to in terms of exports and market cap exposure. And Korea, being one of the best performing markets so far this year despite massive foreign selling, could be subject to more foreign selling to raise cash levels. A trade off is made towards favouring Asean markets versus Korea and Taiwan. Foreigners net sold US$15bil in Korea in 2007 in addition to US$22bil in the last two years. What are they thinking on the best performing market in Asia (other than Chinese stocks) this year? Trading at 12.1x 12m forward P/E. It is the second cheapest market outside Thailand in terms of absolute 12m forward P/E. It’s D/Y however is one of the lowest in the region. P/B, which is the only indicator predictive of 12m fwd return trades at 2.6x standard deviation above its historical average since 1993. KOSPI's performance is also heavily skewed towards the deep cyclicals whereas other index heavyweights like the banks and tech sector had underperformed. We are generally cautious on these two sectors due to increasing US growth uncertainty and the lack of share price catalysts for the banks. We believe investors can better out performance by buying outright Korean deep cyclicals, which are benefiting from the global capex cycle. Fig. 50: Annual net foreign buying in Korea US$bil 15 10 5 - Fig. 51: Korea sector performance vs Kospi Index 200 Banks Tech 180 Steel 160 KOSPI 140 (5) (10) (15) 1993 1994 1995 1996 1997 1998 1999 2000 2001 Taiwan (Maintain Underweight) 2002 2003 2004 2005 2006 2007 We are maintaining our underweight view on Taiwan. We are positive on the economic growth prospects as investment had made a comeback to growth contribution and we expect it to be sustainable. However US uncertainty and the tech sector outlook still looms. This places risks on the exports and the tech sector where Taiwan has the highest exposure among the Asian countries. With the elections cycle in January - March next year (legislative in January, presidential in March) we expect political volatility to be at its peak towards the end of the year. Hence we do not expect any constructive address of economic policy issues, which is much needed in Taiwan. 120 100 80 Jan Feb Mar Apr May Jun Jul Aug Sep 25
Page 1 and 2: Top Down Strategy and Large Cap Sto
Page 3 and 4: Table of Contents Regional Equity S
Page 5 and 6: Stock Profiles Key Data Regional Eq
Page 7 and 8: Strategy Overview: Asian Equity Reg
Page 23: Strategy Overview: Asian Equity Reg
Page 31 and 32: Regional Data Monitor Regional Equi
Page 33 and 34: Country Assessments & Stock Profile
Page 35 and 36: Country Assessment Regional Equity
Page 45 and 46: Stock Profile: CDL Hospitality Trus
Page 47 and 48: Stock Profile: F & N Regional Equit
Page 49 and 50: Stock Profile: SembCorp Industries
Page 51 and 52: Stock Profile: UOB Regional Equity
Page 71 and 72: Stock Profile: China Mobile Regiona
Page 73 and 74: Stock Profile: Dongfeng Motor Regio
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Stock Profile: ICBC Regional Equity
Page 77 and 78:
Stock Profile: Lee and Man Paper Re
Page 79 and 80:
Country Assessment Regional Equity
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Stock Profile: AMMB Holdings Region
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Stock Profile: Bumiputra-Commerce R
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Stock Profile: Resorts World Region
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Stock Profiles: Advanced Info Servi
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Stock Profiles: Charoen Pokphand Fo
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Stock Profiles: KASIKORNBANK Region
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Stock Profile: Bank Rakyat Indonesi
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Stock Profile: Semen Gresik Regiona
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