Why the China rally can sustained.

- Trading account opened approaching 100 million!
- A shares on average trading @ P.E. 39x but with strong earning growth ranging from 50% to 140%
- Valuation are stretched but not in a bubble situation.
- Most importantly China has gone through many structural changes that should boast productivity & earnings, WTO, corporate Tax, banking reform & ESOS.
- Beijing is less worried about high valuations but is concerned about public little awareness of the risk, putting their life saving in the market. Only attempt to engineer a short & measured correction.
- Expecting more volatility.
- China market rally is very similar to Japan in the early 1980's till 1990 from 4,000 to 44,000!
- Crazy bull in China to be tamed by serious capital outflows into Hong Kong equity market and rising supply of new shares at home.
Impact of any sharp fall in Ashares on SAR will be shortlived as H-share valuations remain subdued. Use pullback to build positions.
- We conservatively estimate that about US$25b could flow through to HK equities within 12 months through QDII scheme. Key targets of fund inflows will be H-shares and red chips.
-H-share year-end target revised to 12,300 from 11,800 points, representing 18x 2007
earnings. Go for stocks benefiting from:
1. Greater fund flows under China’s wider QDII scheme
2. Potential listings of Hshares and red chips in Ashare market
3. Potential evolution into group listings and asset injections
4. Industry consolidation
5. Laggards

China Strategy June

Investment Themes
We have identified five investment themes that can capitalise on the
upcoming rally in Hong Kong-listed China stocks in 2H07. They are:
• stocks will benefit from the fund flow from China. These will include
those H shares and B shares that trade at big discount to their A-shares.
Our picks include Chongqing Iron (48% discount to A-share), Jiangxi
Copper (46%), Datang (44%), Chalco (41%), Sinopec (35%) and China
Life Insurance (31%).
• stocks with asset injection/Group listing stories. They include China
Shenhua, CNOOC, China Shipping, First Tractor, Angang Steel and
Chalco.
• stocks planning A-share listing. They include China Mobile,
PetroChina, China Telecom, CNOOC and China Shenhua.
• stocks that benefit from resource-pricing reform. They include Chalco,
China Shenhua, Jiangxi Copper and China Coal Energy.
• laggards. They include PetroChina, China Life, Zijin Mining and Lingbao
Gold.