Strategy

January 17, 2011 January 17, 2011

China

China Portfolio Strategy

A-share outlook: growth amid challenges

Equity Research Launching A share strategy. 2011 outlook: growth amid challenges

Our forecast is for the CSI300 to reach 4,000 by end-2011 (28% upside from end-2010 levels), mainly driven by earnings growth. More frequent policy adjustments and large/small cap style rotations are among the major challenges in investing A shares in 2011E. We expect the market to trend up, but with high volatility.

Hanfeng Wang, Ph.D, CFA

+86(10)6627-3318 hanfeng.wang@ghsl.cn Beijing Gao Hua Securities Company Limited

Helen Zhu

+852-2978-0048 helen.zhu@gs.com Goldman Sachs (Asia) L.L.C.

Timothy Moe, CFA

+852-2978-1328 timothy.moe@gs.com Goldman Sachs (Asia) L.L.C.

Upside remains for growth but policy concerns cap valuation

We forecast CSI300 earnings growth of 18% 2011E, driven by 15.6% topline growth and a slight expansion in margin, unexceptional based on historical levels. Our GS/GH bottom up earnings growth estimate is 2.6ppt lower than WIND consensus and 5ppt lower than our top-down earnings model. We are less optimistic on valuation expansion as frequent policy changes may cap substantial re-rating.

Christopher Eoyang

+81(3)6437-9888 christopher.eoyang@gs.com Goldman Sachs Japan Co., Ltd.

Ben Bei

+852-2978-1220 ben.bei@gs.com Goldman Sachs (Asia) L.L.C.

Liquidity supportive, and better than in 2010

Despite the widely anticipated slowdown in money supply in 2011, we think other factors, like the mid-long term trend of Chinese households’ shifting towards riskier financial asset allocation, should continue to support A share market liquidity. This trend may be accelerated amid higher inflation, and thus more negative real interest rates over 2011E. Equity financing, shares unlocking among other indicators all point to better liquidity conditions than in 2010.

Structurally aggressive; favor consumer, industrials, materials

We prefer...