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Asia-Pacific Morning Summary February 11, 2011

For further product information, contact: Asia-Pacific Investment Research +852-2978-1000 Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Global Investment Research

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The Goldman Sachs Group, Inc.

This document contains comments related to the following stocks: AAC Acoustic (2018.HK) BYD Electronic (0285.HK) China BlueChemical (3983.HK) China Yurun Food Group (1068.HK) Compal Communications (8078.TW) Dalian Port Company (2880.HK) Daqin Railway (601006.SS) Esprit Holdings (0330.HK) Foxconn Int'l Holdings (2038.HK) Gansu Dunhuang Seed (600354.SS) Grand Korea Leisure Co. (114090.KS) Hanjin Shipping (117930.KS) Hefei Fengle Seed (000713.SZ) HTC Corp. (2498.TW) Hualu-Hengsheng Chemical (600426.SS) Hubei Yihua Chemical Industry (000422.SZ) India Cements (ICMN.BO) Jiangsu Yangnong Chemical Co. (600486.SS) KB Financial Group (105560.KS) KCC Corp (002380.KS) Kingfa Sci. & Tec. (600143.SS) Korea Investment Holdings (071050.KS) Korean Air (003490.KS) Largan Precision (3008.TW) LG Corp. (003550.KS) Lianhe Chemical Technology Co. (002250.SZ) Lier Chemical Co. (002258.SZ) Longping Hi-Tech (000998.SZ) LS Corp. (006260.KS) Mediatek (2454.TW) MStar Semiconductor (3697.TW) NCsoft (036570.KS) NHN (035420.KS) Orient Green Power (ORIN.BO) Orion (001800.KS)

Focus Items China: Hukou reform: a mid to long term goal, picking up pace 1

China Yurun Food Group (1068.HK) Buy: Overreaction to inflation concerns; to Buy (CL) on strong earnings

2

Esprit Holdings (0330.HK): Signs of steady recovery are not transitory; maintain Buy

3

Dalian Port Company (2880.HK) Buy: Riding on the secular oil demand growth; initiate with Buy

4

Xiamen International Port (3378.HK) Sell: Overcapacity and low pricing power; Initiate with Sell

5

Tianjin Port Development Holdings (3382.HK): Competition in bulk persists; initiate with Neutral

6

Orion (001800.KS) Sell: Concerns on 2011 domestic growth outlook; down to Sell; on C-list

7

India Cements (ICMN.BO): Disappointing 3Q, negatives priced in, up to Neutral on valuation

8

Taiwan Synthetic Rubber Corporation (2103.TW): Downgrade to Neutral; positives factored in; we see 2Q margin risk

9

Key Data Changes Investment List Additions

Company Ticker Investment List Additions

China Yurun Food Group 1068.HK Asia Pacific Buy List

Asia Pacific Conviction Buy List

Dalian Port Company 2880.HK Asia Pacific Buy List

Orion 001800.KS Asia Pacific Conviction Sell List

Asia Pacific Sell List

Xiamen International Port 3378.HK Asia Pacific Sell List

Investment List Removals

Company Ticker Investment List Removals

India Cements ICMN.BO Asia Pacific Sell List

Taiwan Synthetic Rubber Corporation 2103.TW Asia Pacific Buy List

Initiations

PetroChina (A) (601857.SS) PetroChina (H) (0857.HK) Qinghai Salt Lake Industry Group (000578.SZ) Qinghai Salt Lake Potash (000792.SZ) Shandong Denghai Seed (002041.SZ) Shanghai Int'l Airport (600009.SS) Shenzhen Expressway (H) (0548.HK) Shenzhen Noposion Pesticide Co. (002215.SZ) Singapore Telecommunications (STEL.SI) Sinofert Holdings (0297.HK) TSMC (2330.TW) Taiwan Synthetic Rubber Corporation (2103.TW) Tianjin Port Development Holdings (3382.HK) Tripod Technology (3044.TW) Unimicron (3037.TW) Wan Hai Lines (2615.TW) Wharf Holdings (0004.HK) Xiamen International Port (3378.HK) Yantai Wanhua Polyurethanes (600309.SS) Yunnan Yuntianhua (600096.SS) Zhejiang Xinan Chemical (600596.SS)

Company Ticker Rating/

Coverage view Price Target Current Year Next Year Fiscal y/e

Dalian Port Company 2880.HK B/N HK$4.01 Rmb0.16 Rmb0.19 Dec

Tianjin Port Development Holdings 3382.HK N/N HK$2.07 HK$0.09 HK$0.11 Dec

Xiamen International Port 3378.HK S/N HK$1.47 Rmb0.10 Rmb0.11 Dec

Rating and price target changes Rating/

Coverage view

Price Target Estimates

Company Ticker New Old New Old % chg Current

Year Next Year

Fiscal y/e

China Yurun Food Group 1068.HK ↑ B/N N/N ↑ HK$31.20 HK$31.00 0.6% HK$1.48 HK$1.69 Dec

Dalian Port Company 2880.HK B/N -- HK$4.01 -- -- Rmb0.16 Rmb0.19 Dec

Esprit Holdings 0330.HK B/N unch ↓ HK$50.00 HK$57.00 (12.3%) HK$2.83 HK$3.42 Jun

Grand Korea Leisure Co. 114090.KS B/N unch ↓ W25,000 W26,000 (3.8%) W1,648 W1,696 Dec

India Cements ICMN.BO ↑ N/N S/N Rs93.00 unch -- Rs3.91 Rs6.23 Mar

KB Financial Group 105560.KS B/N unch ↑ W72,600 W69,500 4.5% W6,400 W6,967 Dec

Korea Investment Holdings 071050.KS B/A unch ↑ W58,000 W54,000 7.4% W4,162 W5,136 Mar

NCsoft 036570.KS N/N unch ↓ W208,000 W220,000 (5.5%) W7,772 W8,649 Dec

NHN 035420.KS N/N unch ↓ W185,000 W193,000 (4.1%) W10,174 W11,397 Dec

Orion 001800.KS ↓ S/N N/N ↓ W320,000 W400,000 (20.0%) W29,950 W15,305 Dec

Taiwan Synthetic Rubber Corporation 2103.TW ↓ N/N B/N NT$81.00 unch -- NT$4.78 NT$6.91 Dec

Tianjin Port Development Holdings 3382.HK N/N -- HK$2.07 -- -- HK$0.09 HK$0.11 Dec

Xiamen International Port 3378.HK S/N -- HK$1.47 -- -- Rmb0.10 Rmb0.11 Dec

Estimate changes

Current Year Next Year

Company Ticker

Rating/ Coverage

view New Old % chg New Old % chg

Fiscal y/e

China Yurun Food Group 1068.HK B/N ↑ HK$1.48 HK$1.43 3.3% ↑ HK$1.69 HK$1.54 9.2% Dec

Dalian Port Company 2880.HK B/N Rmb0.16 -- -- Rmb0.19 -- -- Dec

Esprit Holdings 0330.HK B/N ↓ HK$2.83 HK$3.20 (11.4%) ↓ HK$3.42 HK$3.93 (13.1%) Jun

Grand Korea Leisure Co. 114090.KS B/N ↓ W1,648 W1,652 (0.3%) ↑ W1,696 W1,693 0.2% Dec

India Cements ICMN.BO N/N ↓ Rs3.91 Rs5.89 (33.7%) ↓ Rs6.23 Rs9.47 (34.2%) Mar

KB Financial Group 105560.KS B/N ↑ W6,400 W6,003 6.6% ↑ W6,967 W6,692 4.1% Dec

Korea Investment Holdings 071050.KS B/A ↑ W4,162 W4,091 1.7% ↑ W5,136 W4,844 6.0% Mar

LG Corp. 003550.KS N/N ↓ W10,400 W12,186 (14.7%) ↓ W12,003 W13,580 (11.6%) Dec

LS Corp. 006260.KS B/N ↑ W7,913 W7,663 3.3% W9,491 unch -- Dec

NCsoft 036570.KS N/N ↓ W7,772 W8,455 (8.1%) ↓ W8,649 W9,271 (6.7%) Dec

NHN 035420.KS N/N ↓ W10,174 W10,530 (3.4%) ↓ W11,397 W11,855 (3.9%) Dec

Orion 001800.KS S/N ↓ W29,950 W30,435 (1.6%) ↑ W15,305 W15,017 1.9% Dec

Singapore Telecommunications STEL.SI B/N ↓ S$0.24 S$0.25 (4.6%) ↓ S$0.27 S$0.28 (1.6%) Mar

Tianjin Port Development Holdings 3382.HK N/N HK$0.09 -- -- HK$0.11 -- -- Dec

Xiamen International Port 3378.HK S/N Rmb0.10 -- -- Rmb0.11 -- -- Dec

Other Headlines

Basic Materials

China: Agriculture: China raises 2011 minimum rice prices by 10%-22% yoy; positive 10

Asia Pacific: Agriculture: Plantations: MPOB January inventories down mom, may bottom in February

11

Consumer Cyclicals

Esprit Holdings (0330.HK): First Take: 1H above on lower SG&A; continues to get "less bad" 12

Grand Korea Leisure Co. (114090.KS): In line with expectations; GKL at earnings inflection point 13

Energy

PetroChina (H) (0857.HK): Impact of Cutbank Ridge JV with Encana modest; retain Sell 14

Financial Services

KB Financial Group (105560.KS): In line with expectations; a net loss but strong NIM mgmt 15

Korea Investment Holdings (071050.KS): In line with expectations; solid earnings trend- attractive entry point

16

Industrials

LG Corp. (003550.KS): Below expectations: hurt by consolidated subsidiaries 17

KCC Corp (002380.KS) Buy: Concerns on poly-silicone business overdone; reiterate Buy (CL) 18

Wharf Holdings (0004.HK): HK$10bn rights issuance to fund landbank acquisition in China 19

LS Corp. (006260.KS): In line with expectations: SPSX turnaround to drive 2011 earnings 20

Technology

NCsoft (036570.KS): Below expectations; cutting target price to W208,000 21

China: Technology: Healthy CNY electronics sell-through in-line with inventory stocking 22

NHN (035420.KS): In line with expectations: Margin compression likely in 2011 23

Asia Pacific: Technology: LTE: The time has arrived; implications for AEJ equities 24

Asia Pacific: Technology: Touch panels: Market share reshuffle through product transition 25

Telecom Services

Singapore Telecommunications (STEL.SI): Below expectations but Buy thesis remains intact 26

Transportation

China: Transportation: Infrastructure: China air, road & rail: Golden week traffic points to meaningful trends

27

Wan Hai Lines (2615.TW) Buy: Discount to peers should narrow; reiterate Buy 28

Korean Air (003490.KS): Early signs of 1Q pent up demand; premium strategy intact 29

Hanjin Shipping (117930.KS) Buy: Seasonal and cyclical weakness well known; Reiterate Buy 30

Utilities

Orient Green Power (ORIN.BO): In line with expectations: Biomass mass fuel costs down qoq 31


Goldman Sachs Global Investment Research

Focus Items

China: Hukou reform: a mid to long term goal, picking up pace 1

Helen Zhu (Hong Kong): [email protected], +852-2978-0048 Goldman Sachs (Asia) L.L.C. Timothy Moe, CFA (Hong Kong): [email protected], +852-2978-1328 Goldman Sachs (Asia) L.L.C. Christopher Eoyang (Tokyo): [email protected], +81(3)6437-9888 Goldman Sachs Japan Co., Ltd. Hanfeng Wang, Ph.D, CFA (Beijing): [email protected], +86(10)6627-3318 Beijing Gao Hua Securities Company Limited Ben Bei (Hong Kong): [email protected], +852-2978-1220 Goldman Sachs (Asia) L.L.C. Jason Lui, CFA (Hong Kong): [email protected], +852-2978-6613 Goldman Sachs (Asia) L.L.C.

Legacy hukou system still plays a major role today China’s hukou (household registration) system, separating urban and rural citizens, continues to determine a significant portion of eligibilities and benefits relating to employment, education, and societal protections today. Reforms that would relax some of the restrictions and gradually equalize rights and benefits may play a major role in facilitating key objectives like income equality and greater social safety nets; faster urbanization and improved productivity. Better resource allocation and more geographically balanced development may also result.

Reform is accelerating, progress/format may vary by region After being identified by State Council as a target at end 2009/1H10, some cities/provinces have started to introduce their own hukou reform plans. Senior leadership support has been increasingly evident and hukou reform may be featured in the 12th five year plan. We foresee faster progress in regions with more urbanization need and talent demand, infrastructure support capabilities, and greater financial capability to fund the associated upfront costs. We expect the pace to be faster in smaller to mid sized cities, central/western regions and select seaboard provinces with labor shortage.

Three themes of beneficiary companies; new baskets This mid to longer-term theme will underpin three trends: 1) higher demand for safety-net related (healthcare, education) consumption and services products over time; 2) sustained demand for urbanization-related upstream sectors; and 3) rising need to drive agricultural yields/efficiency as agricultural labor flows into urban areas. We introduce our new baskets GSCNRROF and GSCNRRON for exposure to these themes. Hukou reform will bring costs to enterprises (to fund benefits etc) but these may be offset by lower staff turnover (less recruiting/training costs), higher productivity.



China Yurun Food Group (1068.HK) Buy: Overreaction to inflation concerns; to Buy (CL) on strong earnings

2

1068.HK, HK$23.00 Market cap US$5,350 mn

Target price HK$31.20 Fiscal y/e Dec 2010E 2011E

Net inc. (HK$) 2,557 mn 3,052 mn

EPS (HK$) 1.48 1.69

EPS growth 36.1% 13.7%

P/E 15.5X 13.6X

Dividend yield 1.9% 2.0%

Investment Lists

Asia Pacific Buy ListAsia Pacific Conviction Buy List

Coverage view Neutral

Yifan Deng (Hong Kong): [email protected], +852-2978-0528 Goldman Sachs (Asia) L.L.C. Joey Zeng (Beijing): [email protected], +86(10)6627-3129 Beijing Gao Hua Securities Company Limited

Source of opportunity We upgrade Yurun to Buy from Neutral and add it to our Conviction list. The stock has fallen recently on concerns related to a potential placement and high inflation. We believe a share placement is unlikely in the near term, as the major shareholder is in blackout until May 2011, related to the 2010 results announcement. Also we are not overly concerned about inflation given (1) slaughtering business should see better profitability with higher hog prices, and (2) strict pricing controls on pork are unlikely due to fragmented market structure. Our new 12m TP HK$31.2 implies 19X 2011E P/E and 36% upside.

Catalyst (1) Strong growth in 2010E. We see upside to the company’s guided slaughtering volume growth of 40% in 2010 and believe unit profit in the slaughtering business is likely to have trended up in 2H2010 on higher hog prices. (2) We expect robust earnings momentum to continue, with hog prices seeing a 20+% yoy increase in 1H2011E, indicating robust slaughtering profitability. (3) Continuing capacity expansion will leverage on the consolidation trend in the slaughtering industry, driving future growth. Yurun targets 70mn heads slaughtering capacity by 2015, from 30mn heads in 2010. We raise our 2010E-2012E EPS estimates by 3%-9% to reflect better-than-expected volume growth and government subsidies. We expect 17% CAGR in net profit and 32% CAGR in core earnings in 2010-2012E.

Valuation Our 12m TP HK$31.2 (from HK$31.0) is based on EV/GCI and translates into 19X 2011E P/E, or 23X recurring core earnings plus 3X 2011E government subsidy. The stock is now trading at 13.6X 2011E P/E, or 17.5X core earnings.

Key risks Unfavorable movement in hog price and supply; execution on capacity expansion.

Esprit Holdings (0330.HK): Signs of steady recovery are not transitory; maintain Buy 3


Target price HK$50.00 Fiscal y/e Jun 2011E 2012E

Net inc. (HK$) 3,645 mn 4,399 mn

EPS (HK$) 2.83 3.42

EPS growth (15.4%) 20.7%

P/E 13.7X 11.3X


Investment Lists

Asia Pacific Buy List


Joshua Lu (Hong Kong): [email protected], +852-2978-1024 Goldman Sachs (Asia) L.L.C. Vivienne Mao (Hong Kong): [email protected], +852-2978-0953 Goldman Sachs (Asia) L.L.C.

What's changed We continue to see Esprit as an attractive turnaround story this year. While the pace of recovery (wholesale still hovering at flat/low single-digit decline in Jan-May 2011) trails our original forecast of high single-digit growth in 1H2011, we believe the improving order book trends are not transitory. There are signs of better outlook among major wholesale customers via increased orders, while we believe the replenishment orders programs could ultimately deliver topline growth that exceeds the initial order book commitments. We reduce our FY11/12/13 EPS estimates by 11%/13%/11% to factor in later arrival of positive topline growth and lower gross margin on the back of sharp increases in raw material prices.

Implications We believe current valuations offer room for significant upside potential (as we expect positive earnings growth to resume in 2HCY11), supported by a 5% annual dividend yield. While skeptics may point to a number of false starts in the past two years and prefer to wait for clearer signs of recovery, we believe entry levels may not be as attractive as now when such signs emerge.

Valuation We continue to see value in Esprit shares, which is trading at 12X CY2011E P/E with CY11E dividend yield at c.5%., vs. Inditex (ITX.MC, Buy, Feb 10: EUR55.04) and H&M (HMb.ST, Neutral, Feb 10: Skr213.30) at 18X and 17X CY11E P/E with similar dividend yields. Our new 12-month target price is HK$50 (from HK$57), still



based on 16X C2011E P/E. Maintain Buy.

Key risks Recovery occurring later than expected; cotton price leading to greater pressure on margins.

Dalian Port Company (2880.HK) Buy: Riding on the secular oil demand growth; initiate with Buy 4



Net inc. (Rmb) 711.3 mn 854.5 mn

EPS (Rmb) 0.16 0.19

EPS growth (37.3%) 20.1%

P/E 16.4X 13.7X


Investment Lists



Frank He (Hong Kong): [email protected], +852-2978-7414 Goldman Sachs (Asia) L.L.C. Simon Cheung, CFA (Hong Kong): [email protected], +852-2978-6102 Goldman Sachs (Asia) L.L.C. Janet Lu (Hong Kong): [email protected], +852-2978-1642 Goldman Sachs (Asia) L.L.C.

Source of opportunity We believe Dalian Port (PDA) is well positioned to benefit from the launch of PetroChina’s new 4.2mn cubic meter commercial oil storage facility in Dalian in 2011E. In addition, we expect the expansion of PDA’s own oil storage capacity and the increase of storage tariff upon lease renewal to facilitate the growth of storage division in the coming years. Also, the recent tariff hikes for foreign trade container will help PDA to achieve net profit CAGR of 54% for the container division during 2010-12. We believe PDA offers defensive growth momentum and we initiate coverage on PDA with a Buy rating and 12-month target price of HK$4.01.

Catalyst We believe the industry consolidation in Liao Ning province will be a catalyst for PDA shares and expect its primary positioning to remain intact. We also expect the stock to benefit from PetroChina’s plan for increased capacity, which would in turn fuel higher earnings growth for PDA: The Dalian municipal government intends to build a petrochemical industrial zone in Changxing Island and PetroChina plans to set up a new petrochemical plant on the island during 12th five year plan. The designed crude oil processing capacity is 20mn tonnes, which would bring the total capacity of PetroChina in Dalian to 50.5 mn. In addition, we forecast PDA’s total oil and chemical storage capacity to increase from 4mn cubic meters in 2010 to 6mn cubic meters in 2014E.

Valuation Our target price is HK$4.01, derived by our DCF-based SOTP methodology. Trading at 0.9x 2011E P/B, we view the current valuation as attractive relative to 1.3x P/B for the regional ports sector.

Key risks Slower than expected launch of new oil storage facility by PetroChina; high depreciation charge arising from heavy investment in oil storage capacity.

Xiamen International Port (3378.HK) Sell: Overcapacity and low pricing power; Initiate with Sell 5

3378.HK, HK$1.58 Market cap US$553.2 mn


Net inc. (Rmb) 262.9 mn 298.9 mn

EPS (Rmb) 0.10 0.11


P/E 13.9X 12.2X


Investment Lists

Asia Pacific Sell List



Source of opportunity Xiamen International Port Co. (XIPC) faces low pricing power and intense competition as it operates in a fragmented industry landscape. Moreover, we expect the opening of a new competitor container terminal will result in ongoing low utilization rates. Despite its proximity to Taiwan, we see limited impact from the new economic cooperation framework agreement, as we estimate container throughput with Taiwan accounts for less than 10% of XIPC’s total throughput. With these relatively weak fundamentals among China ports stocks, we rate XIPC a Sell relative to Dalian (Buy) and Tianjin Port (Neutral), which offer better upside to our target prices.

Catalyst Rollout of new container terminals by Xiamen Ocean Gate will exacerbate over-supply in Xiamen. We



forecast 1.3mn TUE annual capacity addition from Ocean Gate over 2011-2013 will drive overall capacity from 11.3mn in 2010 to 13.0mn 2013. As a result, we expect utilization in Xiamen will stay below 60% until at least 2013. Although XIPC’s bulk throughput showed steady growth in 2004-2009, we forecast its profitability as being on a consistently downward trend — due to cargo mix changes and heightened competition. In addition, XIPC has an option to acquire the remaining 50% stake in container operator Xiamen Songyu Terminal from its parent. If taken up, we view limited NAV accretion potential for XIPC, but do see potential risk of equity financing arising from the transaction.

Valuation Our 12-month target price is HK$1.47, based on our DCF-based SOTP methodology. We find its cash return is inferior to other regional ports, underlining our relative Sell on the stock.

Key risks (1) Better-than-expected domestic and international container trans-shipment; (2) Faster expansion of its hinterland to inland China.

Tianjin Port Development Holdings (3382.HK): Competition in bulk persists; initiate with Neutral 6



Net inc. (HK$) 532.5 mn 679.9 mn

EPS (HK$) 0.09 0.11

EPS growth 423.2% 27.7%

P/E 23.1X 18.1X


Investment Lists

Neutral



Investment view We believe Tianjin Port Development’s (TPD) iron ore business will continue to face pressure, due to competition and reallocation of production capacity by major steel makers. In addition, the rollout of new coal handling capacity in regional ports creates throughput uncertainties. In mitigation, we view containers and automobiles as key growth drivers for TPD, thanks to its broad hinterland coverage, rapid local economic growth and strong demand for automobiles. However, we see limited upside to the current share price based on current valuation and initiate coverage on the stock with a Neutral rating.

Core drivers of growth Tianjin Port’s hinterland covers around half of China and rapid economic development in the Binhai New Area in Tianjin provides a growth driver for TPD. We estimate 39% of TPD’s container throughput is generated by domestic trade and this offers resilience in growth terms. Associate Euroasia started trial operations in 2010 and we expect rising container throughput contributions from this terminal. Moreover, TPD’s parent company intends to inject a 50% owned 300,000dwt oil terminal into TPD’s 57% owned subsidiary Tianjin Port Co (TPC) in 2011.

Risks to the investment case Upside risk: Better-than-expected iron ore throughput; downside risk: lower-than-expected bulk margins due to competition.

Valuation Our 12m NAV-based target price is HK$2.07, which equates to our 2011 NAV estimate. TPD’s historical average NAV discount stands at 4%.

Industry context China ports trade at 15.4x 2011E P/E and 1.3x 2011E P/B on average vs. TPD at 18.5x 2010E P/E and 1.3x 2011E P/B.



Orion (001800.KS) Sell: Concerns on 2011 domestic growth outlook; down to Sell; on C-list 7

001800.KS, W404,000 Market cap US$2,169 mn

Target price W320,000 Fiscal y/e Dec 2010E 2011E

Net inc. (W) 179 bn 91 bn

EPS (W) 29,950 15,305

EPS growth 381.3% (48.9%)

P/E 13.5X 26.4X


Investment Lists

Asia Pacific Conviction Sell ListAsia Pacific Sell List


Jeehye Song (Seoul): [email protected], +82(2)3788-1773 Goldman Sachs (Asia) L.L.C., Seoul Branch Paul Hwang (Seoul): [email protected], +82(2)3788-1176 Goldman Sachs (Asia) L.L.C., Seoul Branch

Source of opportunity We downgrade Orion to Sell from Neutral and add it to our Conviction Sell List, given (1) our cautious view on its domestic confectionary business in 2011E; and (2) its relatively expensive valuation, compared to Chinese F&B peers. Our 2011 parent OP estimates for Orion are 17% below Bloomberg consensus, based on our concerns over (1) weak sales growth; and (2) margin outlook. Excluding the value of its domestic business and asset value, Orion’s overseas business trades at 15X 2011E EV/EBITDA, above the benchmark Chinese F&B peer average of 11X, despite similar EBITDA growth outlook at 26% vs. the Chinese peer average of 23%.

Catalyst Slowing domestic sales growth. We forecast Orion’s domestic sales growth to slow to 2% yoy in 2011 from 13% yoy in 2010, considering (1) potentially weak demand post the price hike in January, following wholesalers’ inventory buildup prior to the expected price hike at end-2010; and (2) the lack of major sports events in 2011 (vs. the World Cup and Asian Games in 2010). Substantial downside to consensus. Our 2011/2012 parent OP estimates are 17%/21% below Bloomberg consensus. We see limited room for OPM improvement in 2011E (vs. consensus, implies a 110 bp yoy increase), given (1) rising raw material prices; (2) little product mix improvement; and (3) increasing focus on mass products.

Valuation We revise our 2011-2012E EPS by 1%-2%, reflecting 4Q10 results, raw material price trends, and accounting standard change into IFRS from K-GAAP, and we cut our 12-m SOTP-based TP to W320,000 (from W400,000), following weak price performance of its Chinese F&B peers. We also shift our primary accounting standard into consolidated from Parent basis.

Key risks Stronger-than-expected consumption in domestic and overseas.

India Cements (ICMN.BO): Disappointing 3Q, negatives priced in, up to Neutral on valuation 8

ICMN.BO, Rs89.75 Market cap US$606.2 mn

Target price Rs93.00 Fiscal y/e Mar 2011E 2012E

Net inc. (Rs) 1,244 mn 1,984 mn

EPS (Rs) 3.91 6.23

EPS growth (67.5%) 59.5%

P/E 23.0X 14.4X


Investment Lists

Neutral


Pritesh Vinay (Mumbai): [email protected], +91(22)6616-9038 Goldman Sachs India SPL Natasha Parchani (Mumbai): [email protected], +91(22)6616-9040 Goldman Sachs India SPL

What happened We upgrade India Cements (ICMN) to Neutral from Sell, post the recent underperformance - the stock is trading below our 12-month EV-RC based target price of Rs93, implying 3% upside. While we continue to believe that the margin recovery will remain muted in FY12, given excess capacity, weak demand in South India and higher fuel costs, all the negatives seem to be priced in at current levels. ICMN is trading at 75% FY12E EV/RC vs. mid-cycle of 90%. Since we added ICMN to our Sell list on June 22, 2010, it has fallen 20% vs. 2% decline for Sensex. (Last 12 months: -25%, vs. +10% for Sensex).

Current view India Cements reported 3QFY11 net income at Rs215mn, down 38% yoy, 38% below GS estimates and Bloomberg consensus. 3QFY11 revenue was 8% below our expectations, as 3Q volumes surprised to the downside –sales stood at 2.04mn tons, down 23% yoy, down 25% qoq with capacity utilization rate at a disappointing ~60%. Average realizations improved 23% qoq (+Rs 722/t qoq) vs. GSe of 19.3% qoq. However, this did not translate into a commensurate increase in EBITDA/T (which improved by +Rs 519 qoq) due to higher cost of coal and revised power tariffs in Andhra Pradesh and Tamil Nadu. EBITDA/ton came at Rs 631 vs. Rs112 in 2Q. Interest costs in 3Q were up 45% qoq, led by higher working capital financing and loan draw down for the Rajasthan expansion. We lower our FY11E-FY13E estimates by 19%-34% to account



for high thermal coal costs (India Cements imports 70% of its coal requirements), the delay in ramp up of the Indonesia coal mines and higher interest costs. While we continue to stay cautious on pace of margin recovery, at current valuations (0.6x P/B) the risk-reward looks balanced. Key risks include: upside: faster-than-expected recovery in pricing; downside: higher coal costs and lower-than-expected demand growth in South India.

Taiwan Synthetic Rubber Corporation (2103.TW): Downgrade to Neutral; positives factored in; we see 2Q margin risk

9

2103.TW, NT$77.20 Market cap US$1,742 mn

Target price NT$81.00 Fiscal y/e Dec 2010E 2011E

Net inc. (NT$) 3,108 mn 4,490 mn

EPS (NT$) 4.78 6.91


P/E 16.1X 11.2X


Investment Lists

Neutral


Tommy Wong (Taipei): [email protected], +886(2)2730-4194 Goldman Sachs (Asia) L.L.C., Taipei Branch Willy Chen (Taipei): [email protected], +886(2)2730-4183 Goldman Sachs (Asia) L.L.C., Taipei Branch

What happened We downgrade TSRC from Buy to Neutral but remain positive on TSRC’s long-term outlook. TSRC’s share price has rallied significantly in 2010, but we think the share price currently has been reflected the robust price increase of its SBR/BR products and offers limited upside to our 12m P/B-ROE-based NT$81 target price. We see potential contraction in its margins in the medium term as well as uncertain economic outlook to be headwinds for share price performance. Our TP and earnings estimates are unchanged. Since we added TSRC as Buy on January 19, 2010, the shares went up 87% vs. the TAIEX up 9%.

Current view We are Neutral on TSRC after the share price run up to near the NT$80 level recently. We think TSRC’s SBR spread has hit likely a near-term peak and could see a slight correction in 2Q11 because of: (1) faster-than-expected rising input prices, Butadiene (BD), which has seen a 12% increase in January, versus our previous expectations of it occurring in March, (2) our view that it will be more difficult for a full input cost pass through as we expect its key customers, i.e. Cheng Shin Rubber (2105.TW, Neutral, TP: NT$64), are facing significant margin contraction approaching historical low levels, and (3) cost pass through will be slightly more challenging this year on narrowing shortage situation (though we highlight synthetic rubber remains short for 2011). We observed a significant rise in Bloomberg consensus earnings estimates over the past 2 months, and ours are now below the highest consensus earnings. We think the bulls maybe assuming strong Dec10/Jan11 to be sustainable underpinning their higher forecasts, which we view differently and could post downside risk. Nonetheless, we see rising natural rubber prices to support the shares price but would be less of a catalyst in 2011 versus 2010 due to the cost pass-through issue. Upside/downside risk: 1) Tire/synthetic rubber demand, 2) input cost pressure and cost pass through ability, 3) execution of new capacity adds.

Other Headlines

Basic Materials

China: Agriculture: China raises 2011 minimum rice prices by 10%-22% yoy; positive 10

Jessie Pinglun Lai (Beijing): [email protected], +86(10)6627-3461 Beijing Gao Hua Securities Company Limited Chris Shiu, CFA (Beijing): [email protected], +86(10)6627-3462 Beijing Gao Hua Securities Company Limited

News On February 9, State Council held a routine conference for grain production and announced increases in the 2011 minimum acquisition prices for early/late long-grain nonglutinous rice and short-grain nonglutinous rice of 10%, 10% and 22% yoy respectively, to Rmb2,040/2,140/2,560 per mt (Rmb1.02/1.07/1.28 per jin). The new price floor is in line with recent transacted rice prices according to Ministry of Agriculture, supporting the



crop price uptrend year-to-date. The government also announced subsidies of Rmb6.7bn for drought relief and irrigation facilities.

Analysis Domestic wholesale rice price rose 19% yoy in December 2010, fairly in line with the higher price floor in 2011. Given continued adverse weather in China, the higher price floor demonstrates the government’s intention to incentivize planting intensity through higher farmer returns and ensure grain supply. Consequently, we expect demand for crop yield improvements such as higher-yielding seeds, fertilizers and pesticides to increase. Higher rice prices are incrementally positive for producers and distributors of rice seeds, urea and compound fertilizer.

Stock picks Rice seed beneficiaries: Longping Hi-Tech (000998.SZ, Sell, Rmb30.68) and Hefei Fengle (000713.SZ, Sell, Rmb19.55); Fertilizer beneficiaries: Hubei Yihua (000422.SZ, CL-Buy, Rmb19.36), Sinofert (0297.HK, CL-Buy, HK$4.38), Qinghai Salt Lake Potash (000792.SZ, Buy, Rmb58.51), China BlueChemical (3983.HK, Neutral, HK$6.22) and Hualu Hengsheng (600426.SS, Neutral, Rmb14.17).

Catalyst (1) Relatively low fertilizer inventory levels for key nutrients in coming months, supporting fertilizer prices; (2) tightening global crop balances and potentially lower yields/acreage in the March 31 Prospective Plantings report.

Industry risks Severe adverse weather, sharp declines in crop prices and price and export restrictions by the government.

Asia Pacific: Agriculture: Plantations: MPOB January inventories down mom, may bottom in February 11

Patrick Tiah, CFA (Singapore): [email protected], +65-6889-2468 Goldman Sachs (Singapore) Pte Nikhil Bhandari (Singapore): [email protected], +65-6889-2867 Goldman Sachs (Singapore) Pte

Malaysia January 2010 inventories down further mom Malaysia Palm Oil Board (MPOB) reported that Malaysia’s January 2010 palm oil inventories declined 12% mom to 1.42 mn tons, 2% below market expectations (a Reuters survey indicated 1.45 mn tons), positive for prices. Production remains weak falling 14% mom, which is in line with the seasonal trend, while exports also moderated as we believe consumers were already well stocked ahead of Chinese New Year.

CPO inventories may bottom in February Production may decline further mom in February, which is in line with the seasonal trend and this year the impact may be more marked given severe flooding in certain CPO production areas (e.g. Johor, which is about 16% of Malaysia’s 2010 production). Meanwhile, initial indications for exports in February are encouraging– cargo surveyor SGS reported that Malaysia’s Feb 1-10 exports rose 46% mom, which indicates that inventories may fall further in February. However, production typically troughs in February (and recovers thereafter), and hence we believe that inventories may recover from March onwards.

CPO prices close to peak, may moderate in 2H 2011 CPO price fundamentals remain strong – declining inventories in Malaysia indicate a continued tight market which is supportive for prices. However, we believe that this has been largely factored in by high CPO prices (which are up 43% over the last 4 months). We believe CPO production may recover in 2H 2011 on normalizing yields (after 2 years of weak yields 2009-2010 on yield stress and adverse weather) and hence lift inventory levels and moderate the current high prices.

Neutral on plantations; Buy IFAR and Sime, Sell KLK, AALI We maintain our Neutral stance on the sector and are stock selective. Our Buys are IFAR (attractive valuations and strong organic growth potential) and Sime Darby (sector laggard; heavy equipment business may benefit from the Queensland floods; and the business portfolio review may boost 4th quartile CROCI), while our Sells are Astra Agro Lestari (limited organic growth potential) and KLK (rich valuations, stock price outperformance).



Consumer Cyclicals

Esprit Holdings (0330.HK): First Take: 1H above on lower SG&A; continues to get "less bad" 12


Target price HK$57.00 Fiscal y/e Jun 2011E 2012E

Net inc. (HK$) 4,042 mn 4,970 mn

EPS (HK$) 3.20 3.93

EPS growth (4.5%) 23.0%

P/E 12.2X 9.9X


Investment Lists



Joshua Lu (Hong Kong): [email protected], +852-2978-1024 Goldman Sachs (Asia) L.L.C. Vivienne Mao (Hong Kong): [email protected], +852-2978-0953 Goldman Sachs (Asia) L.L.C.

News Esprit reported 1HFY11 net profit of HK$2.14bn, -21% yoy but well above our estimate of HK$1.4bn. The main beat came from lower SG&A; 1HFY11 SG&A were up 7% yoy, well below the 25% yoy increase in 2HFY10. Overall, OP was -22% yoy, and OP margin of 15% was down from 18.3% a year ago, but up from 10% in 2HFY10.

Analysis Key highlights: 1) Europe wholesale revenue grew 1.8% in local currency in 2QFY11 (Oct-Dec 2010), the first positive growth trend since mid-2008. However, Esprit said retailers remain conservative with pre-orders, and the wholesale order book for Jan-May 2011 was down in low single digits. 2) Interim dividend payout of HK$1/share (60% payout ratio) is much higher than 35% payout ratio a year ago. In our view, this indicates management’s confidence in the business outlook. 3) China business stabilized further (but still not exciting), with retail SSS +0.5% for 1HFY11 vs. -4.2% in 2HFY10. China now accounts for 8% of group turnover.

Implications We think the Europe wholesale order book remains the key near-term swing factor, and while progress (of low single digit decline for Jan-May2011) is not as fast as we would liked to see, it is clear that since October 2010 we now have 9 months of wholesale order book being flat/slightly down vs. previous two years of mid-teens decline. We believe this provides enough evidence that business has troughed. Our target price and estimates are under review. We will revert with more details after analyst briefing at 3pm today (HK time).

Grand Korea Leisure Co. (114090.KS): In line with expectations; GKL at earnings inflection point 13




EPS (W) 1,648 1,696


P/E 11.5X 11.1X


Investment Lists



Paul Hwang (Seoul): [email protected], +82(2)3788-1176 Goldman Sachs (Asia) L.L.C., Seoul Branch HJ Moon (Seoul): [email protected], +82(2)3788-1728 Goldman Sachs (Asia) L.L.C., Seoul Branch

What surprised us Grand Korea Leisure (GKL) released 4Q10 results that were in line with our estimates, but still above Bloomberg consensus by 12% on net profit – the first positive earnings surprise after three consecutive quarters of earnings disappointments in 1Q10-3Q10. We saw some signs of a more rational competitive landscape (i.e., not too aggressive promotions) in 4Q10 in terms of agent expense as a percentage of drop amount, casino comp as a percentage of drop amount, and ad spending as a percentage of sales, wherein the quarterly hold ratio improved to 14.8% in 4Q10 from 12.1% in 3Q10, the first qoq improvement since 3Q09.

What to do with the stock We reiterate our Buy rating on GKL (on Conviction List), as we believe GKL has reached an inflection point in its earnings momentum, where we forecast 42% yoy EPS growth in FY11 as we expect GKL to fully capture the benefit of solid traffic growth (especially from the Chinese visitors, which we expect will account for 24% of GKL’s total visitors in FY11E vs. 13% in FY09). Moreover, we see 4%/7% upside risk to consensus FY11 OP/NP estimates (not to mention attractive valuation vs. regional peers). After lowering our FY11/12 OP estimates by 3%/3% (reflecting 4Q10 results, forex assumption changes) and introducing FY13 earnings estimates, we lower our 12-m TP to W25,000 (from W26,000) by applying a target FY11E EV/EBITDA multiple of 9X (unchanged). Risks are stronger-than-expected competitive landscape and geopolitical risk.



Energy

PetroChina (H) (0857.HK): Impact of Cutbank Ridge JV with Encana modest; retain Sell 14

Chris Shiu, CFA (Beijing): [email protected], +86(10)6627-3462 Beijing Gao Hua Securities Company Limited Nilesh Banerjee (Mumbai): [email protected], +91(22)6616-9045 Goldman Sachs India SPL

News PetroChina issued a press release before the Hong Kong market opened on Feb. 10 stating that it and Encana have signed an agreement for PetroChina to acquire a 50% interest in Encana’s Cutbank Ridge business assets in British Columbia and Alberta in Canada for a consideration of C$5.4 bn. The proposal is subject to due diligence, signing of the JV agreement, and approval by PetroChina’s board and by Canadian and Chinese authorities.

Analysis Encana is a pure-play gas company and gas accounts for about 96% of its total proved reserves as of end-2009. Based on Encana’s press release, the 50% interest represents current daily production of about 255 MMcf per day, which we estimate would be about 3.5% and 1.2% of PetroChina’s 2011E gas production and total oil and gas production, respectively. The 50% interest represents proved reserves of about 1.0 tcf of gas equivalent as of end-2010, which would be about 1.6% and 0.8% of PetroChina’s proved gas reserves and proved oil and gas reserves as of end-2009, respectively. The implied reserve life would be about 11 years. The valuation is US$32.6/boe of proved reserves versus PetroChina’s own EV/end-2009 proved reserves of US$12.8/boe and Encana’s US$14.1/boe. We note, however, that Cutbank Ridge is still under ongoing development and enjoys rapid growth. Encana’s management guided for production of 400 MMcf/day for Cutbank Ridge (100%, including Montney as its main driver) for 2010, and our Americas Energy Team estimates it will grow to 638 MMcf/day by 2014E, implying a CAGR of 12%— comparable to our estimate of PetroChina’s gas production CAGR of 13% during the same period — and the JV is likely to accelerate its pace. We also believe that PetroChina may benefit from Encana’s experience in unconventional gas development given that Montney is a shale gas play.

Implications The impact on PetroChina would be modest if it materializes, in our view, given the small relative size. Our estimates, TP and rating are unchanged.



Financial Services

KB Financial Group (105560.KS): In line with expectations; a net loss but strong NIM mgmt 15



Net inc. (W) 2,473 bn 2,692 bn

EPS (W) 6,400 6,967

EPS growth 2,368.0% 8.9%

P/E 8.9X 8.2X


Investment Lists



Josh Hwang (Seoul): [email protected], +82(2)3788-1178 Goldman Sachs (Asia) L.L.C., Seoul Branch Philippa Rogers, CFA (Tokyo): [email protected], +81(3)6437-9970 Goldman Sachs Japan Co., Ltd. Joon Park (Seoul): [email protected], +82(2)3788-1723 Goldman Sachs (Asia) L.L.C., Seoul Branch

What surprised us As expected, KBFG reported 4Q10 net loss of W230.7bn, slightly lower than our estimate of W103bn net loss. Positives: 1) although few one-offs (i.e., collection of delinquents) are attributable to 10bp out of 31bp qoq NIM expansion in 4Q, this reaffirms our positive view on further margin expansion potential from re-pricing of high cost funding and rate hikes and 2) greater-than-expected improvements via extensive NPL management (a total of W1.54tn cleanup) in both coverage ratio (up by 14%p qoq to 120%) and NPL ratio (down by 51%p qoq to 1.79%) should bring better volume growth environment for the bank, in our view. Negative: Despite the fact that the group has written down its investment in BCC (W117bn impairment loss) to 1X of book (bought at 2.2X) and expect limited loss going forward, however, this repeated loss may overshadow the group’s global growth strategy going forward.

What to do with the stock We maintain our Buy rating on the stock as we see further upside revisions to its margins, evidenced by strong inflows of core deposits, and greater credit cost normalization should accelerate the group’s earnings recovery much faster than expected. The stock is trading at 0.99X 2011E BVPS. We raise our GS CAMELOT-based 12m TP to W72,600 (1.27X 2011E BVPS) from W69,500 as we raise 2011E/12E EPS estimates by 6.6%/4.1% to reflect higher margins and greater volume growth outlook. We introduce our 2013 estimates. Key risks; 1) slower-than-expected macro and property market recovery, 2) lower-than-expected rate hikes, and 3) competitive volume growth with margin contraction.

Korea Investment Holdings (071050.KS): In line with expectations; solid earnings trend- attractive entry point

16


Target price W58,000 Fiscal y/e Mar 2011E 2012E


EPS (W) 4,162 5,136


P/E 10.8X 8.8X


Investment Lists


Coverage view Attractive

Eunice Lee (Seoul): [email protected], +82(2)3788-1724 Goldman Sachs (Asia) L.L.C., Seoul Branch Philippa Rogers, CFA (Tokyo): [email protected], +81(3)6437-9970 Goldman Sachs Japan Co., Ltd. Stan Lee (Seoul): [email protected], +82(2)3788-1778 Goldman Sachs (Asia) L.L.C., Seoul Branch

What surprised us KIH released only the detailed results for Korea Investment Securities. KIS FY3Q11 bottom line of W64bn came in mostly in line with our expectation and Bloomberg consensus of W63bn/W61bn. Positives: (1) Brokerage commission income increased by 21% qoq and 45% yoy. qoq growth was stronger than what we have seen with Daewoo and WIS (20%/11% in FY3Q11) (2) Asset mgt product sales fees rose by 36% on the back of robust growth of wrap accounts and stable mutual fund sales. Contribution to operating revenues now up to 20% from 15% qoq. (3) SG&A costs have been best managed when compared to larger brokers which have reported earnings so far. Cost-to-income ratio improved from 60% to 59% qoq. Negatives: none of note.

What to do with the stock Reiterate Buy. We believe 3Q results confirm the positive momentum in the following areas with recent share price correction offering an attractive entry point: (1) Benign trend of brokerage income on the back of increasing brokerage M/S by utilizing cross selling opportunities (2) Its business portfolio best positioned to grow asset management subsidiaries’ earnings contribution to over 15% of total earnings on the back of potential turnaround of AUM industry and continued strong inflow of money into wrap accounts. We modestly adjust our FY2011-2013E EPS by 2%-6% on better-than-expected net commission income trends and thus



we raise our 12mn TP to W58,000 from W54,000 (11.3X EPS FY2012E). Maintain Buy. Risks: unexpected sharp fall in ADT and delayed recovery in asset mgt business. Gov’t intervention to control excessive competition. KIS FY3Q11 results Source: Company data, Goldman Sachs Research estimates.

Industrials

LG Corp. (003550.KS): Below expectations: hurt by consolidated subsidiaries 17



Net inc. (W) 1,829 bn 2,111 bn

EPS (W) 10,400 12,003


P/E 8.2X 7.1X


Investment Lists

Neutral


Sean Choi (Seoul): [email protected], +82(2)3788-1791 Goldman Sachs (Asia) L.L.C., Seoul Branch William Shim (Seoul): [email protected], +82(2)3788-1729 Goldman Sachs (Asia) L.L.C., Seoul Branch

What surprised us During market hours on Feb 10, LG Corp reported weak preliminary 4Q10 results with net profit of W202 bn, 31% and 39% below GS and consensus estimates. Combined equity method gain from LG Corp’s unconsolidated subsidiaries was strong at W54.6 bn, beating our estimate of –W66.3 bn largely on stronger-than-expected contribution from LG Electronics (LGE, 066570.KS, W117,000, Neutral). However, costs from consolidated subsidiaries were higher than expected, resulting in the weak operating and net profits for LG Corp.

What to do with the stock We maintain our Neutral rating on the stock. Based on the 4Q10 result as well as recent EPS revisions made by GS analysts to LG Corp’s major subsidiaries including LGE, LG Chem (051910.KS, W379,000, Neutral), and LG Uplus (034020.KS, W6,120, Sell), we lower 2011E/2012E EPS estimates by 14.7%/11.6%. We also introduce our 2013E EPS estimate of W14,495. We maintain our SOTP-based 12-month target price of W98,000. LG Corp is currently trading 30.5% discount to its NAV, in-line with its historical average of 30.1% since 2004. Key risks include unexpected changes in its subsidiaries’ operations and valuation received by Siltron during its potential IPO in 2011E.

KCC Corp (002380.KS) Buy: Concerns on poly-silicone business overdone; reiterate Buy (CL) 18




EPS (W) 23,166 26,649

EPS growth (25.6%) 15.0%

P/E 14.1X 12.3X


Investment Lists


Coverage view Cautious

Sean Choi (Seoul): [email protected], +82(2)3788-1791 Goldman Sachs (Asia) L.L.C., Seoul Branch William Shim (Seoul): [email protected], +82(2)3788-1729 Goldman Sachs (Asia) L.L.C., Seoul Branch

Source of opportunity We believe that investor concerns over KCC’s new poly-silicone (poly-si) venture, especially on CAPEX requirement and KCC’s ability to fund it, are overdone. With 2011E/2012E EBITDA of W642/736 bn (W441/510 bn on parent basis) and 2011E net debt to equity ratio of only 0.11X, we believe that KCC’s cash flow and balance sheet are sufficiently strong to fund its CAPEX requirement of approx. W400 bn/3,000 tons. KCC plans to add two 3,000 ton plants over two years to reach a total capacity of 9,000 tons by the end of 2012E. KCC currently has one plant in commercial production. We reiterate our target price of W480,000 and our Buy rating (on CL).

Catalyst We believe that improving profitability of KCC’s poly-si business will help alleviate concerns over its poly-si venture. We expect the first batch of KCC’s poly-si production capacity - 3,000 tons launched in 2010 – to exceed cash cost break-even in 2011E. Recent strength in poly-si spot price is also positive in our view: according to PVInsight, current spot price is US$70/kg. GS Alternative Energy Team currently expects poly-si spot price to rise 6% yoy to US$64/kg in 2011E.

Valuation



Our 12-month target price of W480,000 currently implies 47% potential upside and is based on SOTP with a 20% discount.

Key risks Key risks to our target price and investment view include any material changes in key end-markets’ (autos, shipbuilding, and domestic E&C) outlook.

Wharf Holdings (0004.HK): HK$10bn rights issuance to fund landbank acquisition in China 19



Net inc. (HK$) 13,939 mn 8,016 mn

EPS (HK$) 5.06 2.91

EPS growth (20.4%) (42.5%)

P/E 10.5X 18.2X


Investment Lists

Neutral


Simon Cheung, CFA (Hong Kong): [email protected], +852-2978-6102 Goldman Sachs (Asia) L.L.C. Frank He (Hong Kong): [email protected], +852-2978-7414 Goldman Sachs (Asia) L.L.C. Janet Lu (Hong Kong): [email protected], +852-2978-1642 Goldman Sachs (Asia) L.L.C.

News Late last night, Wharf announced that it intends to raise HK$10bn cash by issuing 275.4mn rights at HK$36.5 each, 31% discount to its last closing price. This represents 10% of its existing issued capital and 9.1% of the enlarged capital base upon its completion. Its 50% major shareholder, Wheelock, has agreed to underwrite the rights issuance, as an indirect means to channel cash to Wharf. If the other shareholders decide not to participate, Wheelock’s shareholding in Wharf would increase to 54.6%.

Analysis This is not the first time that Wharf has raised capital by rights issuance. In November 2007, it raised HK$9bn by issuing 305mn rights at HK$30 each. This time around, the capital raised will also be used to fund its property investment in China, consistent with the group’s strategy to increase its asset weighting in China from 30% currently to 50% in the medium term. Since mid-2010, Wharf has spent HK$21bn to acquire 10 more sites in Shanghai, Ningbo, Wuhan, Changzhou, Suzhou, Wuhan and Changsha with a total GFA of 29mn sq ft, raising its landbank in China to around 120mn sq ft, vs. its medium-term target of 150mn sq ft. The terms of the rights issuance imply that the net debt to equity ratio could improve to 19% at end-2011E (vs. our base case estimate of 28%). We estimate Wharf has HK$29bn in outstanding land premium.

Implications While we like Wharf’s exposure to high-end retail spending in HK, the stock looks fairly valued in our view, trading at 34% discount to 2011E NAV, vs. its long-term average of 30% discount. Our estimates and target price are unchanged.

LS Corp. (006260.KS): In line with expectations: SPSX turnaround to drive 2011 earnings 20




EPS (W) 7,913 9,491


P/E 13.0X 10.9X


Investment Lists



Seung Shin (Seoul): [email protected], +82(2)3788-1779 Goldman Sachs (Asia) L.L.C., Seoul Branch In Young Chung (Seoul): [email protected], +82(2)3788-1799 Goldman Sachs (Asia) L.L.C., Seoul Branch

What surprised us 4Q EBIT was 4% below our estimate, but net profit was 12% above our estimate due to tax credit. While LS Industrial System and LS Nikko Copper missed our estimates, LS Cable and LS Mtron beat our estimates for equity method income. We believe the improving outlook for the U.S. economy should fuel the turnaround of SPSX earnings this year. In 2010, earnings of SPSX dropped 90% yoy due to non-recurring restructuring charges. Hongqi Electric generated US$70m revenues in 2010, but the company guided US$290m revenues with 5% operating margin this year, which should be consolidated on IFRS operating revenues and profit. Starting from 1Q11, LS Mtron should begin recognizing revenues from its new tractor production site in China. Healthy 4Q10 results at LS Mtron support our view that 2011 will be a turnaround year. In particular, we believe the loss from FCCL (flexible copper clad laminate) should decrease this year as production stabilizes. We estimate 2010E loss from FCCL alone was Won10bn-W12bn. We tweak 2010E EPS by 3.3% post the 4Q results.



What to do with the stock We maintain our Buy (Conviction List) on LS Corp and our price target of W133,000, based on SOTP valuation. The share price has corrected sharply over the past two weeks on expectation of weak 4Q10 results, and we believe the encouraging 2011 outlook is not reflected in current valuation.

Technology

NCsoft (036570.KS): Below expectations; cutting target price to W208,000 21




EPS (W) 7,772 8,649

EPS growth (10.0%) 11.3%

P/E 28.2X 25.3X


Investment Lists

Neutral


Seung Shin (Seoul): [email protected], +82(2)3788-1779 Goldman Sachs (Asia) L.L.C., Seoul Branch Piyush Mubayi (Hong Kong): [email protected], +852-2978-1677 Goldman Sachs (Asia) L.L.C. In Young Chung (Seoul): [email protected], +82(2)3788-1799 Goldman Sachs (Asia) L.L.C., Seoul Branch

What surprised us Consolidated EBIT/net profit was 37/21% below our ests on one-off employee bonus (W4-5bn) and sluggish revenue growth on lack of new game launches. Management guided CBT of B&S in 1H11, and OBT by end 2011, but did not confirm if commercialization will happen within this year. Mgmt stated that CBT of GW2 may happen within this year, but commercialization schedule remains uncertain. IFRS 2011 guidance is max.W700bn of sales and max. W200bn of EBIT (excluding new games). On the baseball team launch, the company will amortize W5bn of registration fees and deposit W10bn (to be refunded in 5 yrs) when the company receives its official license from KBO. Mgmt said major OPEX will not occur until 2013/14 when the team hopes to join the major league. In addition, the company plans to add “education service” to its business scope (announced, Feb. 9). The company also officially cancelled its shareholders return policy that 1/3 of earnings will be used to pay dividends or buy back shares, stating that it wants to keep a large cash reserve for potential M&A opportunities in the future. The company had net cash of W583bn in 4Q10 and we expect FCF to remain positive in the next three years.

What to do with the stock On the back of these results we cut our 2011/12E EPS estimates by 7/3%, mainly due to higher expectation for operating expenses after headcount rose in 4Q. Our 12m TP comes down from W220,000 to W208,000, maintaining target 2011E P/E of 24x (peak cycle consensus P/E). We continue to believe that commercialization of B&S is unlikely in 2011. Upside risk: Commercialization of B&S in 2011. Downside risk: Higher than expected expenditure to establish a baseball team.

China: Technology: Healthy CNY electronics sell-through in-line with inventory stocking 22

Donald Lu, Ph.D (Beijing): [email protected], +86(10)6627-3123 Beijing Gao Hua Securities Company Limited Lingling Hu (Beijing): [email protected], +86(10)6627-3520 Beijing Gao Hua Securities Company Limited Evan Xu (Beijing): [email protected], +86(10)6627-3176 Beijing Gao Hua Securities Company Limited

Retail sales +19% yoy driven by TV, fridge and digital products The PRC Ministry of Commerce reported Chinese New Year (CNY; Feb 2–8) national retail sales of Rmb 405bn — up 19% yoy, versus +17.2% yoy in CNY in 2010, and +16.2% yoy on average for CNY during 2005–2010. Consumer and communication electronics sales were robust, mainly driven by strong demand for mid/ high-end home appliance such as LED TVs, energy–saving refrigerators, digital cameras and video recorders, smartphones, 3G handsets, and the clunker/rural subsidy programs. For example, according to sina.com, overall sales of electronics products in Guangzhou increase by over 20% yoy during the CNY holiday.



Our store checks findings: LED TVs and smartphone are hot Our store visits in Beijing and Yantai suggest: (1) LED TVs are gaining popularity and some brands such as Samsung and Changhong offer only limited LCD models. The average TV ASP promotion is 10%-15%. Sharp and Samsung seems to be selling better than other brands. Internet TV has started to gain popularity. (2) Smartphone sales were above feature phone sales at some stores in Beijing, but well below feature phone sales in Yantai, a third-tier city. We have found that more smartphone buyers understand the concept of mobile Internet today than four months ago in Beijing, but few customers are familiar with mobile Internet in Yantai. iPhone remains far more popular than other names. After iPhone, Nokia and Samsung, followed by HTC are among the top selling names. The most popular 2G handsets are Samsung, Nokia, BBK, and Oppo. Handset ASP discount was less than 10% during the holiday. (4) HP and Lenovo PCs with ASP of c. Rmb4, 000 were selling well after a 10% price discount. (5) Overall inventory of TV, PC and handsets were sufficient, except for some hot models such as Nokia E63/E71, and Samsung 40” and 60” LED TVs.

CNY sell through healthy but in-line with inventory stocking We view the buoyant CNY holiday sales as healthy especially in-light of the relatively moderate price discount. However, we note inventory has been plentiful for almost all categories and believe that the sell-through probably just matches the inventory stocking before CNY. We maintain our Buy rating on MStar due to its strong growth potential in handset, Sell rating on Mediatek due to continued margin pressure, and Neutral on TSMC and UMC due to cyclical concerns.

NHN (035420.KS): In line with expectations: Margin compression likely in 2011 23




EPS (W) 10,174 11,397


P/E 20.3X 18.1X

Dividend yield -- --

Investment Lists

Neutral


Seung Shin (Seoul): [email protected], +82(2)3788-1779 Goldman Sachs (Asia) L.L.C., Seoul Branch Piyush Mubayi (Hong Kong): [email protected], +852-2978-1677 Goldman Sachs (Asia) L.L.C. In Young Chung (Seoul): [email protected], +82(2)3788-1799 Goldman Sachs (Asia) L.L.C., Seoul Branch

What surprised us 4Q consolidated EBIT and net profit were in line with our expectations. Search ad revenues rose 12% qoq and display ad revenues increased 21% qoq, while EBIT margin remained stable at 46%. The management guided that PPC has recovered back to earlier levels seen during its partnership with Overture. While there is little visibility on the company’s recent decision to enter the open market, we think the investment may be limited as it would leverage the existing knowledge shopping platform. Mobile traffic is rising sharply—UV increased 3X yoy, while PV rose 20X yoy. In January, the company generated average W50 mn/day (annualized run rate of W18.3 bn) of mobile search revenues. Further, the company guided to W80-100 bn of revenues from Tera in 2011. In the Japan market, the company stated that Livedoor is making a marginal profit and it plans to launch Tera in 3Q11.

What to do with the stock While the company has guided to a 20% increase in revenues this year, we forecast only a 14% increase due to weak growth in the games business (10% vs guidance of 15%-20%). We expect EBIT margin to decline from 36% in 2010E to 35% in 2011E and 34% in 2012E due to deteriorating product mix in the games business (increasing mix of low-margin publishing games at the expense of high-margin casual games) and ramp-up expenses associated with the social network services. Consequently, we revise our 2010E-2012E EPS down by 3%-7% and lower our 12-m TP to W185,000 (from W193,000) based on 2011E P/E of 16.3X (3-yr average of 12m forward consensus P/E). Key risks: better than expected success for Tera, slowdown in the search ad revenues.

Asia Pacific: Technology: LTE: The time has arrived; implications for AEJ equities 24

Robert Chen (Taipei): [email protected], +886(2)2730-4196 Goldman Sachs (Asia) L.L.C., Taipei Branch Donald Lu, Ph.D (Beijing): [email protected], +86(10)6627-3123 Beijing Gao Hua Securities Company Limited Edward Yen (Taipei): [email protected], +886(2)2730-4182 Goldman Sachs (Asia) L.L.C., Taipei Branch



Iris Wu (Taipei): [email protected], +886(2)2730-4186 Goldman Sachs (Asia) L.L.C., Taipei Branch

LTE opportunity could succeed after several years of discussion Our US TMT team has published a detailed report titled “LTE: fueling the mobile super-cycle; implications across TMT” on the 4G LTE (Long Term Evolution) opportunity with potential winners and losers from LTE transition. The bottom line: we believe LTE is set to ramp much faster than prior wireless technology transitions such as 2G to 3G, with 3 key ingredients for success: (1) Ecosystem is in a much better position than the early stages of 3G; (2) Experience in mobile internet speed is much better now to drive LTE adoption with download speed in excess of 1st gen broadband speeds; (3) Economics are meaningfully beneficial to operators (lower cost/bit and capex/opex savings) while also providing a higher utility to consumers.

Likely winners in AEJ equities: OEM, components, and foundry OEM: we see HTC (Buy, Conviction List) at the frontier of operators’ aggressive push for LTE adoption, as HTC has been leading competition by rolling out competitive 4G LTE smartphones. We expect its 2nd gen LTE phone for Verizon and first LTE phone for AT&T in 3Q11 to gain significant operator support and enhance its consumer brand preference. Components: we expect the killer apps for LTE, such as HD video streaming, on-line gaming, and digital home connectivity, to continue to require higher spec’d components to improve user experience. We see Unimicron (Buy, Conviction List, PCB), Largan (Buy, camera lens), and AAC Acoustic (Neutral, acoustics and heptics) as key candidates for earnings upside, given increasing dollar value per box and entry barriers. Foundry: we believe the LTE opportunity should be incrementally positive for TSMC (Neutral), as the more complicated chipset structure and power consumption requirement are likely to help TSMC utilise its high-end manufacturing process and widen its leadership.

Likely losers in AEJ equities: chipsets, ODM/EMS vendors Chipsets: We believe the ramp-up of LTE service should be incrementally negative to Mediatek and MStar, since it may mean they are 2 generations behind the curve. ODM/EMS: We see particularly negative implications for ODM/EMS companies Foxconn Int’l, Compal Comm and BYD Electronic due to the lack of outsourcing opportunities.

Asia Pacific: Technology: Touch panels: Market share reshuffle through product transition 25

Liang-chun Lin (Taipei): [email protected], +886(2)2730-4185 Goldman Sachs (Asia) L.L.C., Taipei Branch Maggie Lu (Taipei): [email protected], +886(2)2730-4188 Goldman Sachs (Asia) L.L.C., Taipei Branch

January sales varied, reflecting customer differences Touch panel makers reported January sales that showed diverging performance. Those touch panel makers that already mass produce tablets saw higher revenue decline ahead of new tablet launches. J-touch experienced the biggest decline mom due to order cuts from Samsung. Cando, as a new tablet supplier, appear to be gaining momentum over main rival, Sintek, due to production yield improvement and new tablet customers. We believe these trends suggest that touch panel makers in general are not solution providers yet and that their growth outlook is subject to customers’ design changes. We expect greater visibility for share price momentum after the new tablet launches.

Tablet remains a key swing factor for growth Cando saw a 22% mom rise in January sales, reflecting a low share in iPad touch sensor and new customer wins, according to Economic Daily. YFO’s Jan sales were up 2% mom due to low tablet exposure last year, but we believe visibility of its tablet growth remains unclear amid rising competition.

Product transition is higher in non-Apple tablet supply chain However, other touch panel makers saw significant monthly sales declines due to tablet product transition, which was more severe for the non-Apple supply chain side. J-touch reported a 33% mom decline in sales, following December’s 38% mom decline. TPK’s sales were down 27.5% mom, which was more than Wintek’s -13%, due to higher share in iPad and non-Apple customers in 4Q10.



Telecom Services

Singapore Telecommunications (STEL.SI): Below expectations but Buy thesis remains intact 26

STEL.SI, S$3.09 Market cap US$38,710 mn

Target price S$3.67 Fiscal y/e Mar 2011E 2012E

Net inc. (S$) 3,862 mn 4,364 mn

EPS (S$) 0.24 0.27

EPS growth (1.2%) 12.9%

P/E 12.8X 11.3X


Investment Lists



Piyush Mubayi (Hong Kong): [email protected], +852-2978-1677 Goldman Sachs (Asia) L.L.C. Sachin Salgaonkar (Mumbai): [email protected], +91(22)6616-9169 Goldman Sachs India SPL John Han (Hong Kong): [email protected], +852-2978-0178 Goldman Sachs (Asia) L.L.C.

What surprised us SingTel reported FY3Q2011 operating revenue of S$4,706mn (S$1,636mn from Singapore, S$3070mn from Optus-Aus), EBITDA of S$1,286mn, and underlying net profit of S$969mn; which was +5.8%/+4.6%/-2.1% yoy, +2%/-4%/-7% vs. our estimates, and +1%/-8%/+5% vs. consensus. Positives: The Singapore business was boosted by +6.4% mobile revenue growth qoq due to consistently strong postpaid net adds of +41K coupled with postpaid ARPU which grew to S$92/mo (+4.5% qoq) from S$88/mo. Similarly in Australia, Optus mobile revenue grew 5% to A$1,561mn from A$1,498mn in Q211. Comparatively Optus mobile revenue grew +10.9% from June to December hoh vs. the incumbent Telstra’s +6.5%. Negatives: Optus’ mobile service margin fell to an all time low of 29.4% from 29.6%/30.3% a quarter/year ago. We attribute the decline to a +12% increase in SG&A costs from higher customer acquisition/retention costs.

What to do with the stock We lower our 2011E/2012E/2013E net profit estimates by -1%/-2%/-2% primarily on estimate changes to Associates: AIS, Bharti, and Telkom (covered by Sachin Salgaonkar). We maintain our 12-month SOTP-based target price of S$3.67. Despite the slightly disappointing results, our Buy thesis remains intact given Singtel’s overall strong position in its Sing/Aussie businesses. We recommend further accumulation of the stock with our target price implying 19% potential upside to current levels. Risks: Increasing competition from Telstra which has begun spending A$1bn on gaining back market share from Optus. Lower than expected subscriber adds in the Singapore Mio TV business.

Transportation

China: Transportation: Infrastructure: China air, road & rail: Golden week traffic points to meaningful trends

27

Ronald Keung (Beijing): [email protected], +86(10)6627-3483 Beijing Gao Hua Securities Company Limited Tom Kim (Hong Kong): [email protected], +852-2978-0856 Goldman Sachs (Asia) L.L.C.

357mn Chinese travelled in China’s 7-day Spring Festival, +13.5% According to the NDRC, China’s transport infrastructure (airports, roads, railroads and ferry terminals) handled 357mn travelers during the 7-day Chinese New Year (CNY) golden week between Feb 2-8, +13.5% compared to the CNY golden week last year. We gathered the traffic performance of various modes of transport and identified meaningful traffic trends.

Highway takes higher market share; Rail growth outpaced air Rail passenger volumes grew by 9% to 32mn travelers (including high-speed rail), outpacing air that grew by 6% to 5mn during the 7-day period compared to 2010. Cars/buses remained the key mode of transport capturing higher market share where highway passenger volumes were up 13.8% reaching 311mn travelers. Back in 2010 during the golden week, air passenger growth of 19% outpaced that of rail (12%) and road (11%).

Major Chinese airport hubs are reaching capacity constraints The total number of flights deployed during the golden week was up 5%, while air passengers were up 6%, equating to a 2pp improvement in load factors to 72%. Besides a high-base effect, we think airport



infrastructure bottleneck at major hubs (Beijing, Guangzhou, Shenzhen) was to blame where BJ and GZ only recorded flat passenger throughput. Meanwhile, the Shanghai catchment area gained higher market share with a 14% increase in passenger throughput (Hongqiao +27%, Pudong +6%).

Daqin line continues to deliver growth According to the MOR on Feb 10, Daqin line transported over 1.25mn tons of coal per day during the golden week driven by strong thermal coal demand, surpassing the highest daily record of 1.24mn tons in Jan 2011. We maintain our 440mn tons assumption (+10%) for Daqin line in 2011.

Reiterate our Buy ratings on Daqin (CL), SH Airport and SZ Exp. We reiterate Buy on Daqin Railway (CL, 601006.SS, Rmb8.49) on attractive valuation of 9.5X 2011E P/E vs. global average of 13.7X, possible freight rate hike, and potential upside to 2010/2011 results and dividend payout. We reiterate Buy on SH Airport (600009.SS, Rmb14.04) with two catalysts including possible injection of Hongqiao and airport charge alignment. We also reiterate Buy on Shenzhen Exp. (0548.HK, HK$4.73). Risks: Uncertain traffic; risks to government-determined pricing; asset injections.

Wan Hai Lines (2615.TW) Buy: Discount to peers should narrow; reiterate Buy 28

2615.TW, NT$21.90 Market cap US$1,654 mn

Target price NT$34.40 Fiscal y/e Dec 2010E 2011E

Net inc. (NT$) 6,403 mn 6,903 mn

EPS (NT$) 2.94 3.17


P/E 7.4X 6.9X

Dividend yield -- 3.4%

Investment Lists



Tom Kim (Hong Kong): [email protected], +852-2978-0856 Goldman Sachs (Asia) L.L.C. Ronald Leung (Hong Kong): [email protected], +852-2978-1255 Goldman Sachs (Asia) L.L.C.

Source of opportunity We reiterate our Buy rating on Wan Hai stock as it is trading at a discount of 37% to the peer group average of 1.01X 2011E EV/FV. We believe this is unwarranted as we expect returns to remain strong at an above-average level of 15.7% for 2011E. The stock has underperformed the sector by 5% ytd due to market concerns on the sustainability of the recent recovery of Intra-Asia freight rates, to which Wan Hai has 80% exposure to in terms of revenue. In our view, the recent pullback presents an attractive entry level, as we think rates should rebound from 3Q11 as the peak season kicks in, at the same time as supply growth slows.

Catalyst In our view, there are three key catalysts: 1) Stronger-than-expected Intra-Asia freight rates; 2) Better-than-expected 4Q10 results; and 3) Consensus earnings upgrades.

Valuation Wan Hai stock is trading at attractive valuations of 0.64X 2011E EV/FV, representing a (in our view unwarranted) discount of 37% to the peer group average of 1.01X 2011E EV/FV. The stock is also trading at compelling valuations of 0.6X EV/GCI on CROCI of 20% for 2011E. On earnings multiples, Wan Hai stock also looks attractive at just 7.7X 2011E P/E and only 2.5X EV/EBITDA. Our unchanged SOTP-based 12-month target price of NT$34.40 is based on a target fleet multiple of 0.94X 2011E EV/FV, reflecting a discount of 45% to the theoretical multiple of 1.70X, which is derived from a return on fleet of 15.7% of 2011E against a WACC of 10.8%.

Key risks Industry and capacity indiscipline in the containerships industry.



Korean Air (003490.KS): Early signs of 1Q pent up demand; premium strategy intact 29




EPS (W) 8,765 6,013

EPS growth 230.3% (31.4%)

P/E 8.3X 12.1X


Investment Lists

Neutral


Hino Lam (Hong Kong): [email protected], +852-2978-0526 Goldman Sachs (Asia) L.L.C. Tom Kim (Hong Kong): [email protected], +852-2978-0856 Goldman Sachs (Asia) L.L.C. Ricky Tsang (Hong Kong): [email protected], +852-2978-6631 Goldman Sachs (Asia) L.L.C.

What's changed We met with Korean Air (KAL) management recently for an update on latest business trends. We highlight two key takeaways: 1) early signs of pent up demand in 1Q, with January load factor at historically high levels of 81% and forward booking trends that suggest robust traffic; and 2) KAL reiterated its long-term strategic goal to ramp up its premium class seat exposure to 14% from 12% by 2014. Meanwhile, KAL's cargo operations remained profitable in January, in line with our expectations. Preliminary load factors were at 72%, above breakeven levels of c.70%.

Implications In our view, if pent up demand for inbound travel holds for the next two months, there could be upside risk to our 2011 earnings outlook. If we continue to see pent up demand from delayed 4Q travels from Chinese and Japanese tourists, we believe there could be upside risk to KAL’s passenger traffic and yields in 1Q11. Looking further ahead, KAL’s strategy in growing its premium seats should bode well with long term profitability, in our view.

Valuation We maintain our Neutral rating on KAL, as the stock appears fairly valued at 1.2X 2011E EV/FV, close to sector average levels of 1.2X. Our 12-m SOTP TP of W81,000 is based on a target EV/FV multiple of 1.23X, derived from an average 2011-12E ROF of 9.3% over a WACC of 8.3%.

Key risks Upside: tourism boost from visa waiver program; Downside: unexpected sharp increases in fuel prices. We note that KAL only has 7% of its 2011 fuel exposure hedged (vs. sector average levels of c.20%). We believe any further increases in fuel prices could negatively impact 2011E earnings. Our sensitivity analysis suggests that KAL’s 2011E EPS could decrease 3.1% for every 1% increase in average 2011E fuel prices.

Hanjin Shipping (117930.KS) Buy: Seasonal and cyclical weakness well known; Reiterate Buy 30




EPS (W) 4,227 6,058

EPS growth 126.3% 43.3%

P/E 9.1X 6.3X

Dividend yield -- 1.3%

Investment Lists



Tom Kim (Hong Kong): [email protected], +852-2978-0856 Goldman Sachs (Asia) L.L.C. Ronald Leung (Hong Kong): [email protected], +852-2978-1255 Goldman Sachs (Asia) L.L.C.

Source of opportunity On February 10, we met with Hanjin Shipping (HS) for an update of its strategy and operating performance. The company stated that its volumes were up 10% yoy in Jan 2011, while Feb has been sluggish due to the Lunar New Year. While visibility is low, the company expects demand to pick up from March. Meanwhile, rates have been relatively stable even on the Asia/Europe trade lane where capacity growth has been more aggressive, which reflects good industry pricing discipline. We expect demand to remain weak as industrial activity in Asia has only just resumed. However, shipments should pick up from March.

Catalyst We think the key catalysts to share price performance include a recovery in spot container freight rates from late 2Q and/or favorable Transpacific contract negotiations (+5%).

Valuation We reiterate our Buy rating on Hanjin Shipping as the stock is trading at attractive valuation of 1.03X 2011E EV/FV relative to the forward return on fleet of 16.1% for 2011E.The stock is also trading at compelling valuations of 0.7X EV/GCI and 1.1X P/B on CROCI and ROE of 9.4% and 18.8% for 2011E, respectively. On earnings multiples, the stock also looks attractive at just 6.4X 2011E P/E. Our 12-month SOTP-based target price of W45,100 (unchanged) is based on a target multiple of 1.11X EV/FV, assuming a discount of 30% to



the theoretical multiple of 1.59X, which is derived from a ROF of 16.1% on 2011E against a WACC of 11.5%.

Key risks There are two key downside risks to our view: 1) Weaker-than-expected bulk freight rates; and/or 2) Rising unit costs, particularly bunker fuel.

Utilities

Orient Green Power (ORIN.BO): In line with expectations: Biomass mass fuel costs down qoq 31

ORIN.BO, Rs23.90 Market cap US$246.0 mn

Target price Rs51.00 Fiscal y/e Mar 2011E 2012E

Net inc. (Rs) 78.0 mn 1,413 mn

EPS (Rs) 0.17 3.02

EPS growth 137.7% 1,711.6%

P/E 143.4X 7.9X

Dividend yield -- --

Investment Lists


Coverage view Cautious

Durga Dath (Mumbai): [email protected], +91(22)6616-9047 Goldman Sachs India SPL Sucheta Sundar (Bangalore): [email protected], +91(80)6637-8691 Goldman Sachs India SPL

What surprised us Orient Green (ORIN.BO) reported 3QFY11 PAT of Rs50 mn vs. our estimate of Rs10 mn. Adjusted for: 1) one-time item of Rs4.6 mn in interest expense and 2) higher other income, profit before tax was about Rs12 mn, largely in line with our expectations. The biomass fuel costs for 3QFY11 was about Rs2.98/kwh vs. Rs4.82/kwh in 2QFY11, down 38% qoq. The fuel costs in 2QFY11 were higher due to increase in fuel consumption on account of unusual monsoons. The overall realization for 3QFY11 improved to Rs4.64/kwh vs. Rs4.48/kwh for 2Q, due to higher proportion of third party sales in its wind segment. The total units sold for 3QFY11 was about 73mn units vs 131mn units in 2QFY11 due to seasonality and lower output from biomass segment on account of shutdown of its Rajasthan plant for operational issues. While there was no capacity addition in the biomass segment in 3QFY11, there was a marginal increase of 7MW in the wind segment, taking the total installed capacity in Wind to 179MW.

What to do with the stock We have a Buy on OGPL with a 12-m SOTP based TP of Rs51, implying potential upside of 113%. While decline in biomass fuel costs should address some of investors’ concerns, we look forward to more details on the management conference call on operating performance and status on upcoming capacity additions. Key risks: Delays in future wind capacities.

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