17 October 2008 Equity Strategy

Pan-Asia abc
Global Research

AI – Asia Insights
When will risk ease?
 Asian valuations have hit record lows…

 …and investors have clearly capitulated

 But equities won’t bottom until all risk issues are resolved

It is only 10 days since we published our Q4 Quarterly, but the world has changed
dramatically. Banking systems in the US and Europe have been partially nationalised,
governments have blanket-guaranteed bank deposits, and Asian equities have fallen 17%
since the end of September (the pricing point for the Quarterly). MSCI Asia ex Japan
(Chart 1) is now down 56% from its peak, roughly what it fell by in the 2000-1 bear
market, and not far from the 66% decline during the Asian Crisis in 1997-8 (Chart 1).

Mostly the view we took in the Quarterly still seems valid. We argued that the first phase
of the bear market – risk aversion – was not over but was nearing its end. There are still
credit risks out there waiting to bite (corporate defaults, the insurance industry, credit
default swaps etc.) and we think it unlikely that markets will bottom until they are dealt
with. But over the next few months, the market’s attention will shift to worries about
slowing growth – of global GDP, Asian exports and earnings. However, that will be easier
to deal with, since it will be more like a normal recession, rather than the unprecedented
circumstances we have witnessed over the past few weeks.

So are we near the bottom? Certainly, some of the conditions are in place. Valuations in
Issue no. 66
Garry Evans* Asia have hit historic lows (see, for example, PE in Chart 2). Investors have mostly
Strategist capitulated: in 30 or so meetings with clients in the past week, we found only one actively
The Hongkong and Shanghai Banking
looking to buy equities. The likely slowdown in growth is mostly understood and
Corporation Limited (HK)
+852 2996 6916 discounted in stock prices. We stick to our view that – like in the 1907 financial crisis –
garryevans@hsbc.com.hk stocks will bottom when the final financial risk issue is resolved.
View HSBC Global Research at:
http://www.research.hsbc.com
*Employed by a non-US affiliate of
1. MSCI Asia ex Japan in bear markets 2. 12-month forward PE
HSBC Securities (USA) Inc, and is not
registered/qualified pursuant to NYSE 110 30
and/or NASD regulations 100 Forw ard PE - Asia ex -Japan
90 25
Issuer of The Hongkong and Shanghai
report: Banking Corporation Limited 80
70 20
60
Disclaimer & 50 15

Disclosures 40
30 10
This report must be read -50 0 50 100 150 200 250 300 350 400 450 500 5
with the disclosures and 94 97 00 07 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
the analyst certifications in
the Disclosure appendix, Source: HSBC (Peak=100. Days from peak) Source: HSBC

and with the Disclaimer,

which forms part of it
 Equity Strategy
Pan-Asia abc
Issue no. 66

HSBC strategy recommendations

Recommended market weights
Market HSBC recommended Benchmark Weighting End-08 Current YTD 12-mth EPS growth
weight weight target index perf * fwd PE forecast 2008
Japan 47.5% 47.5% Neutral 900 956 -30% 11.0 -6%
Australia 13.0% 15.1% Under 4500 4,300 -46% 8.9 14%
China 11.0% 9.0% Over 48 40 -52% 8.4 13%
Korea 6.5% 7.6% Under 1300 1,340 -46% 9.0 0%
Taiwan 5.0% 6.0% Under 5500 5,246 -39% 10.4 -23%
Hong Kong 5.0% 4.9% Neutral 18000 15,998 -49% 10.4 -26%
India 4.0% 3.7% Neutral 12000 10,809 -60% 9.7 9%
Singapore 4.5% 2.8% Over 2200 2,059 -42% 9.4 -4%
Malaysia 2.0% 1.4% Over 1000 950 -39% 10.6 -13%
Indonesia 0.5% 0.9% Under 1700 1,520 -47% 7.1 17%
Thailand 0.0% 0.7% Under 550 482 -45% 6.4 113%
Source: HSBC (Weights relative to MSCI Asia Pacific) *MSCI index in USD terms

Recommended sector weights

Sector HSBC recommended Benchmark Weighting Overweights Underweights
weight weight
Financials 23.0% 26.6% Under AU, IN, JP, KR, TW
Industrials 18.0% 14.6% Over CH, HK, IN, KR, SG TW
IT 11.0% 12.8% Under HK, JP, KR, TW
Consumer disc 9.0% 11.4% Under AU, CH, HK, IN, JP, KR, TW
Materials 9.5% 11.4% Under CH, TW AU, IN
Telecoms 7.0% 5.6% Over HK, IN, JP, MY, TW KR
Energy 5.5% 5.3% Neutral CH, TW
Consumer staples 5.0% 5.1% Neutral CH, TW
Utilities 6.0% 3.9% Over CH, MY IN
Healthcare 6.0% 3.3% Over JP, KR
Source: HSBC (Weights relative to MSCI Asia Pacific)

Top high-conviction buy ideas

Code Name Country/ Sector HSBC rating Upside to target Price Market cap
region price (%) (local, 15/10/08) (USDm)
836 HK China Resources Power CH Utilities Overweight (V) 51.8 17.00 (HKD) 9,177
857 HK PetroChina CH Energy Overweight (V) 96.9 6.45 (HKD) 148,820
2727 HK Shanghai Electric Group CH Industrials Overweight (V) 105.1 1.95 (HKD) 6,092
823 HK The Link REIT HK Real estate Overweight 62.4 13.24 (HKD) 3,684
19 HK Swire Pacific HK Industrials Overweight (V) 78.0 57.30 (HKD) 6,754
BHARTI IN Bharti Airtel IN Telecoms Overweight 40.2 714.85 (INR) 27,959
LT IN Larsen & Toubro IN Industrials Overweight 84.3 895.60 (INR) 10,799
9433 JP KDDI Corp JP Telecoms Overweight 37.6 545,000.00 (JPY) 24,119
033780 KS KT&G KR Consumer Overweight (V) 16.8 89,900.00 (KRW) 10,217
SIA SP Singapore Airlines SG Airlines Overweight 47.1 12.92 (SGD) 10,432
Source: HSBC Note: These stocks are chosen by the strategy team from among HSBC analysts’ top large cap Overweights (in terms of upside to target price) with reference to the markets or
sectors where the strategy team has an overweight call. Valuation and risks can be found from p74 of Pan-Asian Equity Strategy: Next problem: growth. It will start to wilt, pub. 8 Oct. 2008.

Top sell ideas

Code Name Country/ Sector HSBC rating Downside to Price Market cap
region target price (%) (local, 15/10/08) (USDm)
670 HK China Eastern Airlines Co CH Airlines Underweight (V) -57.3 1.17 (HKD) 930
ICICIBC IN ICICI Bank IN Financials Underweight (V) 37.6 414.15 (INR) 9,498
8035 JP Tokyo Electron, Ltd. JP IT Underweight (V) -17.5 3,600.00 (JPY) 6,416
017670 KS SK Telecom KR Telecoms Underweight -19.2 214,000.00 (KRW) 12,706
3009 TT Chi Mei TW IT Underweight (V) -4.0 18.75 (TWD) 4,228
Source: HSBC Note: These stocks are chosen by the strategy team from among HSBC analysts’ top large cap Underweights (in terms of downside to target price) with reference to the markets
or sectors where the strategy team has an underweight call. Valuation and risks can be found from p74 of Pan-Asian Equity Strategy: Next problem: growth. It will start to wilt, pub. 8 Oct. 2008.

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 Equity Strategy
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What are investors thinking? High net worth individuals are being hit by
They are capitulating margin calls, which some are unable to meet. The
Our discussions with fund managers over the past bounce in stocks in Hong Kong on Monday this
week found most, unsurprisingly, dazed and week was met by a flood of sell orders from
depressed (there were some exceptions: long private banking clients.
volatility funds, for example). Few were even All in all, capitulation. That is a necessary – but
thinking about when the market might bottom; not sufficient – condition for stocks to bottom.
only one (on Friday last week) planned increasing
exposure on the view that the market could not Valuations at record lows
have far to fall. At the time we published our Quarterly, we wrote
that valuations were 15-20% above rock-bottom
Virtually all the investors we met had maximum
levels. With the decline in the market since then,
bearish positions. Mutual funds held cash close to
they are now there.
the maximum permitted, and were overweight in
blue-chip, defensive stocks. Most hedge funds Price/earnings
were 60-70% in cash; many were active only in Forward PE (see Chart 2 on page 1) hit 8.4x last
index futures (not being able to short in most Friday, the lowest level in the entire period for
markets does not make things easy for them). which we have data (which goes back to 1991).
Everyone we met understood that growth is going Singapore and Japan hit record lows; only
to decline: no one, for example, believes the Philippines and Indonesia were still a way above
consensus forecast of 13% EPS growth in Asia ex it (Table 3).
Japan for 2009. All have started to look very
3. 12-month forward PE by market
carefully at balance sheets, and to worry about
PE now Low Low Low Hist low
companies getting into difficulties rolling over 2007-8 2000-3 1997-8
their debt. TH 6.7 5.9 8.4 9.4 5.4
ID 7.3 6.6 3.5 7.3 3.5
The bleak mood is partly driven by the fact that CH 8.9 7.6 7.0 4.9 4.9
KR 9.2 8.4 5.3 7.2 5.3
most funds have seen withdrawals and AU 9.4 8.5 12.9 13.8 7.8
SG 9.8 9.0 11.9 10.0 9.0
redemptions. Emerging Portfolio Fund Research IN 10.2 9.4 7.9 7.2 7.2
data shows USD60bn of outflows from global TW 10.5 9.9 9.8 15.8 9.2
MY 10.7 10.3 11.7 6.7 6.7
mutual funds in September. One fund we met was HK 10.8 9.7 11.8 6.5 6.5
seeing redemptions of 1% of funds a day. JP 10.9 9.5 15.9 29.5 9.5
PH 11.1 10.1 11.7 8.0 3.7
AEJ 9.5 8.4 9.0 10.8 8.4
Hedge funds worry about fund-of-funds AP 10.1 9.0 13.3 24.6 9.0
withdrawing their money at short notice. Some Source: HSBC, IBES, Datastream

hedge funds, which have eked out decent

performance this year (for which read only a
small negative return), are closing their books to
keep it that way until the end of the year. Some
hedge funds are even wondering whether they
should not just close down – given that they are so
far below their watermarks that they are unlikely
to make their 20% performance fees again for
years – and set up a new fund later.
PE, however, may not help much in an
environment where analysts are still forecasting
13% EPS growth next year (although, note that
they have cut this forecast from 16% over the past
month), but we have pencilled in a 15% decline,
based on the pattern of previous recessions. If
-15% turns out to be right, that means forward PE

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Issue no. 66

at the low last week was 9.7x – cheap, certainly, 5. Prospective PB by country
but not a historic low. Current Low 2007- Average Low 2000- Hist low
PBR 8 2003- 3
Price/book JP 1.1 0.9 1.7 1.2 0.9
PB is a more reliable measure in bear markets. HK 1.1 1.0 1.6 1.0 0.9
KR 1.2 1.1 1.4 0.8 0.4
Last Friday, it got down to 1.4x. That is not quite TW 1.3 1.2 1.9 1.2 1.2
TH 1.3 1.1 2.2 1.3 0.5
back at the low of 1.2x it bounced off both in the SG 1.4 1.3 1.8 1.1 0.9
1997-8 and 2000-1 bear markets (Chart 4). MY 1.5 1.5 1.9 1.4 0.6
PH 1.8 1.6 2.0 0.9 0.9
CH 1.8 1.6 2.4 0.6 0.4
4. Prospective price/book ratio – MSCI Asia ex Japan AU 2.0 1.8 2.6 1.7 1.7
IN 2.2 2.1 3.2 1.6 1.6
3.5 ID 2.5 2.3 3.0 1.3 1.1
AEJ AP 1.4 1.2 1.9 1.3 1.2
3.0 AEJ 1.5 1.4 2.0 1.2 1.2
Source: HSBC, IBES, Datastream
2.5

2.0 Dividend yield

Dividend yield is the clearest example of how low
1.5
valuations have got. Last week, it reached 4.0%
1.0 for MSCI Asia ex Japan, compared to a high in
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
previous bear markets of 3.7% (Chart 6).
Source: HSBC, IBES, Datastream
6. Prospective dividend yield – MSCI Asia ex Japan

There are two reasons why it might not get that
low, however. First, ROE has trended up over the
past few years: in 1998 it bottomed at 9%, in 2002
at 11%. We think this time it is likely to bottom at
around 13-15%. This, we have argued for some
months, would justify a PB of 1.4-1.5x at the
bottom. We have got there now.
Second, MSCI China (Table 5) is still on a PB of
1.6x versus an historical low of 0.4x. However,
the components of the MSCI index have changed
significantly since the 1990s, and Chinese
companies have recently been making ROE
consistently over 15% (compared to an average of
7.5% in the late 1990s). It seems highly unlikely
that China’s PB will fall below 1.0x.
4.0
3.0
2.0
1.0
0.0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Div idend Yield - Asia ex Japan
Source: HSBC, IBES, Datastream
Many markets are at record high dividend yields
(most dramatically Taiwan, where a dividend
yield of 7.1% last Friday compares to a local bond
yield of 2.1%).
Moreover, the risk to dividends should be fairly
small. We found that even in the Asia Crisis and
aftermath of the TMT bubble, dividends were cut
very little. Payout ratios are also generally quite low,
ranging from 7% in the case of Korea, to 20% in
India, 27% in Japan, 34% in China and 68% in

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Issue no. 66

Taiwan. Only in Taiwan does the high payout ratio banks globally, the signs so far are not good. The
perhaps presage some cuts in dividends. spread between three-month interest rate swaps
and Libor (i.e. how much banks price the risk of
7. Forecast dividend yield by market
lending to other banks) jumped to 3.64% on
DY now High Ave 2001- High High
2007-8 3 1997-8 2000-3 October 10 from 2.32% at the end of September
TW 6.7 7.1 3.5 1.6 3.3 (and 0.09% before mid-2007). But this week it
TH 6.4 7.3 3.5 6.3 4.0 has narrowed by 19bps (Chart 8). Libor has come
AU 5.5 6.0 4.1 4.0 4.6
MY 5.2 5.4 3.0 4.2 2.8 down a little, which suggests banks are becoming
ID 5.1 5.6 4.0 2.5 6.7
SG 4.9 5.3 2.9 2.8 3.2 marginally more willing to lend to each other, but
PH 4.7 5.1 2.2 1.8 2.3 so far almost imperceptibly so.
HK 4.2 4.8 3.4 6.2 4.8
CN 3.5 4.1 3.0 5.1 4.8
JP 2.5 2.8 1.2 1.1 1.3 8. Three-month OIS-Libor spread (%)
IN 1.9 2.1 1.9 2.3 3.1
KR 0.7 1.9 2.0 2.4 2.9 4.0
AP 3.3 3.7 2.0 1.8 2.3 3.5
AEJ 3.6 4.0 2.8 3.7 3.6
3.0
Source: HSBC, IBES, Datastream
2.5
2.0
We would accept that historic low valuations are 1.5
not a perfect guide to market bottoms. There is 1.0
only about 15 years of “history” in Asia. Current 0.5
0.0
events are unprecedented and so history may not
02 03 04 05 06 07 08
be a good guide (although, in this region at least,
we would be hard pressed to argue that events are Source: HSBC, Bloomberg

nastier than during the Asia Crisis). Valuations

everywhere are low: PE, based on (over-
optimistic) 2009 earnings forecasts, in the US is
9.2x, in Germany 7.5x and in the UK 6.8x. Asia
remains on a premium to global PE. But the fact
that we have reached the level that we have been
describing for months as rock-bottom must give at
least a little comfort.
How much risk is there left?
So, on our bottom-spotting check-list, it comes
down to risk. Investors have capitulated,
valuations are at rock-bottom, but have the
financial system risks been cleared up?
But corporate risk pricing continues to rise,
suggesting that while banks may be slightly more
willing to lend to each other they still do not want
to lend to companies. For example, the spread
over US treasuries of five-year BB+ rated Asian
corporate bonds has risen to 10.7% from 7.7% at
the end of September (Chart 9). Spreads have
continued to widen every day this week.

The fixed income markets are better at

pinpointing this than equities (fixed income
investors are much better at judging risk; equity
investors focus more on growth). Despite bank
recapitalisation packages in the US and Europe
and massive injections of liquidity by central

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 Equity Strategy
Pan-Asia abc
Issue no. 66

9. Spread over treasuries of 5-year Asian corporate bonds 10. Credit rating: upgrade/downgrade ratio

2000 100%
90%
1500
80%
1000 70%
60%
500 50%
40% 98 99 00 01 02 03 04 05 06 07 08
0
30%
Jul-06
Sep-06

Jan-07
Mar-07

Jul-07
Sep-07

Jan-08
Mar-08

Jul-08
Sep-08
May-06

Nov-06

May-07

Nov-07

May-08

20%
10%
AAA A BBB 0%
BB+ B+
Source: HSBC Source: HSBC, Bloomberg

What else could go wrong?  The impact of currency movements. With

If banks are now all nationalised or guaranteed,
why have credit markets continued to price in an
extraordinarily high degree of risk? The problem
is that there are still a lot of risks out there which
have not been dealt with – or even recognised.
For example:
 Corporate default risk. Asian companies
have started to go bust, four last Friday alone.
With the credit market frozen, companies are
almost completely unable to raise, or roll
over, debt. Singapore-listed FerroChina, for
instance, announced last week it was unable
to repay its debt: this was seemingly because
it was unable to raise working capital to
finance payables. Credit rating agencies have
only just started to downgrade Asian
companies, with upgrades:downgrades this
quarter so far running at 1:4 (Chart 10). As
worries about debt refinancing rise,
downgrades are increasingly likely. If
companies can’t raise money, any with high
debt/equity ratios or a large chunk of debt
maturing over the next six to 12 months will
be at risk.
risk aversion likely to remain high, selected
Asian currencies will be under pressure.
Korea – with external debt of 45% of GDP
and a currency that has depreciated by 30% in
the past three months – looks particularly
vulnerable. Issuers of foreign currency debt
could struggle to repay it. Moreover, many
borrowers and exporters hedged via
complicated derivatives such as knock-in
knock-out (KIKO) structures, which could
produce large losses. One example from
Korea: Sungjin Geotech, a maker of industrial
equipment, announced derivatives losses of
KRW153bn this week, almost equal to its
shareholders’ equity of KRW161bn.
 Credit default swaps. When corporates start to
default, buyers of protection via CDSs will ask
for payment. Will their counterparties be able to
pay up? The disruption in the CDS market
caused by Lehman Brothers’ defaulting on its
debt (and on CDSs it had sold) has been
tremendous. But the size of the market is
unknown: most estimates put it at USD60-
150trn. Even at the lowest end of the estimate
range, that is almost five times US GDP. In a
recession, the default rate on US sub-investment
grade debt typically rises to 10% (it was only
1% at the start of this year). Given that this
recession could be nastier than usual, the default

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 Equity Strategy
Pan-Asia
Issue no. 66
rate may be 15-20%. The impact of that on the
CDS market is impossible to quantify, but
surely will be nasty.
 Non-bank financial institutions. US and
European governments might have
recapitalised their major banks, but what
about insurance companies, auto loan
providers, hedge funds, small banks and other
financial institutions? They face the same
problems with toxic assets and the freezing-
up of funding markets. Will governments
have to bail these out, too? In the end,
probably. But when the problems surface,
they will scare markets again.
 Asian banks. While we agree that Asian
banking systems look considerably healthier
than those in Europe and the US, it does not
mean that they are without problems.
Loan/deposit ratios in both Korea and India
are over 100% – a problem when wholesale
funding has dried up. The problems with
Korean banks have been widely discussed,
but our banking team’s report Asia banks:
Dodging doomsday?, published yesterday
reveals weaknesses in Taiwan, too.
Taiwanese financial holding companies are at
risk of seeing profits turn negative and capital
adequacy ratios fall below minimum limits if
their credit costs rise and treasury assets
devalue further.
 Countries getting into trouble. Countries
with banking systems dependent on foreign
currency funding will not be able to bail them
out without foreign help. We have seen this
already in Iceland. Other countries and
regions that could be vulnerable to the credit
crunch include Pakistan, Hungary, Ukraine,
Dubai, Macau and the Baltic States. Expect
the IMF to have to come to the rescue. This
will also be an excellent opportunity for
China to use its USD1.9trn of FX reserves in
abc
a way that boosts its strategic power. (The
geopolitical ramifications of the last few
weeks’ events are clearly huge, too.)
Conclusion: wait until risk eases
We are happy, then, to reiterate the conclusion
from our Quarterly: “once the problems at the last
troubled financial institution are resolved…this
should mark the bottom for the stock market”.
The lesson of the 1907 financial crisis (read the
recently published The Panic of 1907 by Robert
Bruner and Sean Carr to understand why this is
the best historical analogy for the present) is that
the stock market is likely to bottom once the last
problem institution has been rescued, even if
economic growth subsequently tanks as a result of
the crisis. But we cannot say we have reached that
point yet.
Change to top stock picks
We are generally happy with our current top buy
and sell ideas (see table on p2), which emphasise
liquid, no-surprises names on the buy side, and
balance sheet risk on the sell side. However, we
are removing from the top sell ideas list
Sumitomo Mitsui Financial (8316 JP,
JPY528,000) since our analysts have raised the
rating to Neutral (V). They argue that, while
earnings are still likely to miss forecasts
massively this year, the sharp decline in the share
price in recent days now reflects this.
Valuation-wise the stock is on 16x HSBC’s
March 2010 forecast; our target price of
JPY600,000 is based on DCF analysis. The main
upside risks to the Neutral (V) rating are better
than expected performance this year or recovery
in sentiment towards financials. Main downside
risks are larger than expected loan losses, further
large bankruptcies and continued poor
performance of equities.
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Disclosure appendix
Analyst certification
The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject
security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no
part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained
in this research report: Garry Evans, Gary Chiu, Steven Li, Steve Man, Michelle Kwok, Mark Webb, Rajiv Sharma, Sumeet
Agrawal, Neale Anderson, Sean Yang, Eric Lin, Todd Dunivant, Shishir Singh, Frank Su, Brett Hemsley and Scott Foster

Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.

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 Equity Strategy
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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target
price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and
the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the
analysts' valuation for a stock.

From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which
identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors
should take.

Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of
the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the
stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts.
For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The
target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.

Rating distribution for long-term investment opportunities

As of 16 October 2008, the distribution of all ratings published is as follows:
Overweight (Buy) 51% (31% of these provided with Investment Banking Services)
Neutral (Hold) 33% (33% of these provided with Investment Banking Services)
Underweight (Sell) 16% (23% of these provided with Investment Banking Services)

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

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HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price Date Disclosure
BHARTI AIRTEL BRTI.NS 714.85 15-Oct-2008 6, 7
CHI MEI 3009.TW 18.75 15-Oct-2008 2, 5, 6, 7
CHINA EASTERN AIRLINES 0670.HK 1.17 15-Oct-2008 2, 5, 6, 7
CHINA RESOURCES POWER 0836.HK 17.00 15-Oct-2008 4
ICICI BANK ICBK.NS 414.15 15-Oct-2008 2, 5, 6, 7, 11
LARSEN & TOUBRO LART.BO 895.60 15-Oct-2008 2, 5, 6, 7
PETROCHINA 0857.HK 6.45 15-Oct-2008 4, 5
SINGAPORE AIRLINES SIAL.SI 12.92 15-Oct-2008 5, 6, 7
SK TELECOM 017670.KS 214000.00 15-Oct-2008 11
SUMITOMO MITSUI FINANCIAL 8316.T 622000.00 15-Oct-2008 11
SWIRE PACIFIC 0019.HK 57.30 15-Oct-2008 2, 4, 5, 6, 7, 11
THE LINK REIT 0823.HK 13.24 15-Oct-2008 5
TOKYO ELECTRON, LTD. 8035.T 3600.00 15-Oct-2008 6
Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 30 September 2008 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 August 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 August 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7 As of 31 August 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company.

Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company, please see the most recently published report on that company available at
www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 This report is dated as at 17 October 2008.
2 All market data included in this report are dated as at close 15 October 2008, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
4 As of 30 September 2008, HSBC beneficially owned 2% or more of a class of common equity securities of the following
company(ies) : PETROCHINA

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Disclaimer
* Legal entities as at 22 August 2007 Issuer of report
'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking The Hongkong and Shanghai
Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' Banking Corporation Limited
HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC
Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities Level 19, 1 Queen’s Road Central
and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Hong Kong SAR
Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Telephone: +852 2843 9111
Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Telex: 75100 CAPEL HX
Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Fax: +852 2596 0200
Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis
Website: www.research.hsbc.com
Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US'
HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC
México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. -
Banco Múltiplo, HSBC Bank Australia Limited.
This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong
regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to
retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Securities and Futures
Commission. All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If it is received by a customer
of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This
document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.
HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified;
HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness.
Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates
and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment)
and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have
assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to
or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or
relating to those companies.
HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S.
persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC
Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report.
In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a
representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking
Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and
304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions
specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in
whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary
Authority of Singapore. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited
(ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001).
Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective
entities make no representations that the products or services mentioned in this document are available to persons in Australia or are
necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular
investment objectives, financial situation or particular needs of any recipient.
In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for
any purpose.
© Copyright. The Hongkong and Shanghai Banking Corporation Limited 2008, ALL RIGHTS RESERVED. No part of this publication may
be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 258/09/2008

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Global Equity Strategy Research Team

Global Asia
Kevin Gardiner Garry Evans
Global Sector Head +852 2996 6916 garryevans@hsbc.com.hk
+44 20 7991 6714 kevin.gardiner@hsbcib.com
Leo Li
Europe +852 2996 6919 leofli@hsbc.com.hk

Robert Parkes Akane Nishizaki

+44 20 7991 6716 robert.parkes@hsbcib.com +81 3 5203 3943 akane.nishizaki@hsbc.co.jp

Vivek Misra Steven Sun

+91 80 3001 3699 vivek.misra@hsbc.co.in +852 2822 4298 stevensun@hsbc.com.hk

CEMEA Jacqueline Tse

+852 2996 6602 jacquelinetse@hsbc.com.hk
John Lomax
+44 20 7992 3712 john.lomax@hsbcib.com