Download Economic Growth Drivers

Equity Research Asia/Pacific
Economics Report
Economics Team
Asia/Pacific Economics
1. The Post September 11 World:
Cyclical and Structural Adjustments
2. China: Economic Growth Drivers
December 2001
Andy Xie (852) 2848 5220 [email protected]
1
Equity Research Asia/Pacific
Economics Report
Economics Team
The Post September 11 World
The Next Leg Down with US Consumption
Delayed Recovery Is the Bad News
Would Stimulus Work?
But Is It Just Cyclical?
US Slowdown: Cyclical or Secular?
Was It All a Bubble?
The Other Challenge
“Flying Geese” Are Dead
Specialize or Be Poor Again
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
2
Equity Research Asia/Pacific
Economics Report
Economics Team
The Post September 11 World - cont.
Tigers Have to Shrink Relative to China
Where to Look for New Winners
Asia Pacific Economic Forecast Summary
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
3
Equity Research Asia/Pacific
Economics Report
Economics Team
The Next Leg Down with US Consumption
•The US terrorist attacks
were a confidence shock.
US consumption was
maintained by borrowing and
was vulnerable to shock.
•After an IT business
investment-led downturn, US
consumption is likely to drive
the global economy down
another leg.
GDP Growth Forecast (YoY % Change)
2000
Global
US
Europe
Japan
Asia/Pacific
ex-China
Hong Kong
Taiwan
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
China
4.8
4.1
3.3
1.5
7.6
7.4
10.5
5.9
8.8
4.8
8.3
4.0
9.9
4.4
8.0
H1 01
1.9
-0.3
4.5
1.9
1.4
-0.7
3.2
3.4
1.7
3.3
1.8
1.9
7.9
2001E
Old
New
2002E
Old
New
Weight
(%)
2.1
1.4
1.8
-0.8
4.0
1.4
0.2
-1.4
3.0
2.7
0.9
2.5
1.5
2.0
7.5
3.4
2.6
2.5
0.2
5.6
3.9
3.2
2.6
5.0
3.5
3.5
3.3
5.3
4.0
7.8
100
57.3
6.4
12.1
17.9
5.9
3.5
2.9
3.6
4.8
42.7
1.8
1.0
1.6
-0.9
3.3
0.3
-0.3
-2.0
1.3
2.9
-0.6
2.7
-1.5
1.0
7.4
2.1
1.0
1.5
-1.0
4.3
2.3
1.8
1.0
3.0
2.9
2.5
2.6
3.0
2.1
7.0
E = Morgan Stanley Research Estimates
Source: Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
4
Equity Research Asia/Pacific
Economics Report
Economics Team
Delayed Recovery Is the Bad News
•The IT downturn has hit the
region hard. Consumer goods
exports have a lower elasticity
and will have a different impact
than IT on the region
GDP Growth Rate (YoY % Change)
14
12
China
10
Old Forecast
6
ex-China
4
Revised
Forecast
Old Forecast
2
0
M
ar
-9
Ju 4
lN 94
ov
M 94
ar
-9
Ju 5
lN 95
ov
M 95
ar
-9
Ju 6
lN 96
ov
M 96
ar
-9
Ju 7
lN 97
ov
M 97
ar
-9
Ju 8
lN 98
ov
M 98
ar
-9
Ju 9
l-9
N 9
ov
M 99
ar
-0
Ju 0
l-0
N 0
ov
M 00
ar
-0
Ju 1
lN 01
ov
M 01
ar
-0
Ju 2
lN 02
ov
-0
2
•We think the expected
recovery has been pushed out
by two quarters to 3Q02. The
delay increases pressure on
highly indebted companies, in
our view.
8
-2
-4
Revised
Forecast
-6
-8
Source: Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
5
Equity Research Asia/Pacific
Economics Report
Economics Team
Would Stimulus Work?
Europe: Fiscal deficit rises to 1.9% in 2001 from 1.6% in
2000. This has a stabilizer effect. Monetary policy bears
the burden of stimulus and is likely to aggressively follow
the Fed in future.
Japan: Unsterilized currency market intervention.
Supplemental budget for income support could come
soon, perhaps at 0.5% of GDP.
US: Leads the world in stimulus. US$75 billion in tax
cuts; US$125 billion could go into September 11 related
spending. Fed funds rate cut by 400bps.
The global economy should respond strongly soon. However, balance
sheet cleansing by consumers and corporates blunt impact of lower
interest rates. We predict recovery delayed to 3Q02.
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
6
Equity Research Asia/Pacific
But Is It Just Cyclical?
Economics Report
Economics Team
US demand has been the growth engine in East Asia. Is the
current downturn another cycle or is it a secular shift?
•If it’s purely cyclical, East
Asia can treat the current
downturn as before, even
though it’s more severe than
usual.
US GDP and Import from Pacific Rim (YoY % Change)
6
20
US GDP
5
•If the US economy is in a
secular downturn, East Asia
must find other demand
sources to grow.
4
15
10
3
5
2
US Imports from
Pacific Rim
1
0
-5
-1
-10
-2
-15
M
ar
Se 9 1
p9
M 1
ar
Se 9 2
p9
M 2
ar
Se 9 3
p9
M 3
ar
Se 9 4
p9
M 4
ar
Se 9 5
p9
M 5
ar
Se 9 6
p9
M 6
ar
Se 9 7
p9
M 7
ar
Se 9 8
p9
M 8
ar
Se 9 9
p9
M 9
ar
Se 0 0
p0
M 0
ar
-0
1
0
Source: Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
7
Equity Research Asia/Pacific
Economics Report
Economics Team
US Slowdown: Cyclical or Secular?
Cyclical
Secular
1) IT bubble has burst. The consumer
bubble is bursting. Once the excesses
are cleared, the US would resume 3.5%
trend growth rate.
1) Faster productivity in the 1990s was a
bubble phenomenon. After cleansing the
excesses, the US grows at 2-2.5%.
2) September 11 increases cost of doing
business. This slows the economy down
for a while before it is absorbed.
However, it only affects two quarters.
3) Terrorist organizations crumble under
pressure. Arab countries remain friendly
to the West.
2) The war on terror turns into a war
against Islam. Oil production is
permanently disrupted.
3) The US reacts to September 11 by
building a Fortress America: subsidizes
industries, erects tariffs on imports and
reduces immigration.
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
8
Equity Research Asia/Pacific
Economics Report
Economics Team
Was It All a Bubble?
Long Way to Fall?
Was the strong US
economy in the 1990s just
a bubble?
Suspicious characteristics:
1) Rising leverage
45000
1600
40000
S&P 500
35000
1400
1200
30000
Nikkei
1000
25000
600
15000
400
10000
200
5000
0
Jan-98
May-99
Sep-00
The answer should
determine policies
and strategies in Asia
20000
Sep-84
Jan-86
May-87
Sep-88
Jan-90
May-91
Sep-92
Jan-94
May-95
Sep-96
3) Rising investment/GDP
ratio
800
Sep-76
Jan-78
May-79
Sep-80
Jan-82
May-83
2) Dependency on foreign
capital
0
Source: Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
9
Equity Research Asia/Pacific
Economics Report
Economics Team
The Other Challenge
What justification is there for Taipei
salaries being 10 times Shanghai’s?
Your answer determines how economies,
stocks and currencies will unfold in this
decade.
In our view, there is absolutely no
justification for the difference!
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
10
Equity Research Asia/Pacific
Economics Report
Economics Team
‘Flying Geese’ Are Dead
• East Asian development has followed a flying geese pattern. The higher-income economies
are also higher up in the export value chain.
• China has caught up in basic conditions for mass production, such as infrastructure and
education. But wages don’t go up with a large surplus labor force. Hence, China is redefining
prices and encompasses the whole value chain. Flying geese are dear.
Wide Income Dispersion for Now
Japan
Hong Kong
Singapore
Taiwan
Korea
Malaysia
Thailand
Philippines
China
Indonesia
Total
Exchange Rate
Nominal
122
7.8
1.8
34.5
1282
3.8
44.9
50.8
8.3
8435
PPP
163
8.8
1.6
19.0
704
1.6
13.4
10.2
2.0
2198
GDP ($ billion)
Nominal
PPP
4,039
3,019
162
145
91
98
280
511
517
941
90
210
109
366
65
325
1,080
4,530
153
587
6,587
10,730
Pop Per Capita Income ($)
(million)
Nominal
PPP
127
31,781
23,751
7
23,657
21,055
4
22,558
24,285
22
12,585
22,911
47
10,938
19,913
23
3,854
9,015
63
1,738
5,833
71
917
4,577
1,266
853
3,578
210
730
2,802
1,840
3,580
5,832
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
11
Equity Research Asia/Pacific
Economics Report
Economics Team
Specialize or Be Poor Again
•Premium over China can no longer be sustained
by more capital
•Specialization could protect some of the existing
premium
– Finland specializes in telecom equipment and printing machinery.
It has retained a premium in Europe
– Indonesia and Thailand are complementary to China
– Singapore can act as the middleman between China and Indonesia
– Hong Kong can manage Pearl River Delta trade
– Korea and Taiwan must search for niches
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
12
Equity Research Asia/Pacific
Economics Report
Economics Team
Tigers Have to Shrink Relative to China
• Specialization will protect
some of the premium that
the tigers enjoy over China
but not all.
• Regardless of how
successful the tigers are at
transforming themselves,
their premium over China
will decline substantially this
decade, in our view:
– Are Finland’s wages
10 times Europe’s?
180
Post-1989 Slump
Fixed exchange rate
and disinflation
160
140
The Asian Crisis
120
China devalues to follow East
Asian model
Devalue again to
jump-start economy
100
Forecast post-2001
80
IT bubble
60
40
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
• The gap between China
and the tigers will narrow
via (1) faster growth in
China, (2) depreciation of
tigers’ currencies and (3)
renminbi revaluation.
GDP Ratio of Tigers to China (%)
Source: CEIC, Morgan Stanley Research
Tigers include Hong Kong, Korea, Singapore and Taiwan
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
13
Equity Research Asia/Pacific
Economics Report
Economics Team
Where to Look for New Winners
• Manufacturing should remain a primary source of
GDP growth but not increased wealth.
• Property bubble is gone and price appreciation
won’t support wealth creation, in our view.
• Wealth should grow in businesses that have
pricing power in a deflationary environment. They
should have brands, scale or intellectual property
(IP).
• The key themes for wealth creation are:
– Lifestyle: Consumption is income- rather than
lifestyle-driven, as in the past. Rising competition is
likely to create low-priced lifestyle. Companies that
cater to this trend should become valuable.
– Urbanization: China and others could create huge
cities in East Asia. This brings opportunity in urban
services and scale service business.
– Healthcare: Aging and growing income create the
perfect combination for health services.
– Technology: Maths is replacing experience in IP
creation. The law of large numbers of people will
likely apply to East Asia in IP production.
Growth Determines Performance
1991-97
1998-00
Avg. Annual Sales
1991-97
1998-00
Avg. RoA (%), 1997-00
Growth (%)
Consumer
14.7
Property
19.5
IT Hardware
23.9
Telecom
22.1
All ex-Banks
17.7
Avg. Nominal GDP Growth Rate (%)
16.2
ex-China
13
Avg. Real GDP Growth Rate (%)
8.3
ex-China
6.7
US Imports from Asia/Pacific
IT
18.0
Non-IT
11.6
Asia/Pacific
0.6
-3.7
13.2
3.8
7.1
8.2
7.6
8.9
15.0
7.8
5.8
4.5
8.3
10.7
5.2
7.1
7.4
4.2
2.7
12.5
11.9
Japan
Avg Return on Asset (RoA), 1991-2000
Consumer
7.5
4.7
Real Estate
6.7
2.9
IT Hardware
8.7
4.6
Telecom
13.7
5.0
All ex-Banks
7.1
4.5
Avg. Annual Sales Growth (%), 1991-2000
Consumer
10.5
-2.4
Real Estate
12.5
1.5
IT Hardware
20.7
3.8
Telecom
16.6
7.7
All ex-Banks
13.7
0.4
Europe
US
10.9
4.9
6.3
10.0
7.9
13.5
6.9
9.4
9.6
9.8
7.5
10
2.4
9.9
5.6
8.4
8.8
8.7
12.7
7.1
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
14
Equity Research Asia/Pacific
Economics Report
Economics Team
Asia/Pacific Economic Forecast Summary
Real GDP Growth (%)
Non Japan Asia
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
1997
1998
1999
2000
2001E
2002E
6.3
8.8
5
5.6
4.7
5
7.3
5.2
8.4
6.7
-1.7
2.1
7.8
-5.3
6.4
-13.1
-6.7
-7.4
-0.6
0.1
4.6
-10.2
6.5
7.1
3
6.3
0.8
10.9
6.1
3.4
5.9
5.4
4.2
7.3
8
10.5
5.8
4.8
8.8
8.3
4
9.9
5.9
4.4
3.7
7.4
-0.3
4.8
2.9
2.2
-0.2
2.7
-2.7
-2
1
4.5
7
1.8
5.2
2.9
3.5
2.5
2.6
3
1
2.1
4.1
2.8
5.8
7.3
6.2
4.4
2.7
5.1
2
0.9
5.6
6.2
-0.8
2.8
13.2
58
7.5
5.3
9.7
-0.3
1.7
8.1
1.7
–1.4
–4.0
4.8
24.1
0.8
2.8
6.7
0.4
0.2
0.3
1.5
0.4
–3.7
4.2
3.8
2.3
1.6
4.3
1.3
1.3
1.6
2.4
1
-1.3
3.6
11.4
4.1
1.3
6.4
1.3
0.3
1.7
2.1
1.5
0
4
8.9
2
1.4
5.8
0.8
0.8
1
CPI Inflation (%, Period Average)
Asia Ex-Japan
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Source: CEIC, Morgan Stanley Research, E = Morgan Stanley Research Estimates
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
15
Equity Research Asia/Pacific
Economics Report
Economics Team
Asia/Pacific Economic Forecast Summary-cont.
Current Account as % GDP
Asia/Pacific
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Exchange Rate (Per US$, Period End)
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
1997
1998
1999
2000
2001E
2002E
1.8
3.3
-3.6
-0.8
-2.3
-1.7
-5.9
-5.3
19.0
2.5
-2.0
6.1
3.1
1.8
-1.6
4.4
12.7
13.2
2.4
24.6
1.3
12.7
4.2
1.6
6.6
-0.6
4.1
6.0
15.9
10.3
25.9
2.9
9.3
3.5
1.9
5.4
-1.1
5.2
2.4
9.4
12.5
23.6
2.9
7.6
2.7
1.4
4.5
-1.1
4
2.5
7.8
3.7
23.9
5.3
3.8
2.1
0.6
4.4
-1.3
2.9
2.4
6.3
3.5
21.4
5.5
3.3
8.29
7.75
39.20
4,650
1,415
3.89
40.00
1.67
32.60
45.20
8.28
7.75
42.70
8,025
1,208
3.80
39.10
1.66
32.20
36.20
8.28
7.77
43.50
7,100
1,145
3.80
40.30
1.67
31.40
38.20
8.28
7.80
46.70
9,595
1,260
3.80
50.00
1.73
33.20
43.10
8.30
7.80
49.00
13,000
1,280
3.80
53.50
1.88
36.00
45.50
8.20
7.80
51.20
13,000
1,350
3.80
53.00
1.80
35.00
44.50
Source: CEIC, Morgan Stanley Research, E = Morgan Stanley Research Estimates
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
16
Equity Research Asia/Pacific
Economics Report
Economics Team
China Economics
Economic Growth Drivers
December 2001
Andy Xie (852) 2848 5220 [email protected]
17
Equity Research Asia/Pacific
Economics Report
Economics Team
Economic Growth Drivers
Why Are Some People Poor?
How Does China Accumulate Capital?
How Does China Improve Human Capital?
How Does China Improve Its System?
Is China Ready for Takeoff?
Scale and Low Base Offer High Potential
Capital Market Reform: The Last Piece
Stock Market: Key to Corporate Development
Capital Efficiency Remains Low
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
18
Equity Research Asia/Pacific
Economics Report
Economics Team
Economic Growth Drivers -Cont.
Structural Uplift I: Production Relocation
Structural Uplift II: Infrastructure Externality
Structural Uplift III: Super-Scale Urbanization
Structural Uplift IV: Technology
Structural Uplift V: Asset Sales Boost Consumption
Take-off Is Likely After WTO Restructuring
The Next US$10 Trillion Economy
China: Economic Forecast Summary
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
19
Equity Research Asia/Pacific
Economics Report
Economics Team
Why Are Some People Poor?
• A person is poor because a) he didn’t
go to school - no human capital, b) he
can’t afford a machine - no physical
capital, c) the society doesn’t offer
opportunities - the system is
inefficient.
• Becoming rich is, therefore, a
combination of capital accumulation
and improving system efficiency.
Per Capita Income in 2000 (US$)
US
Japan
Hong Kong
Singapore
Taiwan
Korea
Malaysia
Thailand
Philippines
China
Indonesia
Nominal
35,900
31,781
23,657
22,558
12,585
10,938
3,854
1,738
917
853
730
Nominal/
PPP PPP (%)
35,900
100
23,751
134
21,055
112
24,285
93
22,911
55
19,913
55
9,015
43
5,833
30
4,577
20
3,578
24
5,832
13
Gross Fixed Capital Formation (% of GDP)
1970-79
1980-89
1990-97
1998-00
China Hong Kong
34.9
24.6
36.1
25.3
39.3
29.7
37.1
27.5
Taiwan
26.8
21.9
23.6
23.3
Korea
30.7
30.5
36.8
25.7
Japan Singapore
36.0
29.3
39.3
29.4
35.7
26.3
33.1
Source: Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
20
Equity Research Asia/Pacific
Economics Report
Economics Team
How Does China Accumulate Capital?
High savings rate and FDI
One-child policy has decreased the dependency ratio and raised
the savings rate substantially in 1980s. Savings were put into
infrastructure and education. China now has:
a) a national highway system,
b) a national power grid with ample generating capacity,
c) a national telecom system with the largest mobile system in the
world,
d) a national aviation system, and
e) US$250 billion in export earning power
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
21
Equity Research Asia/Pacific
Economics Report
Economics Team
How Does China Improve Human Capital?
Increase enrollment
1) Nine-year education has become universal
2) Technical schools are readily available after secondary
education
3) University system has been massively expanded. The total
enrollment has increased to over 2 million a year (11% of age
group) from 350,000 (or 1.5% of age group) 20 years ago.
4) Post-graduate education has increased significantly.
200,000 have gone abroad for graduate study. Over 20% of
these have returned.
5) Expatriate population has risen to 250,000. About 500,000
Taiwanese live in China.
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
22
Equity Research Asia/Pacific
Economics Report
Economics Team
How Does China Improve Its System?
Join the WTO
1) China used incremental measures to improve incentives for
production. For example, family responsibility system in rural
sector, corporatization of state-owned companies, township- and
village-owned enterprises, special economic zones, foreign JVs,
preferential tax treatment for foreign companies or export, etc.
2) As China has become big, the complicated incentive system is
too difficult to administer. The distortion has created a lot of nonperforming loans. Joining the WTO levels the playing field for
everyone and connects China’s system with the global norm.
Hence, China’s low cost structure is fully unleashed into the
global economy.
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
23
Equity Research Asia/Pacific
Economics Report
Economics Team
Is China Ready for Takeoff?
Takeoff: Fast growth and appreciating currencies
1) China used devaluation to make itself more attractive. Its
currency has been stable for six years. However, foreign capital
continues to pour in, as it has used system improvements to
attract foreign capital.
2) Although devaluation strategy is over, currency appreciation is
still five years away. China has 300 million surplus workers; 18
million join workforce every year. China faces pressure to
appreciate its currency, but it can stop this by expanding money
supply, which doesn’t cause inflation as wages are kept down by
surplus labor. China to have fast growth and stable currency.
3) Beyond 2006 China’s surplus labor may have declined
sufficiently to allow currency appreciation to begin.
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
24
Equity Research Asia/Pacific
Economics Report
Economics Team
Scale and Low Base Offer High Potential
Prices don’t rise
1) Surplus labor keeps wages down. Hence, though total demand
rises with more employment, individual purchasing power is not
rising to allow price increases.
2) However, as more buyers emerge, businesses can leverage
scale to reduce costs, which is the only way to maintain or
increase margins.
3) The big payoff will happen, when surplus labor is sufficiently
reduced to allow wages, prices and currencies to rise at the same.
Between 2006-16 this virtuous cycle will emerge, in our view.
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
25
Equity Research Asia/Pacific
Economics Report
Economics Team
Capital Market Reform: The Last Piece
1) China has high competition in
the goods market, a flexible labor
market, and commitments to a
WTO-defined entry-exit
environment.
350
Red Chip
300
(1997=100)
H Share
250
A Share
200
B share
150
100
50
0
7/15/2001
7/15/2000
7/15/1999
7/15/1998
7/15/1997
7/15/1996
7/15/1995
7/15/1994
7/15/1993
2) The capital market is the only
piece that hasn’t fallen into place.
The banking system is saddled
with bad debts. The domestic
stock market is a bubble. Offshore
listed companies are hampered by
poor corporate governance.
The Stock Market Bubble
Source: Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
26
Equity Research Asia/Pacific
Economics Report
Economics Team
Stock Market: Key to Corporate Development
Chinese corporate development
unfolds in three directions:
1) Foreign ownership through
rising FDI
2) Corporatization and listing of
SOE’s to sustain government
ownership in key sectors
3) Nurturing private sector for
employment generation
25
21.1
Domestic equity fund raising (US$ bn)
20
20
Overseas equity fund raising (US$ bn)
16.5
15
11.5
10.7
10
5
5
4.1
4.2
3.3
1.7
0.8
2001
2000
1999
1998
1997
1996
1995
1992
1994
0.1
-
1.0 1.41.3 1.2
0.6
1993
0.1
-
1.1
0.1
1991
0
10.0
8.9
1990
If the stock market fails in
allocating capital to efficient
companies, China will become
largely foreign owned, which may
not be in the best interest of the
Communist Party in the long term.
Stock Market Fund Raising
Source: Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
27
Equity Research Asia/Pacific
Economics Report
Economics Team
Capital Efficiency Remains Low
Share in Total Fixed Investment (%)
Capital efficiency remains low:
1) State sector remains
dominant in capital formation
2) Private sector remains small
3) Household capital formation
(e.g., property) is just
beginning.
State and
collective
Enterprises
FDI (RHA)
18
16
14
12
10
8
6
4
2
0
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
4) Foreign direct investment is
the main source of efficiency
100
90
80
70
60
50
40
30
20
10
0
Source: Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
28
Equity Research Asia/Pacific
Structural Uplift I: Production Relocation
Japan’s Imports (US$ billion)
100
60
90
China
Hong Kong
Taiwan
50
80
China
Hong Kong
Taiwan
70
60
40
50
30
40
20
30
20
10
10
0
99
19
97
19
95
19
93
19
91
19
89
19
99
19
97
19
95
19
93
19
19
91
0
89
• Global downturn and
WTO are forcing the
pace of relocation.
Half of Taiwan’s
manufacturing sector
survives on protection
and must seek lower
production costs after
WTO. The IT sector is
competitive, but has
come under a margin
squeeze in the global
downturn. Moving to
China is the only way
to preserve margins.
US Imports (US$ billion)
19
• Taiwan is following HK
in relocating its
manufacturing to
China. China’s labor
and land costs are
one fifth of Taiwan’s.
87
Economics Team
19
Economics Report
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
29
Equity Research Asia/Pacific
Economics Report
Economics Team
Structural Uplift II: Infrastructure Externality
Economic development has
been restricted to 20% of the
population along the
southeastern seaboard, which
now accounts for 50% of GDP
and 75% of exports.
Mid- and Upper-Yangtze valley
has 30% of population, but 20%
of GDP and 3% of exports. The
population is dense enough to
make infrastructure pay.
Northeast
Pop = 64 mn
GDP = US$61 bn
Exp = US$12 bn
West
Pop = 51 mn
GDP = US$38 bn
Exp = US$1.5 bn
Northern Plain
Pop = 157 mn
GDP = US$97 bn
Exp = US$4.5 bn
Mid/Upper Yangtse
Pop = 371 mn
GDP = US$244 bn
Exp = US$9 bn
The western development
program is likely to mainly create
infrastructure for the intra-region
and access to the coastal
region. The Three Gorges Dam
gives deepwater port access to
Sichuan province.
Southwest
Pop = 128 mn
GDP = US$70 bn Exp
= US$3.8 bn
Bohai Basin
Pop = 224 mn
GDP = US$270 bn
Exp = US$45 bn
Korea
Pop = 47 mn
GDP = US$398 bn
Exp = US$172 bn
Lower Yangtse
Pop = 138 mn
GDP = US$232 bn
Exp = US$72 bn
Pearl River
Delta
Pop = 128 mn
GDP = US$325 bn
Exp = US$130 bn
Taiwan
Pop = 22 mn
GDP = US$285 bn
Exp = US$148bn
Development of North and
Northwest requires water, which
will be available in 15 years.
Source: CEIC, CIA, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
30
Equity Research Asia/Pacific
Economics Report
Economics Team
Structural Uplift III: Super-Scale Urbanization
• Urbanization lifts labor productivity and
requires capital. China has the high
savings rate to make it happen.
Further, China can take advantage of
massive economies of scale to reduce
per-capita cost of urbanization.
No Migration: Higher Relative Population
• Hong Kong/Shenzhen already has a
population of 14 million and will likely
reach 20 million by 2010. Shanghai has
already hit 16 million and will likely
Population Density Looks Fine But Good Land Is Scarce
reach 22 million by 2010.
Altitude
•China could
have 15 cities
with over 15
million people by
2015 and 30
cities with over
30 million by
2030.
Population
Density
Country
(people/sqkm)
China
123
France
108
Germany
235
Japan
336
UK
239
US
30
<25 m
25-100
100-500
500-1000
1000-2000
2000-3000
>2000 m
Total
Area
Population
(,000
(% of
(% of
sqkm)
Total) (million)
Total) Density
375
4
228
19.6
608
584
6.2
267
23
458
1648
17.4
355
30.6
216
1517
16.1
141
12.2
63
2291
24.2
129
11.1
56
572
6.1
30
2.6
52
2463
26.1
10
0.9
4
9448
1160
123
Source: LLASA LUC-GIS
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
31
Equity Research Asia/Pacific
Economics Report
Economics Team
Structural Uplift IV: Technology
• Less expensive and better technologies allow China to leapfrog competitors, lower costs and
accelerate the pace of development, especially in communication, transportation and
urbanization.
• Communication capex cost has declined by 80% or more. China is making advanced
communication tools available to consumers with low per-capita incomes.
• Production of transportation capacity has declined by 50% in a decade. New bullet train
technology could lower costs further. Inter-province expressways now reach 16,000 km, from
zero in 1988.
• China could accumulate intellectual property soon. IP acquisition has become more dependent
on math computation rather than experience, which favors China with its large population and
effective mass education.
1988
1990
1995
2000
Mobile Subs
(million)
0.0
0.0
3.6
85.3
Freight Trafffic Passenger Traffic
(Ton trillion km)(Person trillion km)
1.9
0.53
2.2
0.47
2.9
0.61
4.1
1.17
Source: China Statistical Yearbooks
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
32
Equity Research Asia/Pacific
Economics Report
Economics Team
Structural Uplift V: Asset Sales Boost Consumption
• Households increased
deposits less last year, as
they put an extra Rmb54
billion into the stock
market and Rmb75 billion
more than last year into
government bonds and
property.
• In our view, the
government can sell
sufficient assets to cover
its liability and boost
consumption when it
becomes necessary.
Source: CEIC, Morgan Stanley
Allowing Households to Save Money
(Increase, Nominal
Rmb billion)
GDP
1994
1213
1995
1172
1996
941
1997
658
1998
493
1999
379
2000
749
Savings Deposit
Adjusted for
Inflation
546
212
739
410
945
724
760
659
722
757
809
880
471
469
Government Debt
Adjusted for
Inflation
68
23
67
24
66
39
56
45
92
96
175
183
250
250
Government Balance Sheet (US$ billions)
Liability
Household
savings deposit
Foreign Debt
Fiscal bonds
Unfunded
social welfare
W elfare cost
For SOE layoffs
Coins and Notes
750
Total
1,660
Andy Xie (852) 2848 5220 [email protected]
150
100
350
150
160
Assets
Telecom
W ireless
Fixed
Cable
Other
Power
Transportation
Manufacturing
Real estate
Services
F/X Reserves
200
150
100
50
120
100
300
200
100
155
1,475
Please refer to important disclosures at the end of this report.
33
Equity Research Asia/Pacific
Take-off Is Likely After WTO Restructuring
Economics Report
Economics Team
How Did Other Asian Economies Take Off
• A developing economy
takes off when rapid
growth and real
currency appreciation
occur together.
4500
4000
• China has had fast
growth but a weak
currency for 20 years
due to high demand for
jobs and a low level of
efficiency.
Japan's GDP
(1985 $, 1955=100)
3000
2500
Taiwan's GDP
(1961 $, 1961=100)
2000
Korea's GDP
1500
(1970 $. 1970=100)
1000
500
China's GDP
(1981 $, 1981=100)
0
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
• The restructuring
timetable for joining the
WTO will likely lift the
level of efficiency and
remove barriers to high
growth. China could
experience a takeoff
between 2006-15.
3500
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
34
Equity Research Asia/Pacific
Economics Report
Economics Team
The Next US$10 Trillion Economy
• If WTO-related reforms China’s GDP (US$ billions, 2000 $)
are carried out, China’s 16,000
economy could be worth
US$10 trillion by 2020. 14,000
• If China implements
WTO-plus reforms, the
economy could reach
US$10 trillion by 2015.
• If reforms fail and China
remains inefficient, the
economy could hit
US$10 trillion by 2025.
10,000
8,000
Aggressive
Restructuring
6,000
WTO
Scenario
Business
as usual
4,000
2,000
2025E
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2014E
2013E
2012E
2011E
2010E
2009E
2008E
2007E
2006E
2005E
2004E
2003E
2002E
2001E
2000
• Possible impediments:
(1) instability,
(2) corruption,
(3) environmental
degradation, and
(4) containment by the
West. Current reforms
appear positive for
China.
12,000
Source: CEIC , Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
35
Equity Research Asia/Pacific
Economics Report
Economics Team
China Economics
Privatization Success
December 2001
Andy Xie (852) 2848 5220 [email protected]
36
Equity Research Asia/Pacific
Economics Report
Economics Team
Privatizations Completed (1999 - 2001)
Date
Privatised Entity
Am ount Raised (US$ m n)
25 Jun 1999
Shandong International Pow er Development
299
28 Oct 1999
China Telecom
2,000
31 Jan 2000
Beijing Capital International Airport
231
30 Mar 2000
PetroChina
2,891
16 Jun 2000
China Unicom
5,651
12 Oct 2000
Sinopec
3,462
31 Oct 2000
China Mobile
6,867
21 Feb 2001
CNOOC
1,431
05 Dec 2001
Alimunium Corporation of China
458
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
37
Equity Research Asia/Pacific
Economics Report
Economics Team
– On October 12, 2000,
Morgan Stanley Dean
Witter priced the largest
Chinese H share IPO in
history for China
Petroleum and Chemical
Corporation (“Sinopec”)
– Sinopec was priced at a
43.4% and 1.9% premium
to PetroChina’s consensus
2000E and 2001E P/E,
respectively. It was also
priced at a 19.5% premium
to Sinopec’s NAV
(PetroChina was priced
only at a 10% premium to
its NAV)
– Landmark pre-IPO
restructuring and
corporatization
achievement
– Significant strategic
investment in the IPO from
Exxon Mobil, the Royal
Dutch Shell Group and BP
Amoco
Case Study - US$3.46Bn IPO for China Petroleum and Chemical Corporation
The Largest Ever Chinese H Share IPO
Offering Summary
Transaction Highlights
Issuer:
China Petroleum and Chemical Corporation
(“Sinopec”)
Pricing Date:
October 12, 2000
Offer Size (Pre-Greenshoe):
- % Pro forma TSO
US$3.46Bn
20.0%
Total Number of H shares/ADSs Offered:
16,780,488,000 Shares / 159,414,640 ADSs
– Largest ever Chinese H share IPO
– Third largest ever Chinese IPO in history
– Extremely successful despite turbulent market conditions and fragile investor
sentiment towards investing in new issues:
• Over US$4.1 billion of institutional and retail demand (over 3x subscribed)
• Over US$710 million of demand in Hong Kong Public Offer (over 4x subscribed)
- Greenshoe (15% of shares offered to
public):
1,258,536,000 H Shares / 12,585,360 ADSs
- ADSs Ratio:
100 H Shares for 1 ADS
Offering Structure:
Hong Kong Public Offer – 5%
Institutional Placement – 45%
Strategic/Corporate investors – 50%
Offer Price:
HK$1.61 per H share
US$20.645 per ADS
Price Range:
HK$1.48 – HK$1.79
Listings:
Stock Exchange of Hong Kong
New York Stock Exchange
London Stock Exchange
Use of Proceeds:
Funds for expansion and debt reduction
10% to parent company
Joint Global Coordinators & Joint
Bookrunners:
Morgan Stanley Dean Witter
China International Capital Corporation
Major Indices and Comp Performance Since PreMarketing (9/11/2000)
– Priced at attractive valuations:
• 43.4% premium to PetroChina’s consensus 2000E P/E
• 1.9% premium to PetroChina’s consensus 2001E P/E
• 19.5% premium to Sinopec’s NAV (PetroChina was priced only at a 10% premium to its
NAV)
– Landmark pre-IPO restructuring and corporatization achievement:
• 15 month process (from mandate) that involved the restructuring of a Chinese SOE
comprised of approximately 100 multi-tiered, independent and cross-competitive
organizations encompassing approximately 10,000 separate companies
• Significant balance sheet restructuring / rating agency process - achieved investment grade
rating (BBB-) by S&P
• Significant regulatory restructuring
– Significant strategic investment in IPO (committed prior to IPO) from Exxon
Mobil, The Royal Dutch Shell Group, BP Amoco, Asea Brown Boveri, Cheung
Kong, Hutchison Whampoa, Henderson Group and Hong Kong & China Gas
– Emphasizes MSDW’s equity franchise in Asia: With this transaction, Morgan
Stanley has lead-managed 6 equity-linked offerings of US$1 billion or above
for Non-Japan Asia issuers since 1998, more than any other underwriter
Breakdown of Demand
Roadshow
Launched
105
Pricing
100
Syndicat e
U.S.
95
12%
21%
90
Morgan
85
Pre-Marketing
Launched
80
Asia &
PWM
St anley &
ROW
27%
CICC
52%
75
52%
Europe
70
27%
9/ 11/ 00
9/ 14/ 00
9/ 19/ 00
9/ 22/ 00
9/ 27/ 00
10/ 02/ 00
10/ 05/ 00
HONG K ONG HA NG SE NG
DOW JONE S 30 I NDUST RI A LS 30
NA SDA Q COM P OSI T E I NDE X
HONG K ONG HA NG SE NG CHI NA
HONG K ONG HA NG SE NG CHI NA
S&P 500 ST OCK I NDE X 500 ST OCK S
Source
10/ 10/ 00
P E T ROCHI NA CO CNY 1 'H'SHS
FactSet
Andy Xie (852) 2848 5220 [email protected]
Dean
10/ 13/ 00
Wit t er
9%
Institutional By
Region(1)
Total Demand By Type
Note: (1) Excluding strategic, corporate and retail investors
Please refer to important disclosures at the end of this report.
138
Equity Research Asia/Pacific
Economics Report
Case Study - US$3.46Bn IPO for China Petroleum and Chemical Corporation
Economics Team
The Sinopec Restructuring Story
– One of the most complex
restructuring assignments
in MSDW history
– MSDW was the key driver
of the restructuring effort
– Actively supported
lobbying efforts with the
State Council
– Effectively led and
achieved positive change
in Sinopec’s corporate
culture resulting in
genuine focus on
shareholder value creation
and the development of
systems and processes to
support it
– A blue print for Chinese
SOE reform
The creation and corporatization of Sinopec was part of a massive restructuring effort:
– Restructuring of a Chinese SOE comprised of approximately 100 multi-tiered, independent and
cross-competitive organizations encompassing approximately 10,000 separate companies
• 1.2 million employees
• Huge and sprawling geographic spread of assets; very diverse scale/efficiency and financial profile
of the assets
• Significant operations outside of core business areas
– Unprecedented accounting process
• KPMG Asia’s largest audit process ever - 8 month process
• 450 full time accountants for first 8 months, 260 full time accountants for year 2000 interim audits
– Creation of ListCo and Non-ListCo holding companies
• Transfer of core assets (and related liabilities) to Sinopec ListCo, residual assets remain with parent
• Non-compete agreements, hundreds of related party contracts worth in excess of US$5 Bn
– Significant balance sheet restructuring/rating agency process
 US$4.0 billion debt-to-equity swap with domestic banks prior to IPO
 US$4.0 billion debt restructuring with parent
 Investment grade rating (BBB-) by S&P
– Important regulatory restructuring
• Liberalizing refined products pricing structure unlocked substantial value and eliminated regulatory
uncertainty
Landmark restructuring and corporatization story - 15-month process (from mandate) that was driven by
senior management and the Morgan Stanley Dean Witter team and was a primary factor in the success of the
IPO
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
339
Equity Research Asia/Pacific
Economics Report
Economics Team
– Succeeded in articulating
and quantifying in simple
terms a rather complex
investment story
– The primary energy
interface with the Chinese
consumer
– A pure play on China’s
growth potential
– Superior growth and
returns to PetroChina
– Less exposed to crude oil
volatility
– Conditions in place to
achieve and surpass
growth and efficiency
objectives
Case Study - US$3.46Bn IPO for China Petroleum and Chemical Corporation
Positioning Sinopec - An Attractive Growth Story / Premium to Petrochina
The key to differentiating Sinopec (in particular from PetroChina) was in highlighting its superior
growth and return profile, which is driven by a number of notable structural factors:
– China is the world’s most attractive energy market
• Unprecedented absolute and relative growth potential
– Sinopec is best positioned to capture China’s growth potential
• The Company’s principal market covers the highly attractive southern and coastal regions (73% of
China’s population and 78% of GDP)
• Sinopec’s dominant infrastructure and networks in its principal market establish insurmountable
barriers to entry, even post-WTO
• Unprecedented dominance in a consolidating market gives it unique pricing power
• End-consumer orientation (versus pure commodity play) leaves it highly leveraged to China’s
growth
– Sinopec will continue to benefit from a highly favorable regulatory and industry environment
• Recent regulatory changes toward a liberalized industry structure are to the benefit of Sinopec
• Leveraged to cycle improvements in the refining and chemicals, but not dependent upon them
• The effect of the WTO will be gradual and largely mitigated
– Sinopec has focused strategies for growth and returns across all of its business segments and the
conditions to achieve its objectives are in place
• Sinopec is aggressively pursuing sustainable and profitable growth opportunities
• Sinopec is taking advantage of the benefits of consolidation and corporatization by implementing a
comprehensive cost cutting and productivity improvement programs
• Sinopec’s incentivized management, its centralized corporate structure, newly implemented
advanced information systems and its financial discipline ensure its ability to meet its objectives
Despite lack of a strong track record, a difficult market environment and other uncertainties,
Sinopec at pricing was able to achieve a slight premium to PetroChina, implying a large premium
on a fully-distributed basis
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
440
Equity Research Asia/Pacific
Economics Report
Case Study - $4.92 Bn IPO for China Unicom Limited
Economics Team
The Largest Chinese IPO in History
– On June 16, 2000,
Morgan Stanley Dean
Witter placed the
largest Chinese IPO in
history - having
generated over $16Bn
in total demand
Offering Summary
– China Unicom was
priced near the highend of the final price
range of HK$13.80 HK$16.00 at HK$15.58,
which is 19.8% above
the mid-point of the
initial price range
Initial Price Range:
Final Price Range:
Offering Structure:
– Asia, U.S., and Europe
institutions generated
35%, 46% and 19% of
the total institutional
demand
Issuer:
Pricing Date:
Offer Size:

% Pro forma TSO
Number of ADSs/Shares Offered:
ADS Ratio:
Offer Price:
Listings:
Use of Proceeds:
Joint Global Coordinators & Joint
Bookrunners:
Offering Highlights
China Unicom Limited
June 16, 2000
US$4,916 MM (Pre-Greenshoe)

20.18%
245,912,700 ADSs/2,459,127,000 Shares
10 Shares for 1 ADS
HK$15.58 per share
US$19.99 per ADS
HK$11.50 – HK$14.50
HK$13.80 – HK$16.00
Hong Kong Public Offer

5%
Institutional Placement

95% (including strategic investor)
Stock Exchange of Hong Kong, New York
Stock Exchange
To expand and upgrade Unicom’s cellular,
long distance and data networks, as well
as the fiber optic transmission network
Morgan Stanley Dean Witter
China International Capital Corporation
Breakdown of Allocation
by region
Comps Performance since Pre-marketing (5/12/00)
Indexed to 100
140
Pre-marketing
130
launched
120
– Largest ever Chinese IPO in history
– Largest ever international equity distribution by an Asian issuer
– Largest Hong Kong Public Offer IPO which generated
approximately 3x of demand
– Over US$ 15 billion of institutional demand (approximately 4x
subscribed)
– Priced at a 19.8% premium to the mid-point of the initial price
range (HK$13.00) and near the top of the revised pricing range
of HK$13.80 - HK$16.00
– Highly successful marketing program:The Company met with
88 institutions in one-on-one meetings during 3 weeks of
roadshow in Asia, Europe and US, achieving an one-on-one hit
ratio of 100%, 83% and 91% in Asia, U.S. and Europe
– Emphasis of MSDW equity franchise in Asia: With this deal,
Morgan Stanley has lead-managed 4 equity offerings of US$ 1
billion or more for Non-Japan Asian issuers since 1998
Emerging
Roadshow launched
Asia & ROW
33%
CTHK
110
100
LD/Data
90
Developed
80
5/12/00
Source
U.S.
51%
5/18/00
5/24/00
5/30/00
6/05/00
6/09/00
6/15/00
CTHK
Developed (3)
Emerging (2)
Long Distance/Data (4)
Europe
16%
Factset
Notes
1. As of June 16, 2000.2.
Andy Xie (852) 2848 5220 [email protected]
Please refer to important disclosures at the end of this report.
41
Equity Research Asia/Pacific
Economics Report
Privatization of Aluminum Corporation of China Limited - A Case Study
Economics Team
Pre-Greenshoe Case Study
– On December 5, 2001,
Morgan Stanley priced the
IPO for Aluminum
Corporation of China
(“Chalco”), re-opening
international equity capital
markets for Asia Pacific
issuers
Offering Summary
– Chalco was priced at
premiums of 94% and 64%
to PetroChina’s and
Sinopec’s 2001E P/E,
respectively. It was also
priced at a 22% premium
to its own NAV; Sinopec
and PetroChina IPOs
priced only at 19% and
10% premiums to NAV,
respectively
– Over 70% one-on-one hit
ratio in each region
– Significant strategic
investment in the IPO from
ALCOA
– S&P “BBB” investment
grade rating
Transaction Highlights
Aluminum Corporation of China (“Chalco”)
Issuer:
Pricing Date:
December 5, 2001
Offer Size (Pre-Greenshoe):
- % Pro forma TSO
US$457.9MM
25.0%
Total Number of H shares/ADSs Offered:
2,588,236,000 Shares / 25,588,236 ADSs
- Greenshoe (15% of shares offered to
public):
Not Yet Exercised
100 H Shares for 1 ADS
Hong Kong Public Offer – 10%
Offering Structure:
Institutional Placement – 58%
Strategic Investor (ALCOA) – 32%
Offer Price:
HK$1.38 per H share
US$17.69 per ADS
HK$1.15 – HK$1.45 / US$14.74-18.59
Price Range:
Listings:
Stock Exchange of Hong Kong
New York Stock Exchange
Use of Proceeds:
Funds for expansion, debt reduction, and
general corporate purposes
10% secondary sale for mandatory
contribution to PRC social security fund
Joint Global Coordinators & Joint
Bookrunners:
Morgan Stanley
China International Capital Corporation
Major Indices and Comp Performance Since PreMarketing (11/5/2001)
Pre-Marketing
Launched
• First Asia Pacific ADR offering since September 11th
• Second largest ADR offering from Asia Pacific region in 2001
• Second major equity issue out of China this year after CNOOC’s IPO completed 10 months ago
– Successfully marketed “deep cyclical” equity offering despite little visibility in
- ADSs Ratio:
160
– First Metals & Mining sector equity issue out of China since 1998
– Reopens international equity capital markets for Asia Pacific region
global economic recovery during uncertain and volatile equity and aluminum
commodity market conditions
– Priced at attractive valuations - premium to Chinese SOE comparables despite
challenging market conditions:
• 24% – 90% premium to 2001 P/E multiples of Chinese SOE comparables
• 22% premium to Chalco’s own NAV; Sinopec and Petrochina priced at only 19% and 10%
premiums to their own NAVs, respectively
– Exceptional quality and breadth of institutional demand:
• Over US$2.8 billion of institutional and retail demand (over 10x subscribed)
• Top global and Tier 1 institutions constitute about US$1.5 billion or 60% of total institutional
demand
• US$320 million of high quality supplemental orders from top institutions that did not have a
one-on-one meeting with management
• Hong Kong Public Offer fully covered
– Redefines nature of strategic investment for Chinese SOEs
• Alcoa (NYSE: AA) to own 8% of equity, have one board representative and form a 50/50 JV at
one of Chalco’s integrated refiners and smelters
• 30 month lock-up; AA to fund 50% of JV’s capex; and significant corporate governance rights
for AA
Breakdown of Demand
(Excluding Alcoa and HK Public Offer)
Pricing
Roadshow
Launched
150
140
Asia & ROW
26%
130
PWM
16.6%
Syndicate
1.4%
U.S.(1)
48%
120
110
100
90
80
11/5/01
Source
11/7/01
11/9/01
11/13/01 11/15/01
11/19/01
11/21/01
11/23/01 11/27/01
Hindalco
Nalco
Alcoa
Alcan
Pechiney
Hang Seng
S&P 500
Dow Jones
11/29/01
FactSet
Andy Xie (852) 2848 5220 [email protected]
12/3/01
12/5/01
Europe
26%
Institutional By Region(1)
Morgan Stanley & CICC
82.0%
Total Demand By Type
Note: (1) Figure excludes PWM demand, includes orders from Canada
Please refer to important disclosures at the end of this report.
142
Equity Research Asia/Pacific
Economics Report
Economics Team
China: Economic Forecast Summary
China: Economic Forecast Summary
(YoY, %, nominal, unless otherwise stated)
1999
2000
Real GDP
7.1
8.0
Nominal GDP
4.6
9.1
Private Consumption
6.7
9.5
Public Consumption
8.4
13.8
Investment, Non-state
6.7
15.9
Investment, State
3.8
3.5
Change in Stocks, % of GDP
1.2
1.1
Net exports, % of GDP
2.7
2.4
Current account, US$ bn
15.7
20.5
% of GDP
1.6
1.9
Trade Balance, US$ bn
29.2
24.1
Exports
6.1
27.8
Imports
18.2
35.8
CPI
-1.4
0.4
Sources: CEIC, Morgan Stanley Dean Witter Research.
Andy Xie (852) 2848 5220 [email protected]
2001E
7.4
8.5
7.4
4.0
16.5
12.0
0.8
1.8
16.3
1.4
18.9
6.5
9.5
1.0
2002E
7.0
8.6
7.5
5.0
18.0
9.0
0.8
1.0
7.3
0.6
13.0
8.0
11.0
1.5
Please refer to important disclosures at the end of this report.
43
Equity Research Asia/Pacific
Economics Report
Economics Team
Clauses
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H7638P
Please refer to important disclosures at the end of this report.
44