Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 ____________________________________________________ The information and opinions in this report were prepared by Morgan Stanley Dean Witter Asia Limited ("Morgan Stanley"). Morgan Stanley has no obligation to tell you when opinions or information in this report change. Morgan Stanley and its affiliate companies are involved in many businesses that may relate to companies mentioned in this report. These businesses include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. This report is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We are not offering to buy or sell the securities mentioned or soliciting an offer to buy or sell them. Morgan Stanley, Morgan Stanley DW Inc., affiliate companies, and/or their employees may have an investment in securities and derivatives of securities of companies mentioned in this report. These derivatives may be issued by Morgan Stanley or others associated with it. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decisions based on their own investment objectives and financial position. Morgan Stanley recommends that investors independently evaluate each issuer, security or instrument discussed, and use any independent advisers they believe necessary. The value of and income from your investment may vary because of changes in interest rates or foreign exchange rates, changes in the price of securities or other indexes in the securities markets, changes in operational or financial conditions of companies and other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. To our readers in the Republic of China: Information on securities that trade in Taiwan is distributed by Morgan Stanley & Co. International Limited, Taipei Branch (the "Branch") and has been authored or reviewed by Dickson Ho, Head of Research. Such information is for your reference only. The reader should independently evaluate the investment risks. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. The Branch may not execute transactions for clients in these securities. This publication is disseminated in Japan by Morgan Stanley Japan Limited and/or Morgan Stanley Nippon Securities, Ltd.; in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte., regulated by the Monetary Authority of Singapore; in Australia by Morgan Stanley Dean Witter Australia Limited A.B.N. 67 003 734 576, a licensed dealer, which accepts responsibility for its contents; in certain provinces of Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Spain by Morgan Stanley Dean Witter, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., which accept responsibility for its contents; and in the United Kingdom, this publication is disseminated and approved by Morgan Stanley & Co. International Limited, regulated by the Securities and Futures Authority Limited. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. This report may not be sold or redistributed without the written consent of Morgan Stanley Dean Witter & Co. Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. Additional information on recommended securities is available on request Andy Xie (852) 2848 5220 [email protected] H7638P Please refer to important disclosures at the end of this report. 44