Table of contents
2010 outlook: Fostering the roots of growth 3
End-2010 index targets: 16,800 for HSCEI and 4,300 for CSI300 5
Macro still a bright spot; reform key to sustain demand 9
Macro issue #1: Government’s exit strategy — The right thing to do 12
Macro issue #2: Property— Slightly expensive, but not a bubble 14
Macro issue #3: Non-performing loans — Not a near-term problem 16
Macro issue #4: Deepening reform to catalyze sustainable demand 18
Earnings: The primary driver of returns in 2010 21
Valuations: China’s growth premium is not fully priced in 28
Liquidity and positioning: Favorable for H; balanced for A 35
Sector allocation, themes, style investing, and stock ideas 40
Style-based stock screens—offshore market 47
Style-based stock screens—A-share market 48
Goldman Sachs/Gao Hua Securities’ top-10 H-share picks for 2010 49
Goldman Sachs/Gao Hua Securities’ top-10 A-share picks for 2010 50
Top-10 picks for the offshore market 51
Top-10 picks for the domestic market 55
2010 sector outlook 60
Airlines: International traffic rebound bodes well for domestic fares 61
Banks: GARP plays benefiting from strong macro and corporate earning recovery 63
Brokers: More active capital markets in 2010 65
Chemicals: 1Q positive on fertilizers; chemicals await 2H10 67
Commodities: Twin demand engines continue to deliver 69
Conglomerates: Recovery priced in 71
Consumer Discretionary: Staying positive on a brighter outlook 72
Consumer Staples: Demand recovery and higher costs 74
Healthcare: Increasing exposure to healthcare reform 76
Infrastructure Construction: Railway construction boom continues 78
Insurance: In the sweet spot; Ping An (A/H) as our top picks 80
Internet: Eyes on online advertising recovery, potential M&A 81
Media and Education: Riding the rising tide of consumer demand 83
Oil & Gas: Prefer E&P and gas exposure 84
Ports: Earnings recovery on strong operating leverage 86
Property: Resumption of NAV growth 87
Shipping: Bullish on bulkers 89
Technology: focusing on late cycle and secular growth stories 91
Telcos: The year of reckoning for 3G 93
Toll Roads: Export recovery and western expansion 94
Utilities: Positive on power producers, lukewarm on water utilities 96
Power Equipment: Prefer wind to diversified equipment makers 96
Appendix 98
Summary of China’s healthcare/social security reform 99
Performance summary 100
Valuations 102
Goldman Sachs/Gao Hua China stock coverage 105
Disclosures 111