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Equity Research 5 October 2004 Asia Pacific/China Investment Strategy Research team Vincent Chan 852 2101 6568 vincent.chan@ Raymond Ho, CA 852 2101 6407 raymond.ho@ China Research Team Vincent Chan (Head of Research) 852 2101 6568 Angello Chan (Utilities Coal) Karen Chan (Airlines) Jay Chang (Internet Software) Jeannie Cheung (Autos Electronics) Prashant Gokhale (Energy, Petrochem.) Peter Hilton (Transportation) Marisa Ho (Consumer, Media) Raymond Ho (Infrastructure Stats) Edison Lee (Telecoms) Bill Stacey (Finance Insurance) Dong Tao (Economics) Natalie Wan (Small Caps) Stanley Wong (Basic materials) Michelle Yan (Food Bev., Retail) Alison Yip (Technology Hardware) Life after the rebound No more than a bear market rebound. The current rebound of China stocks is normal in a bear market environment. Indeed, a similar rebound happened in the last downcycle. The key is fixed-asset investment growth: Completing unfinished projects will help to maintain strong growth in 2004, but a ‘project gap’ would bring down growth significantly in 2005, in our view. Earnings outlook and valuation. Consensus EPS estimates have not yet been downgraded, but this does not mean that they will not be in 2005. Widespread margin decline in downstream sectors in China reveals that the current situation is unsustainable. With the overall China market somehow ‘fairly-valued’, earnings upgrade/downgrades will drive the market ahead. Government policy/reform update. In the next few months, all eyes will be on whether the Chinese government will raise its interest rate or allow its currency to appreciate – which, despite all the talk, one should only believe when it happens. More concrete reform actions are being seen in other areas, such as the new VAT reform in northeast China and the attempt to deal with the ‘non-tradable’ share reform in the A-share market. Investment strategy and model portfolio. We remain OVERWEIGHT industrials, information technology and telecommunication services,