16 April 2010 Nomura N O MU R A I N T E RNA T I O NA L (HK ) L I MIT E D A N C H O R R E P O R T Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months. Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 52 to 56. Strategy | CHINA May Yan +852 2252 6190 may.yannomura.com Mingchun Sun +852 2252 6248 mingchun.sunnomura.com New dawn for Central and Western China China is the story of the moment, but there are many stories in China, and we believe one of the most interesting is being written in Central and Western China. The Central and Western regions have recently surpassed the Eastern region, which has dominated national growth thus far, on 43 out of 65 economic growth measures such as GDP growth, FDI growth, retail sales growth, auto sales, exports and imports. The Central region is seeing industrial migration as a result of the natural evolution of the Eastern region into a services and higher-value-added manufacturing economy. The Western regions growth is accelerating, thanks to rising demand for and rapid development of resources and related industries. Policy is supportive: the transfer of government funds and resources to the Central and Western regions, the opening of tax-free zones, and large infrastructure investments in the past several years are encouraging new businesses, investments, production and consumption. This harmonises well with the governments desire to promote domestic rebalancing to drive economic growth after the global crisis. In this report, we identify many potential corporate beneficiaries of this theme, with key stocks being Maanshan Iron Western China should gain from demand for resources and related products. Catalysts Accelerating growth in Central and Western China should be a mid- to long-term positive for those companies with large exposure to these regions. Anchor themes The investment and consumption booms should continue, boosting real GDP growth to double digits in 2010F. CPI inflation should remain well under control, despite significant PPI inflation in 2010F. This would make 2010F one of the best years in decades for the Chinese economy. New dawn for Central and Western China Introducing our China Central and Western regional basket We identify five “focused” stocks and 11 “large exposure” stocks (all rated BUY) for investors to try to harness growth in Central and Western China. Central and Western regions at tipping point for high growth We identified 43 out of 65 economic growth measures (such as GDP, FDI, retail sales, auto sales, and export and imports) for which the Central and Western regions recently surpassed the Eastern region. We believe that Central China will lead growth in secondary (especially manufacturing) industry, benefiting from factory migration, as the Eastern region evolves into a service sector and higher value-added manufacturing economy. Meanwhile, the Western region should benefit from rising demand for natural resources and urbanisation. Accelerated growth in those regions would be a result of cumulative effects of favourable government policies and economic rebalancing after the global crisis. Favourable government policies and infrastructure investments are fuelling growth High central government fund transfers to the Central and Western regions, the opening of tax-free zones and a large amount of infrastructure investments in the past several years are making those regions increasingly attractive to new business, investment, production and consumption. Renminbi appreciation has added further pressure on companies to move to more cost-efficient locations. Stimulus policies promoting infrastructure and consumption following the global economic crisis are also benefiting Central and Western China. Potential risks from aggressive regional growth Potential risks from rapid regional growth could manifest in financing through bank loans to local government platform companies. While we believe that the central government would have the capacity to step in if there were defaults, how such scenario might play out in sequence could have significant market implications. NEW THEME N O MU R A I N T E RNA T I O NA L (HK ) L I MIT E D Analysts May Yan Senior China Macro Analyst +852 2252 6190 may.yannomura.com Mingchun Sun Chief China Economist Head of China Equity Research +852 2252 6248 mingchun.sunnomura.com And the China Research Team Key statistics by region (2009) GDP (RMBbn) % Population% Urbanisation (%) Eastern 20,974 58 5233956 Central 8,563 24 4203243 Western 6,687 18 3922938 Total 36,223 100 1,335 10047 Source: National statistics bureau, Nomura research Central all those covered by Nomura equity research analysts are rated BUY Strategy | China May Yan / Mingchun Sun 16 April 2010 Nomura 4 Regional disparity Regio