+ + = vs TARGET OUTLOOK vs HSCEI SELL 3 INPUT 1: GOVERNMENT - - PowerPoint PPT Presentation

SLIDE 1

Generating Alpha from Chinese Policy

How Government Action Drives Returns

POLICY INVESTMENT MODEL

SLIDE 2

NSBO CHINA POLICY INVESTMENT MODEL

INTRODUCTION The Model:

• INPUT 1: CHINA’S INDUSTRY TARGETS

Use sectors based on government FYP and targets

• INPUT 2: CHINESE GOVERNMENT POLICY OUTLOOK

Assess whether positive, neutral or negative towards sector based on Beijing analyst and advisor analysis

• INPUT 3: HS SECTOR STOCK MARKET PERFORMANCE

Indicates under/overperformance and potential reversals

• OUTPUT: 2011-14 PERFORMANCE

Generates above-market returns on a consistent basis, identifying key reversal points

• OUTPUT: SECTOR EXAMPLES

Current sector performance and recommendations

• OUTPUT: MARCH RECOMMENDATIONS

Individual sectors

NSBO’s Expertise:

• GOVERNMENT INFLUENCE: Decisive factor for investment

Government owns the major companies in strategic sectors and controls economy and industry targets and performance.

• KEY STRENGTHS: Chinese focus and expertise

Experienced executive team with growing pool of Chinese analysts and industry advisors.

• NSBO’s BEIJING BUILD-OUT: Five-year development

Beijing office provides on-the-ground insight and contact with policy decision-making arena.

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SLIDE 3

NSBO CHINA POLICY INVESTMENT MODEL

• Chinese government policy is a decisive factor in investment in China.

– Can be viewed as a market leading indicator for key sector up and downturns

• NSBO has been tracking Chinese government policy for 5 years and we understand its influence, timing

and importance for key sectors

– In-depth knowledge and insight into sector moves and government shifts

• Our Chinese Government Policy Model integrates three elements to generate key sector

recommendations:

– industry performance – policy outlook – stock market performance

• This generates key BUY and SELL signals for main China sectors

– Long-only can use it to overweight/underweight sectors – Hedge funds can long/short key sectors

• Consistent outperformance vs the HSCEI over time

– Over the past year, our selection of sectors would have outperformed by an average of 4.63%

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INDUSTRY vs TARGET NSBO POLICY OUTLOOK SECTOR vs HSCEI BUY/ SELL

+ + =

SLIDE 4

INPUT 1: GOVERNMENT TARGETS BY SECTOR

1. Identify sectors and annual targets according to China’s Five Year Plan

– eg: rail, roads, power generation, autos, rather than MSCI or FTSE sectors

2. Identify key monthly sector targets:

– need to be on a monthly basis with regular updates –

• ne target per sector at present

3. Use key sector targets as overall industry forecasts

– Monthly targets calculated for each sector based on 5-year previous seasonality (where applicable)

4. Measure over or underperformance of actual vs target on a monthly basis

• Sector constituents chosen to correspond with

Hang Seng China Index

– Above US$1bn market cap – Liquid

• PURELY QUANTITATIVE ELEMENT

NSBO Sector Market Cap (HK$) FYP Target Banks 5,742 Money supply Insurance 1,277 Premium target Oil 3,265 Production target Coal 757 Production target Power Generation 103 FAI Thermal Power 296 Production target Wind Power 58 FAI Steel 71 Consumption target Copper 81 Production target Aluminium 89 Production target Autos 258 Sales target Railways 211 Rail FAI Airlines 150 Freight Ton km Property development 615 Real estate Investment Construction 201 Real estate and infrastructure Investment Telco Equipment 97 FAI Telco Operators 2,346 Revenue target Gas Distribution 77 FAI Water conservancy 46 FAI Healthcare 50 Individual healthcare spending NSBO Sectors based on Chinese government FYP.

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SLIDE 5

INPUT 2: POLICY OUTLOOK

• Identify whether government policy is supportive, neutral or negative towards the sector

– Conclusion derived through in-house research in Beijing and contact with local policy advisors – Not just from a propaganda angle

• QUALITATIVE ELEMENT

Sector Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sept 13 Aug 13 Sept 13 Oct 13 Nov 13 Dec13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Large Banks Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Positive Positive Small Banks Neutral Neutral Neutral Negative Negative Negative Negative Negative Negative Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Positive Positive Oil Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Positive Positive Coal Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Power Equipment Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral IPPs Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Negative Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Telco Equipment Neutral Neutral Neutral Neutral Neutral Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Steel Neutral Positive Positive Positive Positive Positive Positive Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Copper Positive Neutral Neutral Neutral Neutral Neutral Negative Negative Negative Neutral Negative Negative Negative Negative Neutral Neutral Neutral Positive Positive Positive Aluminum Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Negative Negative Negative Negative Neutral Neutral Neutral Neutral Auto Positive Positive Positive Positive Neutral Neutral Positive Positive Positive Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Railways Positive Positive Positive Neutral Neutral Neutral Neutral Neutral Positive Neutral Neutral Positive Positive Neutral Neutral Neutral Positive Positive Positive Positive Property Developer Positive Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Positive Positive Positive Positive Construction Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Neutral Neutral Neutral Negative Negative Negative Neutral Neutral Neutral Neutral Water Neutral Neutral Neutral Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Gas Distribution n/a Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Pharma n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Positive Positive Positive Positive

Key Sector Outlooks

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• Banks had little support over past two years, but monetary loosening, greater

financial diversification and management of defaults has removed negatives

• Property had positive policy from May 2012, but this changed in Dec 2012 and

was tightened in certain cities owing to overheating. Now taking hands-off approach in order to provide economic stability during reform.

• Autos was neutral post consumer subsidies in Dec 2010, but this reversed in Q2

12 with need to boost consumption. Beneficiary of focus on consumer credit. KEY CONSIDERATIONS

• Timing of policy?
• Which department/ministry?
• Superseded by other policy?
• Financial support for policy?

SLIDE 6

INPUT 3: MARKET PERFORMANCE

• Assess relative sector performance to HSCEI on a monthly basis
• Use this in tandem with industry and policy positions to give investment outlook for each sector.
• PURELY QUANTITATIVE ELEMENT
• If a sector is
• a) underinvested/underachieving its targets and
• b) the policy is positive (an increase in support) and
• c) the market performance is underperforming, then this is likely to lead to a turnaround in the sector and the investment outlook is

a STRONG BUY (indicates turning point).

• If the same situation applies, but the industry has outperformed, then this is a BUY (indicates continuing trend).
• If the sector is
• a) overinvested/overachieving and
• b) the policy is negative, with
• c) the market performance is outperforming, then this is likely to lead to a turnaround in the sector and the investment outlook is a

STRONG SELL (indicates turning point).

• If the same situation applies, but the sector is underperforming, then this is a SELL (indicates continuing trend)
• All other outcomes are NEUTRAL.

Industry Actual vs Target Policy Support Sector Performance Outcome Underinvested/ Positive Underperform Strong Buy underachieving Outperform Hold Negative Underperform Hold Outperform Sell Overinvested/ Positive Underperform Buy

• verachieving

Outperform Hold Negative Underperform Hold Outperform Strong Sell

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SLIDE 7

OUTPUT: 2011-14 PERFORMANCE

• Generates above market returns on a consistent

basis

• Identifies key reversals in market performance
• Long-only – underweight/overweight sectors
• Hedge funds – long/short
• Used to identify key entry points – recommendation

not continued next month if return is achieved

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POLICY RECOMMENDATION PERFORMANCE

*Hedge return vs HSCEI assumes long/short positions have straightforward cash hedge position on HSCEI

Apr-13

May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-13 Mar-14 Apr-14 May-13 Jun-14 Jul-14 BUYS Construct Construct Construct Autos Autos Autos Water Water Water Insurance Insurance Insurance Property Property Property Steel Steel Steel Telco Eq Telco Eq Telco Eq Telco Eq Telco Eq Telco Eq Property Pharma Pharma Banks Insurance Insurance Insurance Construct Construct Construct Insurance Insurance Railways Pharma Gas Dist. Gas Dist. Copper Power Eq Gas Dist. Gas Dist. Gas Dist. Gas Dist. Gas Dist. Gas Dist. Water Water Water Telco Eq. Telco Eq. Telco Eq. p Small Bank Small Bank Small Bank Construct Construct Construct Aluminum Aluminum Aluminum

RESULT

• 0.49%
• 1.47%
• 5.18%

+1.60% +4.48% +2.73% +4.91% +11.64% +0.11% +1.64% +2.52%

• 3.28%
• 4.37%

+1.27% +4.06%

VS HSCEI

• 0.69%

+1.45% +6.97%

• 2.13%

2.76%

• 2.26%

+1.89% +3.98% +5.57% +10.86% +1.77%

• 5.14%
• 1.44%
• 3.54%

+3.23%

Vs MSCI CH

• 1.59%
• 0.19%

+3.77%

• 2.34%

2.11%

• 2.01%

+2.48% +6.79% +3.53% +8.20%

• 0.05%
• 1.55%
• 2.02%
• 2.76%

+2.52%

HEDGE RETURN vs HSCEI

• 0.37%

0.13% 1.12%

• 1.07%

+1.38%

• 1.13%

+0.95% +1.99% +2.79%

• 3.79%

+2.14%

• 2.18%
• 0.72%
• 1.77%

+1.61%

March Performance Data

Return Relative to HSCEI

• Rel. to

MSCI China Q2 14 Perf +0.03% Q2 14 Market Neutral & Rel.

• 1.17%
• 2.55%
• 3.11%

12-Month Perf +28.63% 12-Month Market Neutral & Rel. +15.20% +17.63% +16.34% 0.50 1.00 1.50 2.00 2.50 3.00 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Index PIM (Absolute) PIM (Market Neutral) HSCEI

SLIDE 8

OUTPUT: Q3 SECTORS

8 Q2 PERFORMANCE Q3 Industry Performance Vs Target Policy Outlook Rationale Relative Market Performance Recommendation Large Banks +9.20% POSITIVE

+ Overall monetary policy accommodative and lending relatively strong – little downside from WMP/shadow banking

• 2.32%

BUY Small Banks +9.20% POSITIVE

+ As above, with the benefit of targeted loosening and greater financial diversification under market liberalisation

+0.12% Insurance

• 9.22%

Neutral

Capital market reform potentially widens product offering, as well as increasing returns for insurers from investment

• 1.38%

Oil +2.84% POSITIVE

+SOE reform leading to greater changes in oil & gas sector, while gas price mechanism change to improve margins

+4.62% Coal

• 19.33%

Neutral

Pricing change in Jan 2013 has locked in current low prices and environmental concerns preventing thermal build-out

+1.74% Power Equipment +2.38% Neutral

Power project approvals in H1 coming onstream in H2, but nuclear, thermal and wind build-out likely to be moderate

+9.44% Pharma

• 14.45%

POSITIVE

+ Increased health insurance, govt healthcare spending and SOE reform M&A will lead to long-term upside

+0.71% Water

• 3.01%

POSITIVE

+ Strong acceleration of waste water, pollution and other water projects as part of economic stabilisation/envir.

+7.58% Steel

• 24.78%

Neutral

Moderate demand picture for steel owing to housing and infrastructure, but steel trading crisis causing major issues

+11.49% Copper +23.82% POSITIVE

+ Power grid investment expected to accelerate in H2 (esp. UHV), while RMB and trade financing issues in H1 largely over

• 5.35%

BUY Aluminium

• 14.18%

Neutral

Overcapacity remains a major issue, while demand should be

• neutral. Direct power purchase will help improve margins.

+0.36% Auto +45.71% Neutral

Promotion of consumer financing and continued promotion of energy efficient cars offset by environmental concerns

+4.11% Railways +4.98% POSITIVE

+ Government has given full support for China Railway Corp, and encouraging private investment to make up state shortfall

+2.62% Property Developer +10.91% POSITIVE

+ Restrictions being removed and government is taking a hands-off approach to property to stabilise the economy

• 6.86%

STRONG BUY Construction +13.81% Neutral

Local government infrastructure spending starting to pick up, but property still slow in Tier 3 & 4 cities.

• 3.84%

Telco Equipment

• 44.92%

POSITIVE

+ Major promotion of information consumption, fixed-lin and mobile broadband (inc. 4G) in 2014

+6.28% Gas Distribution

• 42.42%

POSITIVE

+ Gas supply set to grow by 18.5% pa under FYP and new pricing mechanism will encourage more production

+6.41%

SLIDE 9

GOVERNMENT INFLUENCE: Decisive factor for investment

Overall policy

• Government has major role in corporate decisions through policy and ownership
• SASAC owns 120 of the largest companies in China and governs their development
• Answering to shareholders comes secondary to national interest for key sectors
• Central and local government policy can differ and ongoing battles between the two

Sector plans

• Overall sector development governed by Five Year Plan targets – currently being set
• Governs foreign investment in key sectors – eg restricted in telecoms and power, but

encouraged in advanced manufacturing

• Acquisitions and management changes governed by central decision-making

0% 20% 40% 60% 80%100% Personal Goods General Retailers Household Goods Real Estate Technology Hardware Support Services Electronic & Electrical Industrial Engineering Construction Mobile Travel & Leisure Industrial Metals Electricity Food Producers Life Insurance Banks Autos Mining Oil & Gas

Government ownership by sector

Bank Central Huijin Ministry of Finance ICBC 47% 47% Bank of China 96% ABC 44% 43% CCB 2%

Examples

• Banks – Easing of regulations and competition for bank deposits promoted exceptional growth in WMPs in 2013, but increase in sector

risks prompted clampdown by CBRC and PBOC on banking sector, causing credit squeeze in June/Dec 2013 and current unwinding.

• Telcos – China Mobile the largest mobile operator in the world (>500m customers) but telco sector was divided up between its main

competitors, China Telecom and China Unicom, to its cost. Now being used to promote 4G domestic technology and investment.

• Property – purchase restrictions put in place by central government caused 15-20% drop in house prices in major cities. Eased after April

2012 owing to economic slowdown, followed by temporary crackdown in Q1 13, now hands-off approach under new administration.

Government shareholdings of major banks

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SLIDE 10

NSBO’S KEY STRENGTHS: Chinese focus and expertise

Executive Team

• Chairman, Derek Han – Chinese knowledge, contacts and leadership
• Chief Executives, Richard Abrahams and Laurie Pinto – wide network of contacts in London, New York and Hong Kong and
• ver 25 years sales experience

Beijing Office

• Based in Beijing, not Hong Kong or Shanghai, giving better access to government thinking and experienced advisors
• Chinese staff and research, not a Western institution or interpretation
• Growing pool of academic/think-tank advisors to give policy insight & direction
• Relationship with GAPP and Xinhua gives status and security onshore

London Office

• Provides sales and regular client contact, feeding investment ideas and recommendations to clients in London, Europe,

Hong Kong and New York

Key Bios

Richard Abrahams, CEO Before founding North Square Capital in 2008, Richard was CEO and Head

• f Trading at Pali International, where over his tenure the firm established

itself as a leader in event-driven equity research and execution. Prior Pali, Richard was head of equity of HSBC in the US. Laurie Pinto, Co-CEO Prior to founding North Square Capital in 2008, Laurie was Chairman and Head of Sales at Pali International, where over his tenure the firm established itself as a leader in event-driven equity research and execution. Laurie brings over twenty years' experience to the firm. Prior Pali, he was a director at DLJ and then Dresdner. Derek Han, Chairman Derek is a former Chairman of PG Partner Bank in Zurich and has been a foreign exchange advisor at Frema Invest, a board member of Ineo, and of Banque SCS Alliance. Derek is also a world-renowned concert pianist, he graduated from the Juilliard School, one of the most prestigious performing arts college of the world, at age 18.

SLIDE 11

NSBO’s BEIJING BUILD-OUT: 5 year development

NSBO’s Chinese Research Time line

2007

Set up office in Beijing – research development and advisory network

2008

Launched Chinese government policy research from London

2009

Merger with North Square in London to build up sales representation and capacity

2010

Built up team in Beijing with greater number of analysts and advisors

2011

Widened client focus to Hong Kong and New York, as well as Europe

2012

Launched international product to focus on China’s impact

• n global stocks and commodities

2013

Launched Policy Investment Model to generate consistent above-market returns based on sector policy outlook

NSBO Research network

Beijing office provides research, insights and policy interpretation. Feeds through into sector and company analysis from policy perspective. Investment idea generation and trading calls in London based on policy and industry analysis.

NSBO Beijing Office

• Team of analysts in major policy sectors
• Financials
• Energy
• Trade/Currency
• Property
• Metals
• Advisory network in research/academic institutions
• Economics
• Financials
• Property
• Autos
• Agriculture
• Telcos
• Ad-hoc advisors on specific sectors/topics

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SLIDE 12

Exclusive Global Distribution by North Square Blue Oak Limited This presentation has been prepared by North Square Blue Oak Ltd. For the purpose of the UK Financial Services & Markets Act 2000 this publication has been approved by North Square Blue Oak Limited, which is authorised and regulated by the UK Financial Services Authority firm (reference number: 524 544). This presentation is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning North Square Blue Oak Limited (“NSBO”), its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the presentation. The presentation should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this presentation are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of NSBO as a result of using different assumptions and criteria. NSBO is under no

• bligation to update or keep current the information contained herein. NSBO, its directors, officers, employees and consultants or clients may have or have had interests or long or short positions

in the securities or other financial instruments referred to herein, and may at any time make purchases and/or sales in them as principal or agent. NSBO may rely on information barriers, such as “Chinese Walls”, to control the flow of information contained in one or more areas within NSBO, into other areas, units, groups or affiliates of NSBO. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this presentation. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Neither NSBO nor any of its affiliates, nor any of NSBO’s or any of its affiliates, directors, employees, consultants or agents accepts any liability for any loss or damage arising out of the use of all

• r any part of this presentation. Additional information will be made available upon request.

Except as otherwise specified herein, this material is communicated to persons who are Professional Clients or Eligible Counterparties as that term is defined under the Markets in Financial Instruments Directive (2004/39/EC). It is not to be distributed to or relied upon by Retail Clients under any circumstances. The information contained herein does not apply to, and should not be relied upon by, private customers. This presentation may not be reproduced or redistributed, in whole or in part, without the written permission of NSBO and NSBO accepts no liability whatsoever for the actions of third parties in this respect.

Beijing, China B616, Nanxincang Business Tower, A22 Dongsishitiao, Beijing, 100007 People’s Republic of China Tel: +86 10 5218 5160 www.nsbo.com 中国,北京 中国,北京东四十条甲22号 南新仓商务大厦B616室, 邮编100007 London, United Kingdom Scandinavian House, 2-6 Cannon Street London, EC4M 6YH United Kingdom Tel: +44 (0)20 7024 4600, Fax: +44 (0)20 7024 4699

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