20 Asia Quants Revision Based Strategy 03may13

Equity Research
ANCHOR REPORT Asia revision-based strategy: The power of consensus change
A revision strategy that takes consensus ratings and target prices into account
With Asia EMI likely to slow or move sideways through 2013, we believe revision-based investment strategies are likely to continue the momentum. Our analysis indicates that investors can earn the best incremental returns and improve IR when consensus rating revisions are corroborated with earnings revision signals. Checking target price potential can further bolster the performance of a revision-based strategy in Asia Pacific ex-Japan, suggesting this factor is informative in identifying mispriced companies. We recommend a revision-based strategy looking at consensus earnings and rating revisions and, concurrently, taking into consideration upside/ downside potential as reflected by consensus target prices.
May 3, 2013
Research analysts Quantitative Research
Sandy Lee - NIHK sandy.lee@nomura.com +852 2252 2101 Rico Kwan, CFA - NIHK rico.kwan@nomura.com +852 2252 2102
Key analysis in this Anchor Report includes:

An approach to analyze style performance in the four-phase earnings revision cycle, from recovery to expansion, slowdown and downturn. We examine the efficacy and correlations of various revision-based indicators, and evaluate the performance of composite revision factors. We set out an earnings revision-based strategy that takes consensus rating changes and target price potential into account, and discuss the strategy performance in developed Pacific ex-Japan and emerging Asia through rigorous back-tests. See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Asia revision-based strategy

Nomura | Asia revision-based strategy
May 3, 2013
ASIA QUANTITATIVE
EQUITY RESEARCH
The power of consensus change
May 3, 2013
A revision strategy that takes consensus ratings and target prices into account
We recommend a strategy to go long stocks with better consensus forecast earnings and recommendation revisions while at the same time with high target price potential, and short stocks with worse consensus forecast earnings and rating revisions, and concurrently with low or negative target price potential. We believe Asia earnings momentum indicators are unlikely to enter an expansion phase but could slow or move sideways in the rest of 2013. The phase of the earnings revision cycle is important for style selection. We adopt a simple approach to analyze the style performance in the four-phase earnings revision cycle, from recovery to expansion, slowdown, and downturn. In a slowdown phase, price and earnings momentum styles dominated, while value factors (especially B/P) saw a declining impact compared to a recovery phase. We think revision-based investment strategies are likely to maintain the positive momentum as we progress through 2013. Valuation wise, the revision style also looks cheaper than that of value of late, in our view. Analysts investment opinions typically influence share prices. Among various revision-based indicators, we observe that earnings revision and change in consensus rating indicators have worked consistently in both developed and emerging Asia, and interestingly, the two factors have low return correlation. We show that investors can earn the best incremental returns and improve information ratio when consensus rating revisions are corroborated with forecast earnings revision signals. Further, it makes sense for investors to consider how much information in estimate revisions is already reflected in stock prices when implementing a revision strategy. We observe that the target price potential factor, defined as the divergence between consensus target prices and current stock prices, is positively correlated with value factor E/P but negatively correlated with revision-based indicators, and thus it can be used as an alternative value measure to integrate with a revision strategy to enhance diversification. We formulate a revision-based strategy by primarily looking at consensus earnings estimate revisions and rating changes and, at the same time, taking into consideration the upside and downside potentials as reflected by the target price potential factor. We reveal that checking target price potential can further bolster the performance of a revision-based strategy in Asia, suggesting the factor is informative in identifying mispriced companies. Additionally, the strategy is more profitable on the long side than on the short side in emerging Asia. This makes the strategy accessible to a wider range of institutional investors given the limitation of short-selling capabilities in some emerging markets, in our view. We present our latest stock ideas based on the recommended strategy.
Research analysts
Quantitative Research Sandy Lee - NIHK sandy.lee@nomura.com +852 2252 2101 Rico Kwan, CFA - NIHK rico.kwan@nomura.com +852 2252 2102
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
May 3, 2013
Contents
Revision-based strategies likely to keep the momentum through 2013
Style performance in different earnings momentum phases
3
4
Information provided by equity analysts efficacy of revision-based indicators

Effectiveness of the revision-based indicators Correlation among the revision-based indicators
7
7 9
Improving earnings-revision strategy by integrating other types of analyst signals 11

Consensus rating changes can add value when they are corroborated with earnings revision signals 11 Utilizing consensus target price to check upside and downside potential A revision-based strategy that takes consensus rating changes and target price potential into account Optimization simulation considering turnover costs Stock ideas from our proposed revision strategy 12 14 16 18
Appendix A-1
22
May 3, 2013
Revision-based strategies likely to keep the momentum through 2013

The performance of revision-related factors deteriorated in 4Q12 but has recovered since January. In contrast, high-risk and value (high B/P) stocks have underperformed since the latter half of January. It is important to assess whether earnings revisionrelated strategies are likely to be effective in the rest of 2013, in our view.
Fig. 1: Performance of reversal, value and risk factors
(%) 20 15 10 5 0 -5 6M reversal B/P E/P Default probability
The performance of revisionrelated factors has recovered since January
Fig. 2: Performance of momentum, revision, and size factors

(%) 10 5 0 -5 -10 -15
Jan-12 Jan-13 Jul-12 Oct-12 Apr-12
6M return StarMine PS
Revision Size
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Note: Universe is based on MSCI constituents. Data run to 26 April 2013. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies
Jan-13
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Note: Universe is based on MSCI constituents. Data run to 26 April 2013. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies
Earnings expectation and revision trends are important drivers for style performance. The regional MSCI AC Asia Pacific ex-Japan index currently trades at consensus 12month forward P/E of roughly 11.9x roughly a 6% discount to the long-term average of 12.6x. Meanwhile, I/B/E/S consensus estimate reveals 13.8% FY2013 EPS growth for Asia Pacific ex-Japan region. In Quants factor Dynamics (March 15, 2013), we mentioned that our Asia earnings momentum index1 is recovering since 4Q12, but the recent median StarMine predicted surprise (forward 12-month) scores2 remain negative and have seen a downturn, particularly in Asia emerging markets. This may imply the risk of downgrades to consensus estimates, we believe.
Fig.3: EMI and Median StarMine predicted surprise developed Pacific ex-Japan
(%) 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0
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Median StarMine predicted surprise scores remain negative and have seen a downturn, particularly in Asia emerging markets
Fig. 4: EMI and median StarMine predicted surprise emerging Asia

(%)
2.5 2.0 1.5 1.0 0.5 0.0
Median StarMine predicted surprise (LHS) Earnings momentum index (RHS)
Median StarMine predicted surprise (LHS) Earnings momentum index (RHS) 2.5 2.0 1.5 1.0 0.5 0.0
1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5
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Note: Universe is based on MSCI constituents. Source: I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies
Note: Universe is based on MSCI constituents. Source: I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies
Our earnings momentum index looks at the degree of the revision to consensus forecasts of FY2 EPS and assesses how the prevailing estimates differs from the past three-month average. 2 StarMine predicted surprise is defined as the difference between the I/B/ES consensus and SmartEstimates (which put higher weightings on top rated analysts forecasts and more recent estimates). 3
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On the macro front, our economists believe that China growth will likely slow through this year and have recently revised down their 2013 GDP growth forecast to 7.5% from 7.7% and CPI inflation forecast to 3.1% from 3.5%, and maintain the view that credit growth will likely slow (Asia Insights Fixed Income Research, 15 April, 2013). We observe an increasingly uncertain economic policy environment amid concerns over slower global growth. Overall in Asia, we believe our earnings momentum indicators are unlikely to enter an expansionary phase but could slow or move sideways in the rest of 2013. In this report, we examine the importance of an earnings revision strategy in the current earnings phases and focus on studying the efficacy of different consensus revisionbased indicators. We then use the findings to devise an effective earnings revisionbased strategy that employs different types of revision signals including consensus rating changes and also take target price potential into consideration.
Earnings momentum indicators could slow or move sideways through this year
We attempt to formulate an effective earnings revision-based strategy that utilizes different types of revision signals
Style performance in different earnings momentum phases

An earnings revision cycle is closely linked with the macro environment and has important implications on style performance. We adopt a simple approach used by our Japan quant team3 to analyze the earnings revision cycle. Here we use our aggregate earnings momentum index (EMI) instead of the OECD leading indicator, as the leading indicator comes out with a lag of two months. We calculate the standard scores of the EMI and take the 1st differential of the index to map the cycle as shown below. We divide the cycle into four phases, from the trough of the earnings cycle the phases move in a counterclockwise direction from recovery to expansion, slowdown, and downturn.
Fig. 5: Earnings revision cycle We adopt a simple approach to analyze the earnings revision cycle
Level
III (slowdown)
II (expansion)
1st diff IV (downturn) I (recovery)
Source: Nomura Quantitative Strategies
We show in below Figures that the phase of the cycle is important for style selection. When earnings momentum recovered from the trough of the earnings cycle, such as in 2009 and Q4 2012, value (particularly B/P), smaller-cap, and high-risk stocks outperformed, while price momentum and profitability styles underperformed. Both price and earnings momentum factors resumed the positive impact in an expansion phase while value stocks (especially E/P) continued to bode well. In a slowdown phase, price and earnings momentum styles dominated while profitability saw a rising impact. In contrast, value factors, especially B/P, underperformed. Defensive high dividend yield and low-risk stocks performed well in a downturn. Even if we check the EMI phase at each month-end and observe the subsequent month style performance, results indicate that the linkage between EMI phases and factor performance is intuitive.
The phase of the EMI cycle is important for style selection
Business cycle clocks and quant factors, Global Quantitative Research Monthly, 16 February, 2012. 4
May 3, 2013
Fig. 6: Earnings momentum index and 1st diff

4 3 2 1 0 -1 -2 Change in EMI (1st diff, RHS) AP EMI (LHS, z-score) 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00
EMI Level 1st diff Sample months
Note: We use the monthly aggregate earnings momentum index (EMI) since end-December 1998. Universe is based on MSCI AC Asia Pacific ex-Japan Index. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
Fig. 7: Average monthly style return (long-short) in different EMI phases

EMI phase and style return on the same month Recovery Size * Momentum Yield Valuation E/P B/P Revision Growth Profitability ROE Risk * 1.16 -0.84 0.21 1.34 0.93 1.12 0.47 0.23 -0.30 -0.44 -0.77 Expansion 0.11 0.89 0.09 0.89 0.88 0.25 0.76 0.15 0.40 0.27 -0.13 Slowdown -0.51 1.15 0.21 0.22 0.31 -0.30 0.75 0.22 0.71 0.75 0.30 Downturn 0.06 0.49 1.19 0.61 0.57 0.18 0.67 -0.37 -0.32 0.19 0.74 EMI phase and subsequent month style return Recovery 1.04 -0.66 0.37 1.68 1.44 0.93 0.43 0.29 0.26 0.05 -0.63 Expansion -0.09 0.78 0.41 0.81 0.88 0.21 0.60 0.00 0.33 0.35 0.44 Slowdown -0.35 1.34 0.04 0.06 0.18 -0.31 0.74 0.05 0.42 0.43 -0.20 Downturn 0.21 0.33 0.91 0.58 0.34 0.38 0.87 -0.24 -0.48 -0.02 0.51
Note: See Figure 33 for style definition. Data run to end-March 2013. Shaded styles are top performers in the EMI cycle. Universe is based on MSCI AC Asia Pacific ex-Japan Index. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
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Recovery <0 >= 0 39 Expansion >= 0 >= 0 48 Slowdown >= 0 <0 31 Downturn <0 <0 52
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It is also worthwhile to note that revision strategy is typically positively correlated with price momentum but in some ways sees distinct characteristics. Performance of price momentum strategy tends to be much more volatile compared to revision. Historically there were periods of months when price momentum was crushed by the sharp risk-relief value rally during the recovery phase and hence this made price momentum strategy relatively less consistent than revision-based strategies in Asia. As we believe the Asia EMI is unlikely to enter an expansion phase but could slow or move sideways through this year, we expect earnings revision-based investment strategies to see better performance as we progress through 2013. From a valuation viewpoint, we are still positive on risk style on a medium-term basis as high-risk stocks remains inexpensive on z-score. But notably the revision as an investment style currently looks cheaper compared to the value style.
In Asia, revision strategy has been more consistent than price momentum strategy
Judging from the Asia earnings outlook, we expect revisionbased investment strategies to see better performance as we progress through 2013
May 3, 2013
Fig. 8: Valuation of composite value and risk styles

(Ratio) 0.5 0.4 0.3 0.2 0.1 Composite Value - Relative P/B (LHS) Composite Risk - Relative P/B (RHS) (Ratio) 1.0 0.9 0.8 0.7 0.6 0.5 0.4
Fig. 9: Valuation of ROE, DY, and revision styles

(Ratio) 5 4 3 2 1 0 Quality by ROE- Relative P/B (LHS) Revision - Relative P/B (RHS) DY - Relative P/B (RHS) (Ratio) 1.7 1.5 1.3 1.1 0.9 0.7
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Notes: Chart shows the relative median B/P between the top and bottom quintile portfolio by corresponding style. Data run to 26 April 2013. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies
Notes: Chart shows the relative median B/P between the top and bottom quintile portfolio by corresponding style. Data run to 26 April 2013. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies
Fig. 10: Relative P/B of top versus bottom quintiles by investment styles (z-scores)
Size* Current ratio Long-term average Standard deviations Z-score 0.66 0.59 0.10 0.71 Momentum 1.55 1.67 0.31 -0.38 Div Yield 1.05 0.85 0.12 1.64 Valuation 0.34 0.31 0.04 0.82 Revision 1.03 1.16 0.15 -0.84 Growth 1.27 1.30 0.17 -0.16 Profitability 2.03 2.40 0.24 -1.52 Risk 0.59 0.67 0.09 -0.79
Note: See Figure 33 for style definition. Long-term average is calculated since 1999. Data run to 26 April 2013. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies
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May 3, 2013
Information provided by equity analysts efficacy of revision-based indicators

Equity analysts study companies financial performance and earnings prospects, and provide investment opinions including earnings forecasts, recommendations, and target prices to investors. Their investment opinions typically influence share prices. Academic literatures and investment professionals have analyzed the delayed market responses to analysts opinions, and such phenomenon can be explained by behavioral finance. First, sell-side analysts typical following the flock behavior and their tendency to stay close to the consensus can potentially induce exploitable inefficiencies into the market. Second, the market does not necessarily discount fully analysts earnings revisions or rating changes when the information becomes available, as analysts may revise their forecasts at different times, causing delays in the dissemination of information. Third, investors may react cautiously to new information provided from equity analysts, and such underreaction provides opportunities to generate alphas.
Equity analysts investment opinions typically influence share prices, and market responses could be delayed
Effectiveness of the revision-based indicators

Which types of revision indicators are effective in Asia Pacific ex-Japan region, and in developed Pacific ex-Japan and emerging Asia? In this section, we examine the performance of various revision-based indicators, namely, revision index, earnings revision, change in consensus rating, change in target price, StarMine predicted surprise, change in revision index, and change in earning revision. We focus on how informative are these indicators compared with each other.
Fig. 11: Performance (long-short) of revision-based indicators in Asia Pacific ex-Japan
(%) 160 140 120 100 80 60 40 20 0 -20 Revision index Change in consensus rating StarMine predicted surprise Change in ER Earnings revision Change in target price Change in RI
We examine the performance of various revision-based indicators
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1.84 4.17 0.44 170
Revision index Asia Pacific ex-Japan Annualised average return (%) Annualised risk (%) Information ratio Turnover (1-way, L/S, %) Developed Pacific ex-Japan Annualised average return (%) Annualised risk (%) Information ratio Turnover (1-way, L/S, %) Emerging Asia Annualised average return (%) Annualised risk (%) Information ratio Turnover (1-way, L/S, %) 9.27 5.33 1.74 120 4.15 7.43 0.56 123 8.05 4.42 1.82 121
Earnings revision
Change in consensus rating
Change in target price
StarMine predicted Change in Change in surprise RI ER
9.53 6.63 1.44 80
9.13 4.24 2.15 146
6.53 6.04 1.08 127
6.89 5.47 1.26 86
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2.01 4.45 0.45 140 1.96 6.44 0.30 140 1.80 5.36 0.34 140
8.04 8.96 0.90 79
8.98 7.06 1.27 148
7.10 8.20 0.87 129
5.93 8.09 0.73 91
2.79 6.46 0.43 171
9.99 7.39 1.35 81
9.22 5.12 1.80 146
6.40 6.75 0.95 127
7.14 6.57 1.09 85
1.53 4.81 0.32 169
Note: See Figure 32 for factor definition. The sample period is from 1999 for all factors except for change in target price, which is started from 2002. Returns are annualized figures. Universe is based on MSCI constituents. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
May 3, 2013
Stocks in the respective regional universes are put into five groups based on each indicator, and their returns are measured assuming long the top quintile and short the quintile with the lowest factor scores, with monthly rebalancing on stock portfolios. In the above Figure, we show their factor performances assuming an equal-weighted approach. Results do not consider transaction costs. In Asia Pacific ex-Japan, all revision-based indicators delivered positive annualized longshort returns. The top three best-performing factors have been earnings revision (9.53%), change in consensus rating (9.13%), and revision index (8.05%). By information ratio (IR), the change in consensus rating factor, defined as the m-m difference in I/B/E/S consensus rating, has delivered lower volatility in monthly returns compared with the revision index and earnings revision indicators, thus leading to higher IR of 2.15 before transaction costs, but we note that turnover of the factor is also high. In contrast, the indicators measuring the rate of change in revision index and earnings revision have registered the lowest IRs. In developed Pacific ex-Japan, change in consensus rating, earnings revision, and change in target price ranked the top three best-performing factors by annualized longshort returns and IRs. Meanwhile, earnings revision, revision index, and change in consensus rating indicators have performed well in emerging Asia. Overall, the revision index indicator has fared relatively better in emerging Asia than that in developed Pacific ex-Japan, while earnings revision and change in consensus rating indicators have worked more consistently in both developed Pacific ex-Japan and emerging Asia.
Fig. 12: Performance (long-only excess return) of revision-based indicators in Asia Pacific ex-Japan
(%) 80 70 60 50 40 30 20 10 0 -10 Revision index Change in consensus rating StarMine predicted surprise Change in ER Earnings revision Change in target price Change in RI
The top three best-performing revision-based indicators in the region are earnings revision, change in consensus rating, and revision index
Earnings revision and change in consensus rating indicators have worked more consistently in both developed Pacific ex-Japan and emerging Asia
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1.95 2.64 0.74 84 2.22 3.97 0.56 84 1.88 3.02 0.62 84
Revision index Asia Pacific ex-Japan Annualised excess return (%) Annualised active risk (%) Information ratio Turnover (1-way long-only, %) Developed Pacific ex-Japan Annualised excess return (%) Annualised active risk (%) Information ratio Turnover (1-way long-only, %) Emerging Asia Annualised excess return (%) Annualised active risk (%) Information ratio Turnover (1-way long-only, %) 5.09 3.53 1.44 59 1.83 4.35 0.42 60 4.27 3.03 1.41 59
Earnings revision
Change in consensus rating
Change in target price
StarMine predicted Change in Change in surprise RI ER
5.00 3.54 1.41 40 3.48 4.61 0.75 39 5.50 3.94 1.40 40
5.22 2.51 2.08 72 4.83 4.40 1.10 73 5.41 3.02 1.79 72
3.85 3.31 1.16 62 3.77 4.64 0.81 63 3.86 3.78 1.02 62
4.13 3.06 1.35 43 3.71 4.76 0.78 45 4.22 3.76 1.12 42
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1.83 2.74 0.67 68 0.80 4.07 0.20 69 2.10 3.25 0.65 68
Note: See Figure 32 for factor definition. The sample period is from 1999 for all factors except for change in target price, which is started from 2002. Returns are annualized figures. Universe is based on MSCI constituents. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
May 3, 2013
The figure above indicates the long-only excess returns of revision-based indicators. We note that the leading revision indicators are profitable when focusing on long-side portfolios only, making them applicable and practical for investors who face short-selling limitations in some of the Asia emerging markets. Overall, we observe similar results on long-side performance, with change in consensus rating and earnings revision indicators faring better in Asia Pacific ex-Japan.
The leading revision indicators are profitable when focusing on long-side portfolios only
Correlation among the revision-based indicators

Figure below reveals the return correlations among these revision-based indicators. Among the top factors, earnings revision and change in consensus rating indicators give the lowest factor return correlation. This brings us to believe that the information contained in consensus rating revision could be different from the earnings revision, and incorporating consensus rating change indicator in an earnings revision strategy can add value and improve strategy performance.
Fig. 13: Correlation among the revision-based indicators
Change in consensus rating 0.13 0.08 1.00 0.06 0.11 0.05 0.12 StarMine predicted surprise Change in RI Change in ER 0.37 0.52 0.11 0.49 1.00 -0.05 -0.03 0.34 -0.04 0.05 -0.19 -0.05 1.00 0.23 0.10 0.04 0.12 -0.05 -0.03 0.23 1.00
Earnings revision and change in consensus rating indicators have low factor return correlation
Revision index Revision index Earnings revision Change in consensus rating Change in target price StarMine predicted surprise Change in RI Change in ER
Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
Earnings revision 0.57 1.00 0.08 0.64 0.52 -0.04 0.04
Change in target price 0.45 0.64 0.06 1.00 0.49 -0.19 -0.05
1.00 0.57 0.13 0.45 0.37 0.34 0.10
Note: See Figure 32 for factor definition. Universe is based on MSCI AC Asia Pacific ex-Japan Index.
Earnings-revision strategies generally deliver consistent returns over the long run in Asia. In below Figures, we take a closer look at the relationship between the rate of change in earnings revision and monthly factor returns of the four leading revision-based indicators: earnings revision, revision index, change in consensus rating, and change in target price. As we highlighted in previous section, there is no surprise that revision strategy relatively underperformed during the initial phase of the earnings recovery cycle, especially at the time when value and high-risk stocks recovered, such as in early 2009. But notably, change in consensus rating indicator continued to perform well during this period. This further increases our confidence that investors can gain incremental excess returns by combining the consensus forecast earnings and rating revision information.
Fig. 14: Monthly returns of earnings revision indicator and median earnings revision change
(%) 3 2 3 1 0 -1 -3 -2 -2 -3 -6 -3 0 1 0 -1 Earnings revision performance (RHS) Median change in ERI (LHS) (%) 6
We believe investors can gain incremental excess returns by incorporating the earnings revision and consensus rating change information
Fig. 15: Monthly returns of change in consensus rating indicator and median earnings revision change
(%) 3 2 3 0 -3 -6 Change in CR performance (RHS) Median change in ERI (LHS) (%) 6
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Note: Universe is based on MSCI AC Asia Pacific ex-Japan Index. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
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May 3, 2013
Fig. 16: Monthly returns of revision index indicator and median earnings revision change
(%) 3 2 3 1 0 -1 -3 -2 0 Revision index (RHS) Median change in ERI (LHS) (%) 6
Fig. 17: Monthly returns of change in target price indicator and median earnings revision change
(%) 3 2 3 1 0 -1 -3 -2 -3 -6 0 Change in TP performance (RHS) Median change in ERI (LHS) (%) 6
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Improving earnings-revision strategy by integrating other types of analyst signals

In the previous section of this report, we showed that analyst opinions on earnings revisions and changes in consensus ratings are useful information when seeking higher returns. Here we show how investors can improve returns by incorporating the two revision-based indicators. Further, while these revision signals are proven effective to generate alpha, it makes sense to avoid buying (selling) stock with little upside (downside) potential, in our view. We thus consider using an additional value like factor, i.e. the divergence between consensus target price and the stock price, to formulate a more profitable strategy.
In this section, we consider integrating various revisionbased signals to formulate a profitable strategy
Consensus rating changes can add value when they are corroborated with earnings revision signals
We first study if the performance of an earnings-revision strategy can be improved by taking into consideration of other revision-based indicators. Here we use earnings revision indicator as the core factor as it has worked more consistently than revision index in both developed Pacific ex-Japan and emerging Asia. We construct various composite revision factors incorporating earnings revision signals with other revisionbased indicators. We illustrate the methodology in below Figure.
Fig. 18: Methodology of composite revision factor We first construct composite revision factors incorporating earnings revision and other revision-based indicators
Note: Normalised value is equal to (factor value country average) / standard deviations. Factor marked with * is reversebased. Source: Nomura Quantitative Strategies
We show the performance of these composite revision factors in below Figures. Results indicate that investors can earn the best incremental returns by integrating earnings revision and change in consensus rating indicators. The performance of this composite revision factor mix improves performance considerably, to 12.6pp from some 9.5pp annual long-short return in Asia Pacific ex-Japan, when consensus rating revision information is used in conjunction with earnings revision signals. IR has been improved to 2.5 (before transaction costs), from 1.44 and 2.15 for simple earnings revision and consensus rating change factor, respectively.
Investors can earn the best incremental returns and enhance IR by integrating earnings revision and change in consensus rating indicators
11
May 3, 2013
Fig. 19: Performance (long-short) of composite revision factors in Asia Pacific ex-Japan
(%) 200 150 100 50 0 -50 Earnings revision ER - Change in CR ER - StarMine PS ER - Change in ER ER - Revision index ER - Change in TP ER - Change in RI
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7.26 5.08 1.43 144 8.26 7.37 1.12 146 6.97 5.64 1.24 144
Earnings revision Asia Pacific ex-Japan Annualised average return (%) Annualised risk (%) Information ratio Turnover (1-way, L/S, %) Developed Pacific ex-Japan Annualised average return (%) Annualised risk (%) Information ratio Turnover (1-way, L/S, %) Emerging Asia Annualised average return (%) Annualised risk (%) Information ratio Turnover (1-way, L/S, %) 9.99 7.39 1.35 81 8.04 8.96 0.90 79 9.53 6.63 1.44 80
ER - Revision index
ER - Change in CR
ER - Change in TP
ER - StarMine PS
ER - Change in RI
ER - Change in ER
9.44 5.60 1.69 100 7.96 7.94 1.00 101 9.91 6.37 1.55 100
12.60 5.00 2.52 121 11.62 7.78 1.49 123 12.96 6.00 2.16 121
9.07 6.59 1.38 100 6.60 8.45 0.78 103 9.87 7.34 1.35 99
9.44 6.33 1.49 79 6.94 8.62 0.81 81 10.17 7.38 1.38 78
Dec-12
8.21 5.15 1.59 128 7.27 7.77 0.94 128 8.38 5.83 1.44 127
Note: See Figure 32 for factor definition. The sample period is from 1999 for all factors except for composite factor with change in target price, which is started from 2002. Returns are annualized figures. Universe is based on MSCI constituents. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
The implications of these results are that consensus recommendation revisions can add value when they are corroborated with earnings revision signals. We believe equity analysts typically revise company recommendations less frequently than earnings forecasts, and they will consider more information such as a companys valuations, cashflows, other financial estimates and assumptions when they determine recommendations. Thus, we can use consensus rating change as an additional confirmation signal.
The implications are that consensus recommendation revisions can add value when they are corroborated with earnings revision signals
Utilizing consensus target price to check upside and downside potential

While the composite revision factor incorporating earnings revisions and consensus rating change signals are proven informative to generate alpha in Asia, it makes sense for investors to consider the current share price level and the upside potential, in our view, when implementing the strategy. There are conventional ways to do this, including evaluating forecast earnings-to price (E/P) multiple or target prices. Forecast E/P is a common value factor and is well known to be an effective factor in Asia. Equity analysts not only project earnings but also share prices target prices. We would like to consider the divergence between consensus target price and the current stock price4 as an alternative measure to check the upside and downside potential. We name this factor target price potential. In previous section, we showed that among the revision-based indicators, change in target price has worked better in developed Pacific ex-Japan, but yielded lower IR in emerging Asia. Here we examine the target price potential factor. Our quant analysts in Japan found that Japanese equities with a large positive divergence between consensus
It makes sense for investors to consider the current share price level when implementing a revision-based strategy We define target price potential as the percentage difference between consensus target price and current stock price
We compare performance of target price potential and E/P factors
Defined as the percentage difference between consensus target price and current stock price. 12
May 3, 2013
target price and current price tend to have strong returns, and vice versa5. Here we examine if the factor has an impact on Asia stock prices and compare its performance with that of E/P. We use same grouping simulation approach as in the previous section and create quintile portfolios based on the percentage difference between consensus target price and the current stock price. The sample period is from year 2002 when the consensus target prices data become available.
Fig. 20: Performance (long-short) of target price potential and forecast E/P factors in Asia Pacific ex-Japan
(%) 120 100 80 60 40 20 Target price potential Forecast E/P
Fig. 21: Performance (long-short) of target price potential and forecast E/P factors by region
(%) 140 120 100 80 60 40 20 0 -20 Target price potential - dev. Pac x J Forecast E/P - dev. Pac x J Target price potential - emerging Asia Forecast E/P - emerging Asia
Dec-01
Dec-02
Dec-03
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Dec-11
Dec-12
Dec-01
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Annualisedaveragereturn(%) Annualisedrisk(%) Informationratio
Targetprice potential 6.72 7.92 0.85
Forecast E/P 9.10 5.92 1.54
Annualisedaveragereturn(%) Annualisedrisk(%) Informationratio
DevelopedPacificexJP EmergingAsia Targetprice Forecast Targetprice Forecast potential E/P potential E/P 4.84 3.93 7.41 10.76 9.42 8.32 8.53 6.52 0.51 0.47 0.87 1.65
We show the performance of target price potential and forecast E/P factors in the above Figure. Returns do not include transaction costs. We note that the target price potential factor has delivered higher annual long-short return (4.8%) and IR (0.51) than E/P (3.9% return and IR of 0.47) in developed Pacific ex-Japan since 2002. Notably, performance of the factor is particularly strong since 2009. In emerging Asia, the target price potential factor has underperformed E/P in the long run, but yielded better returns and similar IR (due to higher volatility) since the start of 2012. It is interesting to point out that performance of target price potential factor is positively correlated with E/P (correlation is 0.65) but negatively correlated with revision-based indicators, including the target price change factor, as observed in the below Figure. Thus, we believe it is prudent to consider target price potential as an alternative value measure to integrate with the composite revision factor and enhance diversification.
Fig. 22: Correlation between target price potential factor and other revision indicators
Change in consensus rating 0.01 0.10 -0.09
Target price potential factor outperformed E/P in developed Pacific ex-Japan, but underperformed E/P in EM Asia
The factor is positive correlated with E/P and can be used as an alternative value measure to integrate with composite factor and enhance diversification
Revision index Asia Pacific ex-Japan Developed Pacific ex-Japan Emerging Asia
Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
Earnings revision -0.50 -0.22 -0.52
Change in target price -0.56 -0.21 -0.57
StarMine predicted surprise Change in RI Change in ER -0.42 -0.06 -0.48 -0.08 0.09 -0.06 -0.12 0.16 -0.21
-0.47 -0.07 -0.46
Note: See Figure 32 for factor definition. Universe is based on MSCI constituents.
Investment strategy using consensus target prices, 6 April 2006. 13
Dec-12
May 3, 2013
A revision-based strategy that takes consensus rating changes and target price potential into account
Based on the findings outlined in the previous section, we formulate a revision-based strategy by primarily looking at consensus earnings revisions and rating changes and, at the same time, taking into consideration upside and downside potential as reflected by the divergence between consensus target prices and current stock prices. We first divide the Asia Pacific ex-Japan universe into five groups based on the composite revision factor, computed using earnings revision and change in consensus rating indicators. The high-revision basket consists of the stocks in the top quintile in each market and sector, whereas the low-revision basket comprises those stocks in the corresponding bottom quintile. Separately, we also divide the regional universe in each market and sector into half, based on the target price potential. We then long the stocks that are in the high-revision group (top quintile) and with high target price potential (tophalf), and short those stocks that are in the low-earnings-revision group (bottom quintile) and with low or negative target price potential (bottom half). We illustrate the methodology to create the long- and short-side portfolios in the below Figure.
Fig. 23: Methodology of the revision-based strategy Methodology
We measure the performance assuming equal-weighted and monthly rebalancing of stock portfolios. The Figures below show a performance summary of the suggested revision-based strategy in Asia Pacific ex-Japan, developed Pacific ex-Japan, and emerging Asia regions, respectively. We note that checking target price potential can further bolster the returns of the revision-based strategy in all regions. In Asia Pacific exJapan, the strategy improves performance significantly, from 11.8pp to 16.1pp annual long-short return, when the target price potential is used for confirming the upside and downside potential. Volatility of the strategy is higher than that for the composite revision factor due to the reduced number of stocks in the portfolios.
Checking target price potential can further bolster the returns of revision-based strategy
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Fig. 24: Performance of revision-based strategy that takes consensus rating changes and target price potential into account
(%) 200 150 100 50 0 -50 Revision with target price potential (L/S) Composite revision indicator (L/S)
Dec-01
Dec-02
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Annualisedaveragereturn(%) Annualisedaveragerisk(%) Informationratio Averageturnover(1way,%) Averagenumberofstocks
Composite revision(L/S) 11.78 4.68 2.52 121.18 286
Revisionwithtargetpricepotential Long/short Longexcess Shortexcess L/Saftercosts 16.14 9.36 6.78 5.50 7.56 4.92 5.34 7.50 2.14 1.90 1.27 0.73 145.87 72.81 73.06 145.87 113 62 51 113
Note: Universe is based on MSCI constituents. Trading costs are assumed 30bp. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
Fig. 25: Performance of revision-based strategy (DM Asia)

(%) 200 180 160 140 120 100 80 60 40 20 0 Revision with target price potential (L/S) Composite revision indicator (L/S)
Fig. 26: Performance of revision-based strategy (EM Asia)

(%) 200 150 100 50 0 -50 Revision with target price potential (L/S) Composite revision indicator (L/S)
Dec-01
Dec-02
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Dec-11
Note: Universe is based on MSCI constituents. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
Note: Universe is based on MSCI constituents. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
The results suggest that the target price potential factor is informative in identifying mispriced companies. Instead of simply selecting stocks with positive consensus earnings revisions and rating changes, it is important for investors to determine how much information in estimate revisions is already reflected in stock prices. We would also like to point out that our strategy is less volatile and also more profitable on the long side than on the short side, especially in emerging Asia. This makes the strategy accessible to a wider range of institutional investors given the limitation of shortselling capabilities in some emerging markets.
Results suggest that target price potential factor is informative in identifying mispriced companies
The strategy is less volatile and also more profitable on the long side than on the short side, especially in Emerging Asia
Dec-12
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Optimization simulation considering turnover costs

We have shown in the previous section of this report that the recommended revisionbased strategy incorporating consensus rating changes and target price potential signals can boost the alpha of a simple earnings revision strategy. Next, we consider turnover and trading costs. The revision-based strategy typically has higher portfolio turnover compared to other conventional investment styles such as value investing. High portfolio turnover could make the return lower due to transaction costs. Thus, it is important to consider a practical portfolio optimization simulation considering turnover and other constraints. Here we test the proposed revision-based strategy through the portfolio management process, by comparing three cases as a source of alpha each month, 1) a simple earnings revision factor; 2) the composite revision factor incorporating consensus earnings and recommendation revision information, 3) our suggested revision strategy using the composite revision factor and also checking the target price potential. We attempt to construct optimized portfolios which utilize the alphas from these cases, with restricted turnover and risk control, and are able to be implemented more practically. We run the portfolio optimization simulation since end-December 2002 using the following parameters.
Fig. 27: Summary of portfolio optimization simulation
Universe Sample period Method Objective Cases: Alpha factor(s) MSCI AC Asia Pacific ex-Japan end-December 2002 to 26-April 2013 on a monthly basis Long-short portfolio optimisation (Axioma Robust Optimisation) Maximise alpha 1. Earnings revision indicator 2. Composite revision indicator (ERI + change in consensus rating) 3. Composite revision indicator, add target price potential with weight of 0.5 Maximum 8% Maximum 20% 1 to 1 Maximum 80 stocks each on long and short side Yes Minimum 0.5%; maximum 10% on the long and short side, respectively End of every month Subsequent one-month total return in USD
We test the proposed revisionbased strategy by conducting portfolio optimization simulation with restricted turnover, risk control, and other constraints
Total risk control (annualised) Turnover control (1-way) Long/Short ratio control Portfolio size Country and sector neutral Asset weight control Rebalancing Performance
The Figure below presents the back-test results. Results confirm that even though revision-based strategy tends to have higher turnover, the proposed revision strategy can obtain better risk-adjusted performance compared with a simple earnings revision factor and the composite revision indicator, even when taking turnover costs into account. Over the back-testing period, the optimized long-short portfolios delivered an absolute return of 15.65% pa in Asia Pacific ex-Japan (or circa 14.2% after trading costs assuming 30bp), with an annualized risk of 7.8%, leading to an information ratio of 2.0 before considering trading costs (or 1.8 net of transaction costs).
The back test results confirm that the proposed revision strategy leads to better performance after considering turnover and costs
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Fig. 28: Performance of optimized long-short portfolios in Asia Pacific ex-Japan

(%) 180 160 140 120 100 80 60 40 20 0 Earnings-revision indicator Composite revision indicator Composite revision & target price potential
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Optimised long-short portfolios Annualised return (%) Average annualised risk (%) Annualised return/SD Average turnover (1-way; %) Average total names (Long/short) Return after transaction costs (%) Annualised return/SD after costs (%)
Earnings-revision indicator 12.61 8.76 1.44 20.67 142 11.11 1.27
Composite revision indicator 15.59 8.40 1.86 20.46 144 14.09 1.68
Composite revision & target price potential 15.65 7.81 2.00 20.37 150 14.17 1.81
Note: Universe is based on MSCI constituents. Trading costs are assumed 30bp. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
When focus on the optimized long-side portfolios only, the proposed strategy also has worked consistently in the Asia Pacific ex-Japan region, with excess returns and IR particularly higher in emerging Asia (below Figure). This leads us to believe that investors can practically apply our proposed revision strategy into their portfolio construction process to seek additional alphas.
Dec-12
When focus on the optimized long-side portfolios only, the proposed strategy delivered better excess returns and IR in emerging Asia
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Fig. 29: Performance of optimized long-only portfolios by regions

(%) 70 60 50 40 30 20 10 Asia Pacific ex-JP Developed Pacific ex-JP Emerging Asia
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Optimised long-only portfolios Annualised active return (%) Average annualised active risk (%) Annualised active return/SD Average turnover (1-way; %) Average total names Active return after transaction costs (%) Annualised active return/SD after costs (%)
Asia Pacific ex-JP 5.76 4.43 1.30 9.79 80 5.05 1.14
Developed Pacific ex-JP 2.13 1.88 1.13 9.92 79 1.41 0.75
Emerging Asia 5.10 4.20 1.21 9.82 80 4.39 1.04
Note: Universe is based on MSCI constituents. Trading costs are assumed 30bp. Active performance is the long-side excess return over the corresponding regional benchmark. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
Stock ideas from our proposed revision strategy

To conclude, we present our latest stock ideas based on the recommended earningsrevision strategy that incorporate consensus rating changes and target price potential information. The Figure below features stocks with better consensus forecast earnings and recommendation revisions while at the same time with high target price potential. These companies are singled out as those that tend to have positive impact on stock prices. The next Figure presents our short allocations and highlights the stock group with worse consensus forecast earnings and rating revisions, and simultaneously with low or negative target price potential. These companies reflect a greater likelihood of underperformance, in our view.
We highlight the latest stock ideas based on our proposed revision strategy
Dec-12
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Fig. 30: Stock ideas (long allocation) based on revision strategy incorporating consensus rating and target price information
Market Australia Australia Australia Australia Australia Australia Australia China China China China China China China Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong India India India India India India India India India India India India Indonesia Indonesia Indonesia Korea Korea Korea Korea Korea Korea Korea Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia Philippines Philippines Philippines Singapore Singapore Singapore Singapore Singapore Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan Thailand Thailand Bloomberg code CWN AU ASX AU SHL AU AIO AU FMG AU SGM AU APA AU 175 HK 1044 HK 2628 HK 1800 HK 762 HK 836 HK 902 HK 27 HK 83 HK 16 HK 20 HK 13 HK 316 HK 1038 HK BJAUT IN HMCL IN UNSP IN CAIR IN ICICIBC IN RCAPT IN RECL IN DRRD IN SCS IN SESA IN STLT IN RELI IN GGRM IJ BDMN IJ ISAT IJ 000270 KS 000810 KS 068270 KS 034020 KS 010140 KS 000880 KS 010130 KS GENM MK SAKP MK MAY MK ULHB MK GAM MK PCHEM MK AEV PM TEL PM EDC PM GENS SP WIL SP CAPL SP YZJ SP ST SP 2201 TT 2823 TT 2891 TT 2603 TT 2474 TT 3008 TT 3673 TT 1710 TT 3045 TT KTB TB PTTGC TB Company Crown ASX Sonic Healthcare Asciano Fortescue Metals Group Sims Metal Management APA Group Geely Automobile Holdings Hengan International Group China Life Insurance China Communications Construction China Unicom Hong Kong China Resources Power Holdings Huaneng Power International Inc Galaxy Entertainment Group Sino Land Sun Hung Kai Properties Wheelock & Co Hutchison Whampoa Orient Overseas International Cheung Kong Infrastructure Bajaj Auto Hero Motocorp United Spirits Cairn India ICICI Bank Reliance Capital Rural Electrification Corp Dr Reddy'S Laboratories Satyam Computer Services Sesa Goa Sterlite Industries India Reliance Infrastructure Gudang Garam Bank Danamon Indonesia Indosat Kia Motors Corp Samsung Fire & Marine Insurance Celltrion Inc Doosan Heavy Industries Samsung Heavy Industries Hanwha Corp Korea Zinc Genting Malaysia Sapurakencana Petroleum Malayan Banking Uem Land Holdings Gamuda Petronas Chemicals Group Aboitiz Equity Ventures Inc Philippine Long Distance Telephone Energy Development Corp Genting Singapore Plc Wilmar International Capitaland Yangzijiang Shipbuilding Holdings Singapore Telecommunications Yulon Motor China Life Insurance Co/Taiwan Chinatrust Financial Holding Evergreen Marine Corp Taiwan Catcher Technology Largan Precision TPK Holding Oriental Union Chemical Corp Taiwan Mobile Krung Thai Bank PTT Global Chemical Sector Consumer Discretionary Financials Health Care Industrials Materials Materials Utilities Consumer Discretionary Consumer Staples Financials Industrials Telecommunication Services Utilities Utilities Consumer Discretionary Financials Financials Financials Industrials Industrials Utilities Consumer Discretionary Consumer Discretionary Consumer Staples Energy Financials Financials Financials Health Care Information Technology Materials Materials Utilities Consumer Staples Financials Telecommunication Services Consumer Discretionary Financials Health Care Industrials Industrials Materials Materials Consumer Discretionary Energy Financials Financials Industrials Materials Industrials Telecommunication Services Utilities Consumer Discretionary Consumer Staples Financials Industrials Telecommunication Services Consumer Discretionary Financials Financials Industrials Information Technology Information Technology Information Technology Materials Telecommunication Services Financials Materials Mkt cap (US$mn) 10,092 6,838 5,454 5,468 11,313 2,049 5,648 4,157 12,701 76,936 13,671 33,827 15,622 14,958 18,835 9,785 38,616 11,310 46,311 3,717 18,106 10,107 6,098 5,371 11,059 24,906 1,607 4,111 6,377 2,409 2,567 5,954 1,831 9,832 6,359 3,353 20,171 10,000 5,759 3,936 7,348 2,124 5,406 7,338 5,231 26,686 3,570 2,789 17,170 7,647 15,989 2,966 15,235 17,294 12,928 2,956 52,151 2,693 2,277 7,466 1,968 3,342 3,625 6,714 977 12,461 11,809 11,215 Avg daily turnover (US$mn) 19.96 27.23 17.62 19.65 71.64 12.13 12.04 29.58 26.72 101.45 20.39 47.82 22.69 24.24 46.02 12.86 82.70 7.17 71.74 4.38 10.28 1.12 1.56 15.72 1.86 7.11 8.83 0.89 0.67 0.89 1.11 1.47 6.01 11.18 2.95 1.49 88.05 16.66 130.05 15.25 51.32 4.79 37.49 5.92 16.55 53.04 8.12 11.06 6.48 2.58 12.68 2.47 28.89 17.76 33.83 4.52 65.04 5.55 11.11 30.35 3.15 63.75 52.19 85.08 2.78 12.72 41.34 33.17 Earnings Change in consensus revision (%) rating 2.25 -0.08 2.08 -0.07 -1.16 -0.14 3.16 0.00 2.97 -0.11 -1.06 -0.21 -0.91 -0.08 5.24 0.00 -0.03 0.00 -0.16 -0.16 1.14 -0.05 -0.31 -0.10 7.15 0.04 11.45 0.03 1.61 0.01 2.98 0.00 1.71 -0.06 7.11 0.00 3.10 -0.14 0.12 -0.26 -0.02 0.00 -3.75 -0.16 -3.90 -0.24 1.84 -0.09 -0.08 -0.27 4.44 -0.05 4.97 0.00 4.32 0.00 -0.72 -0.05 1.86 -0.09 7.79 -0.13 -1.06 -0.12 5.21 -0.04 -1.73 -0.20 1.50 -0.02 -4.53 0.00 -2.92 -0.06 -3.17 -0.03 49.58 -0.50 -3.78 -0.06 -0.28 -0.06 -2.91 0.00 -11.81 -0.03 -1.60 -0.08 8.20 0.00 0.30 -0.13 6.03 -0.05 1.45 0.00 0.14 -0.18 2.31 0.00 -0.70 -0.07 -3.31 -0.08 -0.93 -0.18 -0.37 0.00 0.31 0.00 1.60 -0.11 0.00 0.00 1.62 -0.19 8.14 -0.09 1.31 -0.11 0.21 -0.06 5.59 -0.25 -1.59 -0.52 12.12 -0.19 -3.01 -0.44 -2.63 0.00 1.12 -0.14 3.31 -0.03 Target price potential (%) 0.00 -6.17 0.82 9.19 41.12 25.46 -10.09 15.68 1.73 22.86 21.15 23.60 1.63 -1.65 5.27 21.53 18.34 9.29 13.57 23.04 -2.86 10.03 9.41 -8.63 21.63 14.34 47.44 13.81 2.10 18.35 16.60 23.38 75.25 15.07 0.21 12.02 26.00 21.82 103.49 45.36 38.11 36.22 47.46 8.16 18.87 3.53 4.94 10.61 -0.29 -11.29 -5.68 16.74 -3.52 12.36 15.70 10.91 -11.37 17.26 5.88 9.32 14.10 4.84 3.60 2.38 10.30 -1.49 13.88 19.11
Note: Data as of 30 April 2013. Stocks highlighted are those that fall in the top quintile (group 1) of each market and sector by composite revision factor, and those that are with high target price potential (top half). Universe is based on MSCI constituents. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
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Fig. 31: Stock ideas (short allocation) based on revision strategy incorporating consensus rating and target price information
Market Australia Australia Australia Australia Australia Australia China China China China China China China China China China China China China Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong India India India India India India Indonesia Indonesia Korea Korea Korea Korea Korea Korea Korea Korea Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia Malaysia Philippines Philippines Singapore Singapore Singapore Taiwan Taiwan Taiwan Taiwan Thailand Bloomberg code FLT AU CFX AU TCL AU AWC AU JHX AU SPN AU 1114 HK 881 HK 135 HK 998 HK 410 HK 460 HK 1919 HK 2866 HK 267 HK 2600 HK 2168 HK 941 HK 1193 HK 551 HK 11 HK 302 HK 293 HK 3 HK MM IN UBBL IN ONGC IN CBK IN SIEM IN JSTL IN BBCA IJ TLKM IJ 030000 KS 037620 KS 005940 KS 000100 KS 010620 KS 002380 KS 036570 KS 010060 KS UMWH MK PETD MK AFG MK HLBK MK MMHE MK SIME MK LMC MK GLO PM AP PM SPH SP AREIT SP STH SP 2204 TT 2880 TT 6239 TT 2384 TT IRPC TB Company Flight Centre CFS Retail Property Trust Group Transurban Group Alumina James Hardie Industries SP Ausnet Brilliance China Automotive Holdings Zhongsheng Group Holdings Kunlun Energy China Citic Bank Soho China Sihuan Pharmaceutical Holdings China Cosco Holdings China Shipping Container Lines Citic Pacific Aluminum Corp Of China Yingde Gases China Mobile China Resources Gas Group Yue Yuen Industrial Holdings Hang Seng Bank Wing Hang Bank Cathay Pacific Airways Hong Kong & China Gas Mahindra & Mahindra United Breweries Oil & Natural Gas Corp Canara Bank Siemens/India JSW Steel Bank Central Asia Telekomunikasi Indonesia Cheil Worldwide Inc Mirae Asset Securities Woori Investment & Securities Yuhan Corp Hyundai Mipo Dockyard KCC Corp Ncsoft Corp OCI UMW Holdings Petronas Dagangan Alliance Financial Group Hong Leong Bank Malaysia Marine & Heavy Engineering Sime Darby Lafarge Malayan Cement Globe Telecom Inc Aboitiz Power Singapore Press Holdings Ascendas REIT Starhub China Motor Hua Nan Financial Powertech Technology Wintek Corp IRPC PCL Sector Consumer Discretionary Financials Industrials Materials Materials Utilities Consumer Discretionary Consumer Discretionary Energy Financials Financials Health Care Industrials Industrials Industrials Materials Materials Telecommunication Services Utilities Consumer Discretionary Financials Financials Industrials Utilities Consumer Discretionary Consumer Staples Energy Financials Industrials Materials Financials Telecommunication Services Consumer Discretionary Financials Financials Health Care Industrials Industrials Information Technology Materials Consumer Discretionary Energy Financials Financials Industrials Industrials Materials Telecommunication Services Utilities Consumer Discretionary Financials Telecommunication Services Consumer Discretionary Financials Information Technology Information Technology Energy Mkt cap (US$mn) 3,974 6,459 10,489 2,444 4,649 4,387 6,152 2,741 15,749 30,478 4,302 2,901 5,265 3,686 4,416 7,674 1,884 220,028 6,233 5,705 31,977 3,177 6,914 26,148 10,519 3,604 51,921 3,409 3,602 2,909 27,261 24,260 2,841 1,755 2,123 2,127 1,961 3,124 3,302 3,064 5,491 7,713 2,269 8,935 2,004 18,646 2,770 4,600 6,669 5,792 4,999 6,602 1,355 4,902 1,303 648 2,854 Avg daily turnover (US$mn) 16.52 17.41 34.70 13.87 13.45 6.65 19.97 3.37 45.86 27.05 6.44 7.12 4.64 6.71 8.61 5.50 7.02 140.24 8.28 6.53 21.78 2.60 12.32 20.38 1.55 1.81 1.64 0.66 0.74 3.18 13.51 25.69 9.56 5.64 9.12 6.97 8.36 7.45 41.56 24.26 9.95 3.06 2.34 2.87 1.62 19.45 1.12 2.78 3.25 30.10 20.88 6.35 1.71 3.03 17.20 12.41 6.33 Earnings Change in consensus revision (%) rating 1.11 0.11 0.24 0.08 -7.35 0.13 -42.56 0.29 -2.07 0.08 -2.73 0.00 -1.60 0.22 -13.69 0.00 -4.19 0.18 -0.63 0.20 -8.64 0.09 0.67 0.03 -47.92 -0.01 -24.83 -0.07 -23.07 0.00 -81.58 -0.14 -5.92 0.63 -2.97 0.10 1.86 0.05 -10.25 0.07 -1.11 0.08 -0.84 0.03 -6.34 -0.06 -0.76 0.11 -3.00 0.03 -1.27 0.10 0.98 -0.02 0.00 0.04 -11.43 -0.05 -5.60 0.05 2.20 0.09 1.88 0.18 0.70 0.10 1.96 0.12 -10.60 0.07 0.02 0.00 -19.44 0.00 -24.10 0.00 -7.32 -0.02 -23.23 0.03 0.17 0.31 -0.24 0.00 -0.26 0.35 -0.09 0.10 -6.36 0.00 -6.22 0.04 -0.50 0.09 -0.32 0.00 -1.77 0.00 -2.78 0.40 0.68 0.47 -0.30 0.03 -1.92 -0.04 -1.02 0.05 -6.35 0.22 -150.00 0.08 -8.71 0.37 Target price potential (%) -13.71 -6.68 -6.94 11.31 -9.44 -10.68 10.07 1.46 17.27 11.39 -3.33 -5.89 -3.79 14.86 13.82 -1.96 9.55 4.08 -6.56 4.75 -9.19 3.80 9.04 -14.75 5.98 -22.88 7.87 9.63 4.75 6.63 -5.81 -6.51 -1.47 -16.85 14.42 6.71 30.48 17.13 18.13 31.37 -10.57 -13.69 -2.17 1.54 6.12 6.81 -7.90 -14.42 3.68 -5.49 -5.78 -21.90 -0.29 -3.80 -2.04 -14.46 6.61
Note: Data as of 30 April 2013. Stocks highlighted are those that fall in the bottom quintile (group 5) of each market and sector by composite revision factor, and those that are with low target price potential (bottom half). Universe is based on MSCI constituents. Source: I/B/E/S, MSCI, Nomura Quantitative Strategies
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Fig. 32: Definition of factors

Type Size, price momentum & Liquidity Factors Market cap * Price momentum (1M) Price momentum (12M -1M) Volume turnover ratio Valuation Dividend yield Earnings yield B/P Cashflow yield EBITDA/EV Revision & earnings yield Revision index Earnings revision indicator (FY2) Change in earnings yield StarMine predicted surprise Normalised E/P Change in consensus rating Change in target price Change in revision index Change in earnings revision Target price potential Growth Financial & operating efficiency Sales growth (FY2) EPS growth (FY2) Return on equity Shareholders equity ratio Pretax profit margin Risk Volatility Estimate dispersion Default probability *
Note: The factors marked with * are reverse-based. Source: Nomura Quantitative Strategies
Definition Log of US$ market cap Past 1-month local currency return Last 12-month return less the last 1 month return in local currency Past 1-month trading volume / shares outstanding at month-end F12-month DPS / stock price F12-month EPS / stock price Actual BPS / stock price F12-month cashflow per share / stock price (F12-month net profit + actual interest expense + actual depreciation) / (market cap + interest-bearing debt - cash - short-tern marketable securities) (Number of upward analyst revisions - number of downward analyst revisions) / total number of analysts estimate FY2 EPS / previous 3-month average FY2 EPS F12-month earnings yield - past 3-month average earnings yield (SmartEstimate F12-month - consensus mean) / max(divisor, |mean|) (F12-month earnings yield - average earnings yield in past 36 months) / standard deviation of the earnings yields in the past 36 months Current consensus rating score - previous month consensus rating score Consensus target price / previous month target price - 1 ) x 100% Current revision index - previous month revision index Current earnings revision indicator - previous month ERI (Consensus target price / current stock price - 1) x 100% FY2 sales / FY1 sales FY2 EPS / FY1 EPS F12-month net profit / actual shareholders equity Actual shareholders equity / actual total assets F12-month pretax profit / F12-month sales Past 36-month price return volatility I/B/ES FY1 consensus EPS standard deviation / absolute value for FY1 consensus EPS Default probability estimated using Merton model
Fig. 33: Definition of investment styles

Style Size * Momentum Yield Valuation Revision Growth Profitability Risk * Factors Market cap Price momentum (12M -1M) Dividend yield Earnings yield B/P Revision index Sales growth (FY2) EPS growth (FY2) Return on equity Change in pretax profit margin Volatility Estimate dispersion Default probability
Note: The factors marked with * are reverse-based. Source: Nomura Quantitative Strategies
Definition Log of US$ market cap Last 12-month return less the last 1-month return in local currency F12-month DPS / stock price F12-month EPS / stock price Actual BPS / stock price (Number of upward analyst revisions - number of downward analyst revisions) / total number of analysts' estimate FY2 sales / FY1 sales FY2 EPS / FY1 EPS F12-month net profit / actual shareholders' equity FY2 pretax profit margin - FY1 pretax profit margin Past 36-month price return volatility I/B/ES FY1 consensus EPS standard deviation / absolute value for FY1 consensus EPS Default probability estimated using Merton model
21
May 3, 2013
Appendix A-1
Any Authors named on this report are Research Analysts unless otherwise indicated
Analyst Certification
We, Sandy Lee and Rico Kwan, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Important Disclosures
Online availability of research and conflict-of-interest disclosures
Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport@nomura.com for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. (NGFP) Nomura Derivative Products Inc. (NDPI) and Nomura International plc. (NIplc) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector.
Distribution of ratings (Global)

The distribution of all ratings published by Nomura Global Equity Research is as follows: 43% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 40% of companies with this rating are investment banking clients of the Nomura Group*. 46% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 23% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2013. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.
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May 3, 2013
Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Target Price
A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
Disclaimers
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To the maximum extent permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice. Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poors. 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20 Asia Quants Revision Based Strategy 03may13

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Equity Research

ANCHOR REPORT Asia revision-based strategy: The power of consensus change

Key analysis in this Anchor Report includes:

Asia revision-based strategy

The power of consensus change

Nomura | Asia revision-based strategy

Information provided by equity analysts efficacy of revision-based indicators

Improving earnings-revision strategy by integrating other types of analyst signals 11

Nomura | Asia revision-based strategy

Revision-based strategies likely to keep the momentum through 2013

The performance of revisionrelated factors has recovered since January

Fig. 2: Performance of momentum, revision, and size factors

Fig. 4: EMI and median StarMine predicted surprise emerging Asia

Median StarMine predicted surprise (LHS) Earnings momentum index (RHS)

1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5

Nomura | Asia revision-based strategy

Style performance in different earnings momentum phases

1st diff IV (downturn) I (recovery)

Source: Nomura Quantitative Strategies

The phase of the EMI cycle is important for style selection

Nomura | Asia revision-based strategy

Fig. 6: Earnings momentum index and 1st diff

EMI Level 1st diff Sample months

Fig. 7: Average monthly style return (long-short) in different EMI phases

Nomura | Asia revision-based strategy

Fig. 8: Valuation of composite value and risk styles

Fig. 9: Valuation of ROE, DY, and revision styles

Nomura | Asia revision-based strategy

Information provided by equity analysts efficacy of revision-based indicators

Effectiveness of the revision-based indicators

We examine the performance of various revision-based indicators

Change in consensus rating

Change in target price

StarMine predicted Change in Change in surprise RI ER

9.53 6.63 1.44 80

9.13 4.24 2.15 146

6.53 6.04 1.08 127

6.89 5.47 1.26 86

8.04 8.96 0.90 79

8.98 7.06 1.27 148

7.10 8.20 0.87 129

5.93 8.09 0.73 91

2.79 6.46 0.43 171

9.99 7.39 1.35 81

9.22 5.12 1.80 146

6.40 6.75 0.95 127

7.14 6.57 1.09 85

1.53 4.81 0.32 169

Nomura | Asia revision-based strategy

Change in consensus rating

Change in target price

StarMine predicted Change in Change in surprise RI ER

5.00 3.54 1.41 40 3.48 4.61 0.75 39 5.50 3.94 1.40 40

5.22 2.51 2.08 72 4.83 4.40 1.10 73 5.41 3.02 1.79 72

3.85 3.31 1.16 62 3.77 4.64 0.81 63 3.86 3.78 1.02 62

4.13 3.06 1.35 43 3.71 4.76 0.78 45 4.22 3.76 1.12 42

Nomura | Asia revision-based strategy

Correlation among the revision-based indicators

Earnings revision 0.57 1.00 0.08 0.64 0.52 -0.04 0.04

1.00 0.57 0.13 0.45 0.37 0.34 0.10

Nomura | Asia revision-based strategy

Nomura | Asia revision-based strategy