Global Themes 2019 (What To Watch For) 20181213 PDF

Global Themes 2019
Best ideas in Asian equities
13 December 2018
Key themes stocks, 2019 What to watch for with Shaun Cochran
US Alphabet GOOGL US
China Alibaba BABA US Looking into 2019, our macro mavens see global growth peaking mid-
CCCC 1800 HK
year as the US tax relief and China stimulus come to a close. That said,
they are not convinced a recession is assured or that the trade war will
China Moly 3993 HK
scuttle expansion, but China’s first full-year deficit will put downward
Hong Kong AIA 1299 HK
pressure on the renminbi. Long-duration US Treasuries seem to be the
Japan Fanuc 6954 JP only recommendation resilient to all likely scenarios we anticipate (clearly the return
SBI Holdings 8473 JP of inflation is not one of those). Therefore, we’re not surprised that the recommended
Korea Samsung Elec 005930 KS style bias for equities remains bond-proxies and quality (high-through-the-cycle
Philippines Ayala Corp AC PM ROICs), nor that our chartist remains cautious for 2019, but sees emerging market
Singapore Venture Corp VMS SP outperformance as the next phase after impending lows.
GLOBAL STRATEGY: Trade deals and treasuries. GREED & fear has long argued an
Economic volatility interim deal on Sino-US trade is achievable. The G20 summit gave the first evidence
that bias should be retained in 2019. Of course, binary trade outcomes make
investment decisions more difficult. What is refreshingly clear is GREED & fear’s
steadfast structurally deflationist views. Long-duration US Treasuries are seemingly
policy-proof.
GLOBAL ECONOMICS: Mid-year global growth peak. Chief economist Eric Fishwick
expects the growth rate of the world’s two largest economies to peak by mid-year as
policy support does the same. However, he is not concerned about a trade war as he
notes that it is zero-sum globally and should not hurt the USA as the government can
recycle tariffs into spending. He also does not see trade as the primary driver of the
Chinese economy, but argues that China will print its first full-year current account
deficit in 2019, putting downward pressure on the semi-pegged renminbi.
GLOBAL MICROSTRATEGY: Bond-proxies and quality. Head of Microstrategy, Desh

Peramunetilleke suggests Asia will continue to suffer a bear market as rising rates and
persistent earnings downgrades suppress rallies in the historically strong first quarter.
Assuming no US recession, the cycle should bottom out in 2H19. Until we reach this
Also inside
all-clear point, the team recommends bond-proxies and quality stocks.
Global: Commodities; Oil, gas and
petrochemicals; Technicals; GLOBAL TECHNICALS: Market lows ahead. Chief chartist Laurence Balanco sees
Strategy; Banks; Autos; Battery; rising volatility, widening credit spreads, emerging-market and Asian weakness, and
Automation; Thematics
widespread developed-market topping patterns as signs of a synchronised, rolling
Asia: Tech; Consumer; Gaming; global bear market (defined as 20% plus falls). However, it’s not all bad news, as such
Healthcare experiences typically precede leadership changes with emerging markets beginning to
China: CRR strategy; Infrastructure; outperform developed ones once markets bottom. Sector-wise, energy, materials
Oil, gas and petrochemicals; Power; and/or financials are potential future leaders.
Thru Trains; Property; Autos;
Internet; Consumer discretionary; Stocks to watch. We select from a cross-section of country and sector favourites to list 10
Education
ideas that offer investors the best exposure to our 2019 themes. We remove Samsonite
Hong Kong: Conglomerates from the existing portfolio given our unsuccessful attempt for a tactical trade after its
Japan: Benthos collapse in 1H18 upon accusations of accounting irregularities. We replace it with
Korea: Strategy Singaporean healthcare stock Venture as its own retracement on 2018 earnings
disappointment has created more reasonable expectations.
Taiwan: Semiconductors; Strategy
India: Strategy
Portfolio stocks since last rebalancing Portfolio performance
Singapore: Strategy 10 (%) Price change since rebalancing 30 (%) Port World Asia
Malaysia: Strategy 0
20
Thailand: Strategy (10)
10
Indonesia: Strategy (20)
Philippines: Strategy (30)
0
Ayala Corp
MSCI World
Alphabet
Samsonite
Fanuc
CCCC
MSCI Asia
SBI Holdings
Samsung Elec
China Moly
Alibaba
Australia: Mining & Metals;

AIA
(10)
Strategy
(20)
Global: Themes 2018 Inception Rebalanced
www.clsa.com Source: CLSA, Factset Source: CLSA, Factset
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
For important disclosures please refer to page 65.

Global Themes 2019
Contents
Investment thesis .................................................................................................................................................................... 3
Global themes portfolio ....................................................................................................................................................... 11

Global Economics by Eric Fishwick................................................. 16 Asia Tech by Nicolas Baratte ...........................................................40
A game of two halves Beware of sexy value traps
Global Economics by Eric Fishwick ................................................ 17 Taiwan Semiconductors by Sebastian Hou .................................... 41
Trump versus economics Cyclical downturn to persist throughout 2019
Global Strategy by Christopher Wood ............................................ 18 Korea Tech by Sanjeev Rana ...........................................................42
Trump to deal on trade DRAM - How low can the ASP/margin go?
Global Strategy by Shaun Cochran ................................................. 19 China Internet by Elinor Leung ........................................................43
Trump trapped From mobile internet to the internet of things
China Economics by Eric Fishwick .................................................. 20 Global Thematics by Shaun Cochran ..............................................44
So long surplus An internet transformation begins
China CRR Strategy by Haixu Qiu .................................................. 21 Asia Consumer by Oliver Matthew ..................................................45
Policy vs sentiment M&A to increase as a tool to speed up China access
China Infrastructure by Alexious Lee ............................................. 22 China Consumer discretionary by Dylan Chu ................................ 46
Defensive countermeasures to spur economic growth Shields over swords
Global Commodities by Andrew Driscoll ........................................ 23 China Education by Mariana Kou ....................................................47
Base metals to bounce back The pursuit of knowledge
China Oil, Gas and Petrochemicals by Ken Shin ........................... 24 Asia Gaming by Jonathan Galligan ..................................................48
Inflection point Weak hand
China/HK Power by Charles Yonts ................................................ 25 Hong Kong Conglomerates by Jonathan Galligan ......................... 49
Emerging from a policy smog New era, new strategy
Global Oil, Gas and Petrochemicals by Ken Shin .......................... 26 Asia Healthcare by David Stanton ..................................................50
IMO 2020 - Opacity and opportunity Spending on drugs to inexorably increase
Global Technicals by Laurence Balanco ......................................... 27 Japan Strategy by Nicholas Smith ...................................................51
Looking for the next leadership sector The trade war that wasn’t
China Thru Trains by Alexious Lee ................................................. 28 Korea Strategy by Paul Choi ............................................................52
MSCI/FTSE inclusion in FY19 In exports we trust
Global Strategy by Christopher Wood ............................................ 29 Taiwan Strategy by Ming Kai Cheng ...............................................53
No sustainable Treasury breakout Slowing tech and crippling politics
Microstrategy by Desh Peramunetilleke ......................................... 30 India Strategy by Mahesh Nadurkar ................................................54
A year of two halves Much awaited earnings-growth recovery
Global Banks by Brian Johnson ....................................................... 31 Singapore Strategy by Yew Kiang Wong .........................................55
Growing dislocation between USA and rest of world Beacon of safety
China Property by Nicole Wong ..................................................... 33 Indonesia Strategy by Sarina Lesmina ............................................56
Bad news is good news After the pause
Global Autos by Christopher Richter .............................................. 34 Malaysia Strategy by Sue Lin Lim ....................................................57
Shock waves The making of a new Malaysia
China Autos by Alexious Lee ........................................................... 35 Thailand Strategy by Suchart Techaposai ....................................... 58
Moving parts, overhangs and catalysts Politics in action
Global Lithium-ion Battery by Ken Shin ........................................ 36 Philippines Strategy by Alfred Dy ...................................................59
Turn of the tide Poised for a comeback
Australia Mining & Metals by Dylan Kelly ..................................... 37 Australia Strategy by Richard Johnson............................................60
Rare combination Housing conundrum
Global Automation by Morten Paulsen .......................................... 38 Global Themes 2018 by Shaun Cochran .........................................61
Turnaround year How did the 2018 predictions do?
Asia Tech by Nicolas Baratte .......................................................... 39
Buy tech now? Almost there but not quite
All prices quoted herein are as at close of business 11December 2018, unless otherwise stated
2 shaun.cochran@clsa.com 13 December 2018

Investment thesis Global Themes 2019
Global themes
th
th CLSA’s 10 annual Global Themes report arrives almost a decade after this global
The 10 in our
annual series expansion began. The world’s political and economic leadership, and the
associated geopolitical and monetary conditions, have significantly changed since
2009 with the one constant being rising debt-to-income levels. As investors
contemplate how to profit from these opportunities and protect themselves from
the related risks, our analysts have laid down their tarot decks to glean how to
best proceed in 2019. In classic CLSA style, they don’t always agree.
Chief economist Eric Fishwick notes that world trade growth is currently narrow:
Our macro mavens see
the USA has pulled away from Europe, driving developed world demand while
slowing growth but no
train wreck despite China is the emerging markets’ engine. He is confident that the world’s two
the trade tussles largest economies will grow into 1H19, but this will be short-lived. Trump’s fiscal
package begins unwinding in 2H19 and China will have passed through its own
stimulus. This ‘buy now and sell in May’ bias is in stark contrast to recent market
sentiment as are Eric’s trade views noting that it is zero-sum for the world.
China’s pain won’t extend globally and stimulus efforts will resist damage to its
growth. He believes tariffs are unlikely to do much harm to the US economy as it
runs a deteriorating deficit and the government recycles tariffs into spending.
On Sino-US trade, Christopher Wood long argued that an interim deal is

GREED & fear goes as far
as a compromise deal
achievable. The G20 summit gave the first evidence of that bias, which he retains
being the base case into 2019. Both sides understand that retaliatory dynamics ultimately serve no
one. There is a deal to be made and The Donald’s instincts are clearly to strike
one and declare a ‘victory’. 1Q19 will determine if there is one China can tolerate.
Trump’s willingness to deal aligns with Theorality’s view that 2020 will
Trump administration
faces material meaningfully constrain the administration on the back of the mid-term election
indictment risk results, the Mueller investigation and the looming fiscal cliff. A recommendation
to indict at least one senior administration member is a clear and present danger.
World trade growth is good; trade volume growth at 3mma % YoY Effects of Trump’s tariffs on Chinese goods
10 (3mma %YoY) Developed economies 600 (US$bn) 25% 10% 10% or 25%
9 Emerging economies
8 Total
500
7
6
5 400 267
4
3
300
2
1
0 200
(1) 200
(2) 250 250
100
(3)
(4) 50 50
34
(5) 0
12 13 14 15 16 17 18 6 Jul 18 23 Aug 18 24 Sep 18 1 Jan 19 (?) ???
Source: CLSA, cpb.ni Source: CLSA, Office of the United States Trade Representative
As to trade dynamics, Eric predicts that China will print its first full-year current
Ironically, China will
report its first annual
account deficit in 2019 as it remains a pro-consumption economy and domestic
deficit next year growth continues to outpace global. This will show absolute mercantilist claims
against China to be outdated (albeit the relative US trade surplus remains stark).
The other critical ramification is for the pegged Rmb - the longer the deficit
persists the more difficult the PBoC will find managing the crawling peg.
13 December 2018 shaun.cochran@clsa.com 3

Zooming in on China, CRR strategist Haixu Qiu see less risk to the economy from
China - a wavering
Trump’s tariffs than from the souring private sector. Echoing economics, CRR is
domestic economy that
absolutely needs assuming Beijing is cognisant of declining sentiment and seeks to reverse it. They
stimulus expect favourable credit policies for SMEs and corporate tax cuts. On the liquidity
front, head of China industrial research and capital access Alexious Lee agrees.
Besides the already announced Rmb1.35tn special fund, he expects further Belt
and Road Initiatives via fresh PPP orders, of which state engineering,
procurement, construction (EPC) contractors are the core beneficiaries. He
favours CCCC and CRRC.
This is welcome relief for head of resources research Andrew Driscoll as trade
Base metal prices to
experience relief tensions and tepid Chinese demand have dragged down base-metal prices. He
believes the emerging demand support factors will gel with metal prices trading
well into industry cost curves and supply has already started to respond. All of
which should lift his top picks OZ Minerals, Alumina and Vedanta.
On the flip side is China’s impact on global gas markets. Here it is domestic
The commodity with the
strongest Chinese
demand outstripping supply that is tipping the equation. Beijing’s strong
demand support is gas commitment to control pollution under the ‘Beautiful China’ banner is already
driving seismic shifts in its energy consumption and fuel mix. The emphasis on
coal-to-gas switching reforms will enact a move away from regulated pricing to
allow a greater role for market forces. We should expect stricter monitoring of
adherence to environment policies to persist. This will benefit large SOEs such as
our top picks CNOOC, PetroChina and Sinopec.
‘Beautiful China’ is more than coal-to-gas, enjoying Xi Jinping’s personal support.

Of the other ‘Beautiful
China’ plays, Charles Head of power and ESG research Charles Yonts directs us towards wind
favours the wind sector (Longyuan/Huaneng Renewables) on its strong 2018 operating performance and
we expect policy improvements to continue in 2019. Environmental utilities have
passed the worst of the order flow and funding risks, and Charles argues that a
post-placement China Everbright offers asymmetric optionality.
Looking at policy-driven opportunities, the International Maritime Organisation

Complex refiners will
(IMO) fuel directives become effective in 2020: a cap of 0.5% on sulphur content
benefit from tighter
sulphur rules for on bunker fuel versus the current 3.5%. While many uncertainties remain on how
bunker fuel ship owners and operators will comply, compliance would undermine high sulphur
fuel oil (HSFO) demand and margins favouring complex over simple refiners.
Sino-BRI collaboration; overseas contract revenue & new orders Global refinery product output (2016); structural change to follow
350 (US$bn) Overseas contracting revenue New orders Naphtha
6%
300
LPG
3%
250
Gasoline
200 Others 23%
18%
150 Jet/Kerosene
7%
Middle
100
Heavy Fuel Distilate
Oil 31%
50
12%
0
2013 2014 2015 2016 2017 18CL 19CL
Source: CLSA, MOC, CITICS Securities Source: CLSA, IMO

Our strategist and sector heads see the potential for fundamental growth to
Strained market
capitulate, but not quite yet. Meanwhile, our chief chartist Laurence Balanco
conditions to continue
and then emerging believes rising volatility, widening credit spreads, emerging-markets and Asian
markets outperformance weakness, and widespread developed-market topping patterns all suggests that,
globally, equities are lined up for a synchronised bear market (defined as 20% plus
falls). The encouraging element of all this downside is that it provides a classic
set-up for leadership changes where Laurence sees emerging markets taking over
leadership from developed markets, and energy and materials and/or financials as
potential sector leaders in the future.
MSCI EM and MSCI World weekly chart MSCI Asia ex-Japan - rolling 3M earnings revision (18F)
L3M earnings revision (18F, %)
3.5
4
3.5
3.3
3.2
2.9
2.9
2.9
2.7
2.6
3
2.2
2.3
2.1
2
1.2
1.2
0.9
0.9
0.8
0.6
0.5
0.42
1
0.5
0.5
0.3
0.4
0.2
0.0
0
(1)
(0.6)
(1.2)
(2)
(1.4)
(2.1)
(3)
Jun 16
Jun 17
Jun 18
Dec 16
Dec 17
Aug 16
Feb 17
Apr 17
Aug 17
Aug 18
Feb 18
Apr 18
Oct 16
Oct 17
Oct 18
Source: CLSA, Wind Note: bottom-up calculated with free float adjustment based on current
MSCI universe. Source: CLSA, Facset
Interestingly, on the potential emerging-to-developing-market transition, head of

A potential increase in
Chinese inclusion
China capital access Alexious Lee sees the possible renewal in the Chinese public
factors could help credit cycle, the peaking of share-pledge risk in 3Q18 and potentially rising index
inclusion factors in 2019 as catalysts to renew A-share interest. The subsequent
question is whether the constituents, especially SOEs, see this as an opportunity
to raise alternative financing. On balance, he sees it all as positive.
With so many mixed fundamental and choppy market signals, Chris is refreshingly
One area of unwavering
clear in his steadfast structurally deflationist views. He recommends buying long-
conviction is GREED &
Fear’s love of long- duration US Treasuries. While tensions rose in October 2018 as investors fretted
duration US Treasuries over a 10-year Treasury bond breakout, he reminds readers that yields did not
surpass the 37-year log-scale trend line. Although the false alarm of reaching an
intraday high of 3.26% on 10-year yields threatened to question this base case
that US cyclical momentum has peaked, he expects to see the deflationary trends
reassert themselves as US earnings and GDP slow in 2019.
This all gels well with Desh Peramunetilleke and his Microstrategy team. They
Microstrategy supports
expect ongoing rate hikes, combined with the flattening of the yield curve, to
the cautious tone and
prefers quality and continue to fuel debate about the potential for a US recession. In that context,
bond-proxies until Asia will continue to suffer a bear market as rising rates and persisting earnings
markets settle downgrades suppress any rallies in the historically strong first quarter. As to the
appropriate strategy, on their base case the USA won’t experience a recession,
investors should expect the cycle to bottom out somewhere in 2H19 at which
point valuations will be pushed upwards. Until we reach this all-clear point, they
recommend focusing attention on bond-proxies and quality (high ROIC/ROEs
through the cycle) that have corrected sharply this year and are now trading
below-average PB.

While the global auto sector is an obvious whipping boy for Trump’s trade war,
In global auto we
the more interesting risk Japan autos analyst Christopher Richter highlights is the
actually expect an
aggregate demand likely decline in 2019 sales versus the downgraded 2018 figures, which will
contraction in 2019 . . . primarily be driven by China. The positives within a challenged environment are
electrification, autonomous vehicles and the implications of 5G for connectivity.
Alexious sees similar themes playing out in China in a characteristically policy-

. . . although
electrification will ramp,
accelerated manner. While all this is Beautiful China positive, Chinese automakers
especially in China will not benefit. Startups developing intelligent-connected vehicles (ICV), self-drive
technology and NEVs are increasing competition, are compressing margins and
forcing sector consolidation, which initially benefits consumers over investors.
Of auto’s three positive themes, enabling electrification is closest to a profitable

We like the battery
inflection point. Electric vehicle (EV) sales remain robust, buoyed by falling
companies as
bargaining power tips battery prices, improving customer acceptance, infrastructure availability as well
in their favour as stricter (ex-US) regulations on internal-combustion engines (ICE). A shift from
carrots (incentives) to sticks (regulations) means momentum will be sustained.
These stricter policy thresholds drive the need for improved driving ranges and
energy densities, which favours technology leaders, especially given stricter
quality and safety standards. Oil, gas and petro analyst Ken Shin sees a transfer of
value from upstream materials and components in the battery supply chain to cell
manufacturers, with CATL and LG Chem benefitting the most.
Global auto sales volume SAAR; approaching a stall Chinese ICE and NEV shipment volume forecast; slowing volume
30 (m units) 30,000 (000' units) (%) 20
ICE NEV YoY (RHS)
25 25,000
15
20
20,000
10
15
15,000
10 5
10,000
5 0
5,000
0
0 (5)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2013 2014 2015 2016 2017 18CL 19CL 20CL

Source: CLSA Source: CLSA, CAAM, CITIC Securities
However, Australia materials analyst Dylan Kelly believes the market has
Dylan is unperturbed by
overlooked ex-China rare earths for alternative exposure to lithium, cobalt and
Lynas’ volatility,
suggesting investors nickel sulphate. China’s dominance in rare earths, at over approximately 90% of
buy on weakness . . . supply, will undergo a structural shift resulting from ‘Beautiful China’ and supply-
side reforms, which may squeeze supply (especially if trade-war tensions
escalate). As the largest ex-China producer, Lynas Corp is strategically positioned
to benefit as the primary alternative for what should be increased global demand
for rare earths.
Potential trade war escalation aside, a major auto sector replatforming clearly
. . . while Morten sees offers opportunities as does partial trade clarity on a new Nafta agreement.
2019 as the best buying
Global head of automation Morten Paulsen is confident that next year will offer
opportunities for Fanuc
and Keyence in three the best buying opportunity in three years as new technologies boost the
years efficiency of automated solutions in new markets. While trade resolutions may
not be around the corner, what is more certain is Asia’s ambitions to modernise
factories.

Head of technology Nicolas Baratte argued last year that Asian tech had
Nicolas’ believes 2018’s
tech market trend is
rallied too much and was ready to take a breather. That proved a good call
still ongoing and, in his view, is still ongoing. He suggests revisiting tech stocks in late
1Q19 or early 2Q. As such, beware of sexy value traps. What made a stock
cheap in the old rising consumer unit volumes world does not necessarily
hold water today. He prefers less well understood or owned smallcap
Chinese names like ChinaSoft and Dahua.
Turning to the tech sector, Sebastian Hou see the cyclical downturn that he has
Sebastian is steadfast
that semiconductors are
been calling for as incomplete. He sees pervasive demand deceleration, excessive
yet to bottom inventory across the supply chain and unfavourable leading macro indicators. The
similarities he sees in this cycle versus the dot-com bust could make this correction
the biggest since the GFC. He recommends selectively hiding in relatively defensive
large-cap names, with lower beta and solid FCF, such as TSMC.
His Korean counterpart Sanjeev Rana expects the DRAM weakness to continue
Sanjeev likes DRAM
until at least 1H19. For NAND, he expects ASP declines to continue through the
valuations but wants to
see trough margins to entire year. That said the margin lows in 2H19 will exceed all previous cycle
go full bull suggesting valuations are relatively attractive but need an earnings floor.
Internet analyst Elinor Leung believes voice assistants have reached an inflection
Elinor is excited about
the transition to more
point, with China’s global share of the market rising by over 10% to 29%. With
mature voice systems cloud services also branching out across industries as China migrates to the era of
the internet of things, industry incumbents Alibaba, Tencent and Baidu maintain
their leading positions.
Global smart speaker adoption; China outpaces the world Do we need tougher rules for breaches of data privacy?
100 (%) Others
90 UK
China No
80
US 17%
70
60
20 29
50
40
30 Yes
20
46 42 83%
10
0
1Q18 3Q18
Source: CLSA Source: CLSA, HarrisX
Globally, it is important to note that last year Sir Tim Berners-Lee, co-creator of
Theorality sees the
the web, announced Inrupt, a startup to fund The Solid Project. Solid is a
global risk for the
incumbents as a shift decentralised platform that gives individuals ownership of their data by allowing
towards a privacy storage in Personal Online Data Stores (PODS). Its goal is essential in turning
oriented model current practices, and therefore business models, on their head. In this context
Theorality wonders if 2019 will be the year the internet pivots towards a privacy-
oriented approach. Shaun Cochran prefers old-media content (Disney) over new
media ‘time-on-platform’ companies (Facebook).
Switching the focus back to Asia, head of consumer researcher Oliver Matthew
Oliver suggests M&A
expects M&As between foreign brands seeking access to the Chinese market and
will pick up in the
consumer space for domestic companies facing distribution barriers to continue flowing. Beginning
access to China . . . faintly in 2018, the focus is now on millennials seeking premium items. Thus
fashion, health goods and cosmetics are particularly promising.

Narrowing into China, analyst Dylan Chu advises focusing on defensive positions
. . . while Dylan says
until at least 3Q19. He sees weak discretionary consumption after property prices
stock strategies on the
ground should favour peaked, and deteriorating wage and employment data. The generally calm retail
defensive business market means that OEMs may offer refuge from additional macro-uncertainties.
models He favours Shenzhou International.
Consumer goods retail sales YoY growth; continued slowing China’s internet education platform market; explosive growth
12 (%) 700 (Rmbbn) B2C Internet-education platforms
579.2
11 600 24.0
471.5
500 17-22 Cagr: +23.8% 17.9
10 382.6
400 12.2
309.6
9
249.0 7.6
300 13-17 Cagr: +25.7%
555.2
199.3 4.1
8
453.6
159.2
1.7
200
370.4
124.8
99.1 0.6
302.0
79.9 0.3
244.9
7 0.3
197.6
100 0.2
158.6
124.5
98.8
6 0 79.7
Oct 18
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
2013
2014
2015
2016
2017
2018E
2019E
2020E
2021E
2022E
Source: CLSA, NBS Source: CLSA
In contrast, one sector where Chinese spending is not letting off, regardless of
Mariana is still excited
the macro conditions, is education. Mariana Kou believes three emerging catalysts
about secular education
opportunities despite will continue to drive growth: personalisation, decentralisation and globalisation.
the policy risks Growth is particularly strong in online education and this is beneficial for citizens
in lower-tier cities, who are showing greater interest to pay for such. Our top pick
is Tal Education on the back of its building investments in AI and data.
Jonathan sees a mixed Things aren’t quite as clear cut for the Asian gaming sector as macro-economic
bag on Asia gaming and and trade uncertainties have created significant overhangs for the share prices.
conglomerates needing Still, as VIP growth has decelerated, the fundamentals around mass growth
trade clarity remain firm and we expect 9% growth in 2019. With the weakness in VIP largely
priced in, the defensive nature of mass should support cashflow growth for the
sector. For regional head of gaming and conglomerates, Jonathan Galligan, the
conglos side presents a similar divergence between share-price performance and
bottom-up fundamentals. While the conglos outperformed the market
unceremoniously in 2018 despite little growth in earnings or NAV, 2019 is
shaping up to see more healthy NAV and earnings growth. For the highly
defensive sector, we forecast NAV growth of 12% in 2019 with the wildcard of
structural changes to capital allocation looming large. Although some
conglomerates covered ought to divest, acquisitions remain a possibility.
David sees a more Regional head of healthcare, David Stanton, notes that drug affordability and
compelling story in Asia accessibility continue to apply downward pressure on the market with payers,
healthcare innovators including those in the USA and China. This is driven by payer scrutiny as they
like CSL and Takeda seek to take advantage of genericisation of existing treatments and rising
competition from biosimilar products. Importantly, this is in many respects an
opportunity for Asian producers who seek to develop innovator and copycat
drugs (biologics and biosimilars) in emerging markets where entry barriers are low
and then enter higher-priced, established markets. His preferred BUY-rated Asian
innovators are CSL, Takeda, Beigene and Hua Medicine.

Distilling into our country views, Japan strategist Nicholas Smith sees an
In Japan, Abe has an
opportunity to mitigate the effects of the trade war as well as a potentially easy
easy win by cutting
farming tariffs and win for Abe. With just 38% food self-sufficiency, Japan can’t feed itself. And with
blaming Trump 67% of farmers over the age of 65, Nicholas suggests that undersupply is about
to get incomparably worse. By cutting tariffs on food imports, Abe can offer a
‘victory’ to Trump and so mollify his aggression with a ‘deal’. He also notes this
strategy offers Abe plausible deniability for dismantling a politically sensitive
tariff moat.
Less obvious policy decisions are found in Korea. Local head of research, Paul
Korea faces external
Choi, expects economic difficulty with falling exports likely to be exacerbated by a
softness and domestic
policy own-goals, weakening property market in 1H19 after a series of policy own-goals in 2018.
which means the won The Korean won therefore becomes the saving grace, as its expected depreciation
will weaken will lend a hand to Korean exporters. Interestingly, the besieged DRAM makers -
Samsung Electronics and SK Hynix - and shipbuilders such as Hyundai Heavy are
well geared to this relief.
15-year ₩/US$ rate Nifty earnings growth projections

1,600 30 (% YoY)
25
25
1,500 Downside risk
20 to earnings
1,400
15
1,300
22
10
18-20
1,200 5
11
10
10
9
8
7
6
1
1,100 0
(4)
(5)
1,000
(10)
900
FY19CL
FY20CL
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: CLSA, QuantiWise Source: CLSA
Another market troubled by tech weakness is Taiwan. Potential tariff-induced

Caught in the middle,
supply-chain adjustments and a domestic political standoff further compound this
Taiwan is too tech-
focused to offer more decelerating tech cycle. With such an entrenched industry structure keeping the
than dividend island tethered to global tech trends (EV, 5G, datacentre, etc) it is difficult to
support . . . expect momentum, especially in 1H19. The upside is that Taiwan as a market
continues to run a net-cash aggregate balance sheet and so companies are in
excellent shape to weather the slowdown.
In contrast, India strategist Mahesh Nandurkar argues that the persistent optimism
. . . however, India is
embedded in consensus Nifty estimates will prove less acute next year. Economic
hoping to deliver on
earnings with stronger activity should pick up from levels seen in FY11-15 as irregular initiatives come to
domestic potential an end (such as demonetisation, the NPL clean-up and GST implementations) and,
assuming that downside risks don’t materialise from generous margin
assumptions, Nifty earnings growth could be 18-20%. Corporate banks present
the best opportunities, with ICICI being our favourite.
Over to Asean, languishing global markets will take their toll on Singapore’s
Singapore remains, at
the market level, a economy given its dependence on international trade. Although the ride may be
slave to global trade . . . tough, Singapore will perform better than others in the region given its robust
currency and yields. Our top pick here is DBS, but more broadly we recommend a
defensive strategy favouring dividends.

Another market caught in macro crosswinds is Indonesia. A volatile currency,

. . . whereas our
rising oil prices (for the bulk of the year) and rate hikes have all constrained
Indonesia strategist
sees genuine potential economic recovery since 2017. Head of research Sarina Lesmina sees elections
for a rebound . . . heralding a return to momentum. Assuming the recent oil-price weakness does
not violently retrace, and that the global liquidity tightening begins to ease into
2019, lower borrowing costs and infrastructure spend can trigger a consumption
and economic recovery. In this light, JCI is still a laggard with sensible valuations.
Turning to Malaysia, there are some lofty goals with a German-like Industry 4.0
. . . and our Malaysia
blueprint that aims to make Malaysia a prime destination for high-tech industries,
strategist sees FDI
opportunity where including a development of an aerospace-industry hub. Coupled with a Sino-US
China sees a trade war trade war and clear evidence of rising FDI in 2018 - the question becomes, is
Malaysia a viable production alternative? She hopes so, recommending
healthcare, banks and select tech exposure.
Thai head of research Suchart Techaposai faces far less political clarity, although
Thailand is in
the military-led government appears committed to delivering elections in 2019.
desperate need of
political clarity which With the National Strategy and Reform Plan set in place for the future
should present itself government to implement, Suchart sees a rerating of Thai banks, contractors and
throughout the year properties as likely. The valuations are also undemanding so domestic demand
stocks are the best alternative for now.
Disappointing Thai investment Singapore dividend portfolio performance
80 (% YoY) Public construction investment 140 (13 May 15 = 100) (%) 25

70 Public investment Outperformance to MSCI SG
130 20
60 CLSA dividend cocktail (LHS)
50 120 MSCI SG (LHS) 15
40 110
30 10
100
20 5
10 90
0 80 0
(10)
70 (5)
(20)
May 15
May 16
May 17
May 18
Aug 15
Aug 16
Aug 17
Aug 18
Feb 16
Feb 17
Feb 18
Nov 15
Nov 16
Nov 17
Nov 18
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
Source: CLSA, NESDB Source: CLSA, Bloomberg
In the Philippines, after a torrid 2018 that has seen the PCOMP down 10.26%
Alfred Dy believes
YTD, head of research Alfred Dy believes a number of things could go right in
Philippines valuations
now offer and 2019. Potential catalysts include: falling inflation, improving earnings growth, pre-
asymmetric risk election spending, and progress on tax reform and infrastructure initiatives. While
reward . . . peak valuations are less conducive to ‘what if’ thinking, he notes that value has
re-emerged with consensus PEs of 15x going into 2019 (under the 1sd below
mark). As such, Alfred says the market is poised for a comeback, suggesting
investors should be more inclined to add exposure than to take profit from here.
Finally, in Australia, the housing market should draw most attention with head of
. . . while Australia
needs to push through
research Richard Johnson forecasting falling property prices and other indicators,
a housing downturn which should make observers wary of the broader economic outlook - and is
consistent with the aggressive market underweight Global strategist Christopher
Wood has run for years.

Global themes portfolio Global Themes 2019
Global themes portfolio

Alphabet (N-R)
Thematic investment merit Share price and PE valuation bands
Alphabet’s inclusion in our portfolio is driven by thematic 1,400
strategist Shaun Cochran. Despite the fact that CLSA does Max 28.5x
not cover or rate the stock, he believes its distinctive 1,200
sdu 25.3x
business assets offer unrivalled exposure to a number of core
1,000 avg 22x
disruptive themes. Alphabet is possibly the only large-cap
sdd 19.2x
company that has managed to develop relevant products 800
min 16.4x
across multiple industries undergoing disruptive changes,
600
including AI, healthcare, blockchain and advanced transport.
On this last theme, Alphabet’s autonomous driving 400
subsidiary, Waymo, has very recently launched the world’s
first commercial autonomous taxi fleet in Phoenix, Arizona. 200
Although the roll-out is currently small, we believe it will 0
scale to a globally relevant platform - plausibly as large as
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Apr 14
Aug 14
Apr 15
Aug 15
Apr 16
Aug 16
Apr 17
Aug 17
Apr 18
Aug 18
Uber on a decade view.
Financials
Year to 31 December 16A 17A 18CL 19CL 20CL
Net income (US$m) 19,478 12,662 29,338 33,592 39,204
EPS growth (%YoY) 22.1 (35.4) 131.5 14.0 15.3
PE (x) 28.4 58.5 25.8 22.6 19.6
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
ROE (%) 15.0 8.7 17.5 16.2 15.3
ROIC (%) 14.7 8.5 16.0 14.9 14.2
EV/Ebit(x) 20.3 22.1 23.6 17.1 14.7
Source: Factset
Alibaba (BABA US - US$151.83 - BUY)

Thematic merit Share price and PE valuation bands
Alibaba is well-positioned to benefit from a number of 250
thematic trends that will change the Chinese internet sector.
max 50x
Beyond its well understood network dominance, payments 200
sdu 43.68x
infrastructure and new retail formats, Alibaba is also making
avg 37.36x
progress on new fronts such as voice assistants which are 150
reaching an inflection point in China. The mainland’s 3Q18 sdd 30.34x
share of global market sales of smart speakers jumped from 100 min 23.32x
10% to 29%. The Alicloud business is also poised to penetrate
new sectors as more industries pursue digital solutions. 50
Elinor Leung’s investment case 0

 Alibaba is among our top picks for the Chinese internet Dec 13 Oct 14 Aug 15 Jun 16 Apr 17 Feb 18 Dec 18
sector given strong growth momentum and attractive
valuations. Financials
Year to 31 March 17A 18A 19CL 20CL 21CL
 During Alibaba’s annual Single’s Day event, gross Net income (Rmbm) 43,675 63,985 64,985 83,299 105,049
merchandise volume (GMV) growth was up 27% YoY off EPS growth (% YoY) 0.6 43.1 0.3 28.2 26.1
the back of upgraded technology infrastructure and set a CL/consensus (39) (EPS%) - 76 56.9 57.3 51.4
record of 1bn goods handled vs 812m last year. PE (x) 59.7 41.7 41.6 32.4 25.7
Dividend yield (%) 0 0 0 0 0
 Although Alibaba’s recent results have missed our
ROIC (%) 34.7 34 23.7 40.1 53.8
guidance due to delayed monetisation and macro EV/Ebit (x) 47.7 34.4 33.8 21.3 15.3
headwinds, it has demonstrated solid user growth and
Source: CLSA
engagements, which means that the probability of future
monetisation remains unchanged.

Global themes portfolio (cont’d)

CCCC (1800 HK - HK$7.27 - BUY)
In the midst of macro headwinds and rising trade tensions 30
between the USA and China, Alexious sees infrastructure as a
critical defensive measure in stabilising Sino-economic 25 max 14.28x
growth. As Beijing has already deployed about 60% of its

20
Rmb1.35tn infrastructure fund, he expects a roll-out of sdu 10.49x
further BRI and general infrastructure projects to begin in the 15
next two-four months. State-owned contractors are likely avg 6.69x
beneficiaries and we are hence Overweight the sector. 10 sdd 5.4x
min 4.11x
5
Alexious Lee’s investment case
 Fixed-asset investment is forecast to re-accelerate to 7- 0
8% YoY in FY19 and engineering, procurement and Dec 13 Oct 14 Aug 15 Jun 16 Apr 17 Feb 18 Dec 18
construction (EPC) contractors will likely report double-
digit earnings growth from a backlog-to-revenue Financials
conversions and strong new orders in tier 1 and 2 cities. Year to 31 December 16A 17A 18CL 19CL 20CL
Net income (Rmbm) 16,248 20,480 22,012 25,528 29,402
 EPC contractors’ cash conditions will likely improve due to EPS growth (% YoY) 4.6 26 7.5 16 15.2
Beijing’s softer deleveraging stance. CL/consensus (21) (EPS%) - 106.7 101.6 104.5 0
PE (x) 6.4 5.1 4.7 4.1 3.5
 CCCC’s 3Q18 earnings increased 12% YoY and 9M18
Dividend yield (%) 3 3 3.3 3.8 4.4
earnings up 10% YoY, showing positive operating ROIC (%) 6.3 7.9 8.8 10.2 11.9
cashflow despite deleveraging efforts. EV/Ebit (x) 9.5 6.8 5.4 4.0 2.6
Source: CLSA
China Moly (N-R)

CLSA no longer covers cobalt producer China Moly, although 10
it was under coverage at the time of its initial inclusion in the
9 Max 30.4x
portfolio. With our thematic thesis unchanged Shaun Cochran
8
retains the stock. Despite trade war tensions sending
7 sdu 24.3x
shockwaves through the global auto industry in 2018,
Christopher Richter argues that new thematic technologies 6
avg 18.2x
are still the core drivers of the industry, with electrification, 5
autonomy and connectivity continuing to gain momentum 4 sdd 13.2x
despite slowing global sales. We would note that all three are 3
re-enforcing with the value of electrification enhanced by the Min 8.2x
2
transition to autonomy and connectivity. Ken Shin argues that
1
electric vehicle sales have remained robust and that a virtuous
cycle is materialising for battery-makers. The key dynamic to 0
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Apr 14
Aug 14
Apr 15
Aug 15
Apr 16
Aug 16
Apr 17
Aug 17
Apr 18
Aug 18
track is the likely shifting balance of power between the

traditional auto industry and the battery industry. In the
earliest stages of the industry’s development, the few auto
companies that were committed to an electric future enjoyed Financials
strong negotiating positions. But as industry consensus shifts Year to 31 December 16A 17A 18CL 19CL 20CL
to the inevitable future of electric (and the relevant model Net income (Rmbm) 1,166 3,145 6,151 6,331 6,352
plans aggressively scale) the auto-battery industry will enjoy EPS growth (%YoY) 13.6 130.2 76.6 1.3 (1.3)
simultaneously improving volumes and pricing power. PE (x) 27.0 31.1 10.6 10.5 10.6
Dividend Yield % 2.1 1.9 6.3 4.6 4.6
ROE (x) 5.6 9.4 12.3 12.1 10.4
ROIC (x) 3.1 5.0 - - -
EV/Ebit 54.1 13.2 7.9 7.6 8.0
Source: Factset


AIA (1299 HK - HK$62.35 - O-PF)
Despite the slowdown in the Chinese insurance sector and 110
challenging macro environments, AIA’s resilience and robust 100
max 25.38x
execution will help it navigate these headwinds over its peers 90
and Lloyd Xu retains his Outperform rating. He argues that 80 sdu 21.9x
recruitment is a leading indicator that offers visibility into 70 avg 18.42x
growth, with AIA reporting agent growth. The insurer has also 60
sdd 14.77x
done a better job than peers in navigating the regulatory 50
changes, in part due to its superior product mix and stronger 40 min 11.11x
distribution from a large base. 30
20
AIA investment case 10
 AIA is a resilient stock amid turbulence. While the macro Dec 13 Oct 14 Aug 15 Jun 16 Apr 17 Feb 18 Dec 18
environment challenges everyone, AIA’s robust execution
will help it navigate headwinds better than peers. Financials
Year to 30 November 16A 17A 18CL 19CL 20CL
 Recent press speculation suggests AIA’s Beijing branch Net income (US$m) 4,164 6,120 4,257 5,936 6,781
raised its number of agents by 33% in 9M18, and that it EPS growth (% YoY) 50.5 46.8 (30.5) 39.4 14.2
plans another 20% increase QoQ. As recruitment is a CL/consensus (EPS%) - 118.4 - - -
leading indicator because it offers more visibility of PE (x) 23.1 15.6 22.6 16.2 14.2
growth, this is good news. Dividend yield (%) 1.4 1.6 1.8 2.1 2.3
ROE (%) 12.6 15.9 10.3 13.9 14.4
EV/Ebit (x) - - - - -
Source: CLSA
Fanuc (6954 JP - ¥17,020.00 - BUY)

This year turned out to be tough for global automation stocks, 40,000
as severe competition and trade-war worries pressured
growth and disrupted manufacturers expansion plans. Despite
max 35.95x
these difficulties, China’s relentless push to modernise its
30,000
factories will see strong Chinese automation growth return in sdu 30.32x
CY19 while new technologies enable new services with the
FIELD alliance a core differentiator for this stock. avg 24.69x
20,000
sdd 20.34x
Morten Paulsen’s investment case min 15.99x
 Robotics remains one of the fastest-growing segments
within automation. As the world’s largest industrial robot 10,000
supplier, Fanuc is in an excellent position to capitalise on Dec 13 Oct 14 Aug 15 Jun 16 Apr 17 Feb 18 Dec 18
this trend.
Financials
 Fanuc has the most generous distribution policy of any Year to 31 March 17A 18A 19CL 20CL 21CL
major automation equipment maker in the world and the Net income (¥m) 127,697 181,967 168,300 183,800 234,100
management confirmed this commitment by increasing the EPS growth (% YoY) (19.7) 42.8 (7.5) 9.4 27.9
interim dividend. CL/consensus (22) (EPS%) - 116.2 102.1 98.6 126.3
PE (x) 25.9 18.1 19.6 17.9 14
 Although Fanuc has suffered under China’s weakened
Dividend yield (%) 2.3 3.3 5 4 4.3
automation demand, strength in Japan could dampen this. ROIC (%) 21.8 26.6 19.8 23.3 28.5
Given its dominant market position, cash-rich balance EV/Ebit (x) 16.7 11.1 14.1 11.4 8.9
sheet and superior profit margins, Fanuc deserves a Source: CLSA
premium over the sector.


SEC (005930 KS - ₩40,250.00 - BUY)
Thematically, Samsung Electronics offers underappreciated 80,000
exposure to AI. Any development of specialist hardware will
70,000 max 11.15x
increasingly be internally manufactured. Also the Viv AI voice
platform remains a call option on meaningful software 60,000 sdu 9.49x
capability improvements. Paul Choi forecasts that the
50,000 avg 7.84x
economic slowdown and falling property prices will make sdd 6.73x
2019 a tough year for the Korean economy. This will prevent 40,000
min 5.63x
the Bank of Korea raising interest rates which, combined with 30,000
a current account surplus, will put pressure on the won and
20,000
provide a valuable offset to broader volatility.
10,000
Sanjeev Rana’s investment case Dec 13 Oct 14 Aug 15 Jun 16 Apr 17 Feb 18 Dec 18
 Samsung’s EPS is expected to bottom in 2Q19, with
catalysts such as stabilisation of DRAM ASPs. Financials
Year to 31 December 16A 17A 18CL 19CL 20CL
 DRAM demand growth may begin to exceed supply Net income (₩bn) 22,416 41,345 48,063 43,457 47,420
growth in 2H19 helped by demand from hyper scalers and EPS growth (% YoY) 23.6 92.6 18 (9.3) 9.1
content growth in smartphones. CL/consensus (38) (EPS%) - 2 2.1 1.8 1.9
PE (x) 13 6.7 5.7 6.3 5.8
 Resilient margins, falling capex and rising FCF means that
Dividend yield (%) 1.4 2.1 3.6 4.5 5
DRAM makers like Samsung Elec have room for dividend ROIC (%) 17.1 28 28.3 24.4 25.8
and share buybacks. EV/Ebit (x) 7.2 4.0 2.8 2.8 2.1
Source: CLSA
Ayala Corp (AC PM - P938.00 - BUY)

With significant global uncertainty global equity market 1,400
performance was almost universally weak in 2H18. The 1,300
max 22.76x
Philippines was no exception. However Alfred Dy sees 1,200

sdu 20.84x
multiple potential catalysts: falling inflation; improving 1,100 avg 18.93x

earnings growth; pre-election spending; and progress on tax 1,000 sdd 17.07x
reform and infrastructure initiative. Ayala Corp offers 900 min 15.2x
important non-tech-related exposure to a traditional Asian 800
growth story. 700
600
Jose-Paolo Fontanilla’s investment case 500
 We remain positive on Ayala’s push to buy into new 400
businesses like ecommerce and digital-payment platforms Dec 13 Oct 14 Aug 15 Jun 16 Apr 17 Feb 18 Dec 18
to complement its traditional operations.
Financials
 Ayala’s diverse portfolio should benefit from the country’s Year to 31 December 16A 17A 18CL 19CL 20CL
rising disposable income and its solid financial position will Net income (Pm) 24,730 28,989 31,370 37,370 45,545
allow the firm to support various growth programmes. EPS growth (% YoY) 17.8 17.2 10.2 17.1 21.9
CL/consensus (9) (EPS%) - 107 102.2 103.2 0
 The company has multiple growth engines with energy and
PE (x) 23.5 20.1 18.2 15.6 12.8
industrials expected to be key contributors alongside real
Dividend yield (%) 0.6 0.7 0.7 0.7 0.7
estate and banking. ROIC (%) 12.7 11.1 13.8 14.7 16.2
EV/Ebit (x) 14.0 13.4 9.6 8.3 6.9
Source: CLSA


Venture (VMS SP - S$14.69 - O-PF)
CLSA has long been bullish on precision medicine as a theme. 40
max 28.84x
For more on this see our February 2018 Precision Rx report.
35
Venture is specifically a core development partner to Illumina,
the world’s leading genome-sequencing equipment company. 30 sdu 21.45x
The existence of this relationship alone is a strong validation 25
of the competence and potential of this company. In a 20
avg 14.07x
broader Sino-US trade war environment it is also a potential 15
sdd 10.79x
beneficiary from global production relocation.
10 min 7.51x
Horng Han Low’s investment case 5
 VMS continues its product transition with management 0

guiding for a ‘V-shaped’ QoQ recovery in 4Q18. Dec 13 Oct 14 Aug 15 Jun 16 Apr 17 Feb 18 Dec 18
 It will benefit from new product introductions for multiple

Financials
customers. The recovery could continue into 1Q19. Year to 31 Dec 16A 17A 18CL 19CL 20CL
 The recent weakness in the stock as it retracted what Net income (US$m) 179 373 364 385 426
EPS growth (% YoY) 17.9 102.1 (3.2) 5.9 14.5
were over-inflated consensus expectations offer a more
CL/consensus (8) (EPS%) - 140.2 128.8 124 0
attractive entry point.
PE (x) 22.8 11.3 11.7 11 9.6
Dividend yield (%) 3.4 4.1 5.1 5.1 5.1
ROIC (%) 11.6 25.1 23.8 22.9 23.8
EV/Ebit (x) 17.5 8.0 8.5 7.8 6.6
Source: CLSA
SBI Holdings (8473 JP - ¥2,476 - BUY)

Shaun Cochran believes the stock offers lower risk exposure 4,000
to the rise of cryptocurrencies and, more importantly, max 12.26x
blockchain given that SBI’s primary business is online broking
in Japan. Second, SBI makes significant investments into 3,000 sdu 10.08x
developing blockchain technologies and worked with Ripple
avg 7.91x
to create SBI Ripple Asia, whose consumer-focused 2,000 sdd 6.58x
blockchain remittance app is an example of potential min 5.24x
monetisation angles.
1,000
Hideyasu Ban’s investment case

 Hideyasu Ban argues that SBI is an attractive way to play 0
the theme of data-monetisation given a strong track Dec 13 Oct 14 Aug 15 Jun 16 Apr 17 Feb 18 Dec 18
record of monetising internet financial services faster
than its peers. Financials
Year to 31 March 17A 18A 19CL 20CL 21CL
 He sees its bio-technology-related investments as an un- Net income (¥m) 32,455 46,684 64,843 69,258 71,295
priced offering and a potential source of further upside. EPS growth (%YoY) (0.9) 38.4 28.2 3.7 (0.7)
CL/consensus (EPS%) - - - - -
 SBI Holdings’ enjoy a 21% profit Cagr over the past five
PE (x) 15.5 11.2 8.8 8.4 8.5
years and he projects a 15% Cagr over the next three.
Dividend Yield % 2.0 3.4 4.5 4.4 4.8
ROE (x) 8.7 11.6 14.0 13.3 11.7
EV/Ebit (50.5) (35.9) (27.6) (29.1) (29.0)
Source: CLSA
Note: All prices quoted in our top-picks section are as at close of business 11 December 2018

Global Themes 2019
Global - Economics
A game of two halves
Confidence in world growth will start 2019 strong, only to ebb in 2H
World trade growth is OK, but it is narrow. Developed economy demand

is driven by the USA. Emerging market demand is driven mainly by Asia,
which means China. We see growth in both starting 2019 robust. Eric Fishwick
+44 20 7614 7171
Confidence in China’s economy should be rising by the New Year and eric.fishwick@clsa.com
the USA, thanks to a strong labour market and fiscal stimulus, will
continue to grow about 3%. Enjoy it while it lasts. The USA fiscal boost
will unwind from 3Q19, and the usual duration of policy cycles in China
suggest that mid-year will be the growth peak. Concerns that global
growth is flagging will dominate the tail end of 2019.
World trade growth is good
World trade volume growth (3mma %YoY)
Narrowness increasing. While the pace of global trade growth is decent (3mma %YoY) Developed economies
(the profile is following the flat-topped curve we first mapped for it in 10 Emerging economies
2016) it is getting narrower. Slow growth in Europe and Japan mean that 9
8
Total
the USA is the only developed country whose import volume growth is 7
6
stronger now than it was a year ago. Emerging market import demand is 5
4
stronger and accelerating. It is driven mainly by Asia, although in recent 3
2
months Latin America has also recovered. 1
0
(1)
(2)
Peaky America. At this point in the cycle, with wage growth increasingly (3)
(4)
visible, the USA does not need fiscal stimulus. But with it, 3%-plus (5)
12 13 14 15 16 17 18
growth has become the norm. This is way above trend, meaning the USA
Source: CLSA, cpb.nl
trade deficit is deteriorating (see page 17). Certainly, it will be a reliable
source of import demand, at least to the middle of the year. From 3Q19, America is driving developed economy demand
the USA fiscal profile will swing from boost to growth to drag. As it does Import volume growth (3mma %YoY)
so perceptions of the strength of its economy will drop. And so will its 8 (%YoY) Sep 17 Sep 18
import growth, although we doubt by enough to close the trade deficit. 6
4
Policy-driven China. Market fears that China will not be able to stimulate
its economy are overplayed. The recovery in infrastructure FAI that 2
started in September will continue. Exports may slow (so far they haven’t) 0
but domestic investment is much more important, and confidence that (2)
Beijing has been able to support Chinese growth will be back by start- (4)
2019. It will strengthen further in the first quarter, and by mid-year Advanced United Japan Euro Other
economies States Area advanced
Chinese data will be beating the (relatively high) working group targets we economies
expect to be set for 2019. But this is the beginning of the end; by mid- Source: CLSA, CEIC, DataStream, cpb.nl
year China will be moving away from stimulus, and mid-2019 is likely to
prove the highpoint for most Chinese economic data. Asia is driving emerging market demand
Import volume growth (3mma %YoY)
14 (%YoY) Sep 17 Sep 18
Sell in May… With the regions that are most important to global trade 12
growth both strong in the first half but flatter or decelerating in the 10
second, 2019 will be another year in which positive market sentiment will 8
be front-end loaded. The old adage “sell in May and go away” will be good 6
4
advice. By the time that markets come out of the traditional low-turnover 2
summer lull, growth momentum will be starting to weaken. Markets were 0
concerned about any softness in growth indicators in 2018 when, in fact, (2)
world growth was stable. Concerns will become more justified the longer (4)
Emerging Emerging Eastern Latin Africa
2019 persists. We expect the Treasury curve to invert in the second half economies Asia Europe / America and Middle
CIS East
of 2019, presaging further slowdown in 2020.
Source: CLSA, CEIC
16 13 December 2018

Global Themes 2019
Global - Economics
Trump versus economics
Despite Trump’s efforts, USA trade deficit will set a new high in 2019
If tariffs are to derail the world trade cycle they must depress activity in
either China, the USA, or both. Production relocating is not a threat to
Eric Fishwick
world trade. China will suffer but other countries will benefit; for the
+44 20 7614 7171
global economy it is a zero sum game. We expect that the hit on Chinese eric.fishwick@clsa.com
growth will be contained by the stimulus its government is mounting to
counter the effects of the deleveraging it introduced in 2017. And the
USA should be little affected either by the effect of China’s retaliatory
tariffs or the squeeze on incomes and profits that the higher import
prices implied by tariffs cause. And while USA growth stays above trend, Balance worsening in nominal terms . . .
its trade deficit will get worse not better. US trade balance (USDbn sa)
(20) (US$bn)
Deteriorating over the cycle. The USA trade deficit has worsened (30)
steadily over this business cycle. It did the same in the previous cycle. It (40)
is normal for the USA trade balance to worsen as growth accelerates
above trend, improving only when the business cycle rolls over. (50)
Domestic demand growth expands faster than the economy’s ability to (60)
grow supply. This effect is obviously most powerful when the USA is at
(70)
full employment, as it is now. In the last twelve months, domestic
expenditure growth in the USA was 3.4% (the strongest for 13 quarters) (80)
00 02 04 06 08 10 12 14 16 18
yet trend growth, given the economy’s labour supply, capital and
Source: CLSA, CEIC
productivity growth, is estimated by the Fed at less than 2%. With
demand outstripping the economy’s ability to grow supply, imports are . . . and in real
being drawn in and the deficit is widening in consequence. US trade balance (USDbn 2012 prices saar)
(400) (US$bn)
Absorbing. The USA absorbing imports from the rest of the world is (500)
helped by the persistence of spare capacity in global supply chains. It has

(600)
also been reinforced by Trump’s fiscal stimulus, which has boosted
demand growth in an economy that was already at full employment. (700)
(800)
Tariffs versus growth. The imposition of tariffs on USA imports doesn’t

(900)
change this dynamic unless it squeezes real wages and profits by enough
to slow the economy significantly. This is unlikely, particularly given the (1,000)
00 02 04 06 08 10 12 14 16 18
preferences of the Trump administration. Tariff receipts accrue to the
Source: CLSA, CEIC
Federal government and will, given that the government is running a
deficit, be recycled in the form of government spending. Tariffs may So is the deficit with China
slow the private sector, but not the economy as a whole. US bilateral balance with China (USDbn sa)
0 (US$bn)
Growth versus deficit. And if growth remains above trend, the USA (5)
trade deficit will continue to widen. Despite the President’s wishes, (10)
2019 will see the trade deficit break the already record 2018 figure. This (15)
may also be true of the USA trade deficit with China. Chinese exports to (20)
the USA are income elastic, but the scale of China’s supply chains means (25)
that price elasticity is low. Slower USA growth would be the most (30)
efficient way of reducing the USA trade imbalance, but one that would (35)
be anathema to any politician, and certainly to Donald Trump. (40)
00 02 04 06 08 10 12 14 16 18
Source: CLSA, CEIC
13 December 2018 17

Global Themes 2019
Global - Strategy
Trump to deal on trade
Trump will secure a trade deal with China
GREED & fear has argued that some kind of interim deal, or agreement,
on the Sino-USA trade war is achievable. The G20 summit gave us the
Christopher Wood
first evidence this is the correct bias. This advice is retained into 2019. +852 2600 8516
Both sides understand a retaliatory dynamic ultimately serves no one. christopher.wood@clsa.com
There is a deal to be made and the Donald’s instincts are clearly to build
a position on which he can take profit and declare a victory. The next 90
days will determine if there is a victory China can tolerate him claiming.
Delays an overture. Prior to the G20 summit GREED & fear was advising
investors to be more hopeful than the consensus that some kind of
interim deal, or agreement, could be negotiated that at least reduces the Trump’s tariffs
likelihood of the threatened increase in tariffs. Prior to the summit, the US tariffs on imports from China
600 (US$bn)
stated US position was that from 1 January tariffs on US$200bn of 25% 10% 10% or 25%
imports from China are scheduled to increase from the current 10% to 500
25%. Trump has also threatened to impose 10-25% tariffs on the
400
remaining US$267bn of imports from China if a deal is not agreed. 267
300
The Donald is a deal maker. The negotiating dynamic has been building
200
to something like the decision announced for weeks. This dynamic 200
250 250
should keep investors, on balance, optimistic for several reasons. First, 100
Donald Trump signalled in his tweet on 1 November that he was looking 0

34 50 50
forward to meeting Xi at the G20 and had a telephone call with him 6 Jul 18 23 Aug 18 24 Sep 18 1 Jan 19 (?) ???
where North Korea was discussed. Second, that North Korea was Source: CLSA
discussed is also important because GREED & fear continues to believe
that Trump wants to do a deal on North Korea, and he probably needs
Beijing’s help to achieve that goal. In addition, apart from the long
observed nature of the Donald where he likes to turn on a dime and do a Trump’s approvals
deal, there were some signals that more progress may have been made Donald Trump’s approval ratings
(%) 50-day mov. avg
on agreeing a common ground, for example Peter Navarro’s criticisms of 48
200-day mov. avg
famous Wall Street firms for getting involved in the trade dispute. 46 Trump approval rating
44
The truce is a positive sign. This truce is clearly a positive for markets,
42
particularly Asian stock markets, since it raises the hope that life can
return to normal. More so, as it was not expected by many market 40
participants. It has the potential to underpin a year-end equity rally led 38
by Asia which would probably have the practical effect of delaying the 36
end of US monetary tightening. Of course, none of the above means that
Feb 17
Aug 17
Feb 18
Aug 18
Jan 17
Jul 17
Jun 17
Oct 17
Jan 18
Jul 18
Jun 18
Oct 18
Apr 17
May 17
Apr 18
May 18
Nov 17
Dec 17
Nov 18
Dec 18
Mar 17
Mar 18
Sep 17
Sep 18
there will not be continuing friction between China and America on a

whole host of issues. What it does signal is that both sides understand Source: CLSA, Bloomberg
that a negative retaliatory dynamic that ultimately benefits no one

should be avoided. This is to say, there is a deal to be done most likely in
the areas of intellectual property and markets where China should be
willing to make concessions.
18 13 December 2018

Global Themes 2019
Global - Strategy
Trump trapped
Administration to be ineffectual in 2019
The Trump administration has essentially caught itself in a trap of its

own making and is likely to be ineffectual in 2019. A lack of policy
Shaun Cochran
momentum resulting from the loss of House control, hence an inability
+852 2600 8351
to enact proactive policy to counter the looming fiscal cliff, will be a shaun.cochran@clsa.com
factor. There is also a credible risk that a current senior member faces an
indictment recommendation from Mueller’s lead Grand Jury. Finally,
while not probable, we should not rule out Trump’s own impeachment.
Trump’s base sees delivery. The Trump administration has largely The fiscal cliff
governed based on promises made in the campaign. It has sought to limit Projected decrease in budget authority post 2019
immigration, imposed tariffs on Chinese goods imported to the USA, and Defence (BCA) Non-defence (BCA)
Defence (BBA) Non-defence (BBA)
recently gave states additional powers to apply for waivers to create 700 (US$bn)
alternatives to Obamacare (though it is not entirely repealed). There has 680
also been clear near-term economic reacceleration off the back of 660
640
Trump’s tax efforts; however, the ability to control Congress and pass 620
legislation with relative ease, which the administration now lacks, was a 600
580
core part of the success. 560
540
Fiscal cliff looming. Economic growth has largely matched the 520
500
administration’s goal, with latest figures reporting GDP growth at 3.5% 2017 2018 2019 2020 2021
in 3Q18, bringing the four-quarter average to slightly over 3%. However, Source: CLSA, Congressional Budget Office
given the fiscal package supported this, there is a likelihood that these
effects will fade in response to mounting headwinds. Furthermore, post- Forecasted declining growth
Level & QoQ growth (saar) of gov expenditure
2019 the Fed’s increased discretionary budget will revert to the levels Level actual Level forecast
defined by the 2011 Budget Control Act, creating an aggregate decrease % QoQ saar (RHS)
in budget authority of US$126bn. Not only will this restrict Trump’s 3,050 (USDbn saar 2009 prices) (% QoQ saar) 6
ability to invest in infrastructure, but it will also move government 3,000 5
4
expenditure growth and investment from a 2.9% YoY growth peak in 2,950
3
1Q19 to a 0.5% YoY contraction by 1Q20. 2,900 2
2,850 1
Mueller investigative substance highly likely. As of May 2018, there 2,800
0
(1)
have been five guilty pleas and 14 indictments (excluding organisations), 2,750 (2)
surpassed only by Watergate. If the investigative timelines between 2,700 (3)
Mueller and Watergate are comparable, then it is plausible that Mueller 16 17 18 19 20
already holds damning evidence of criminal wrongdoing. Furthermore, Source: CLSA, Congressional Budget Office
plea bargains are in exchange for executable information, so the base

case should be that some type of indictment recommendation is coming. Negative impact
The core question is obviously against whom. As such, investors should Contribution to QoQ (sa) GDP growth in ppt
(ppt) Contribution to GDP growth (forecast)
not rule out a formal recommendation to impeach. A report is extremely 0.25
Contribution to GDP growth (actual)
likely to make its way to high-ranking Democrats and some degree of 0.20
public disclosure is plausible regardless of the outcome. This is unlikely 0.15
to be positive for the administration or the President and could put 0.10
Republicans in a difficult primary position. 0.05
0.00
Ongoing investigation either way. Trump has lost policy momentum along (0.05)
with his control of the House; tax returns are an easy target that could (0.10)
plausibly puncture the ‘wizard’ narrative. Also a likely risk is an Obama-style (0.15)
deadlock which hamstrings the administration’s ability to manage the fiscal 16 17 18 19 20
cliff which is also likely to scuttle any infrastructure aspirations. Source: CLSA, Congressional Budget Office
13 December 2018 19

Global Themes 2019
China - Economics
So long surplus
China will record first full-year current account deficit in 2019
China recorded only its second current account deficit since joining the
WTO in 1Q18. It will not be its last. Its current account has been eroded
Eric Fishwick
by a combination of structural factors and government pro-consumption
+44 20 7614 7171
policy. The deficit will be back in 1Q19 and will not be reversed by the eric.fishwick@clsa.com
strong export quarters at the end of the year. 2019 will be China’s first
full year current account deficit. Market concerns about whether the
CNY can continue to be managed in a crawling peg will inevitably rise.
Consigning surpluses to history. China had a current account deficit in So long surplus
1Q18 for only the second time since it joined the WTO. Unlike the first Current account balance %GDP
time (4Q16), the 1Q18 deficit was the continuation of a trend visible since 12 (%GDP)
2015 (4Q16 was a freak). Certainly, the massive current account surpluses 10
that China accrued before the GFC can be consigned to history. 8
6
Primary drag. Part of the pressure on China’s current account is from its
large net imports of oil and commodities. Its primary product trade 4
deficit is 1½% of GDP. China’s exports of semi-manufactures offsets 2
some of this, but not all. The rise in oil and commodity prices from early 0
2016 has worsened its trade and current account balances by about ¾% (2)
of GDP. This will reverse if commodity prices fall, but we do not expect 00 02 04 06 08 10 12 14 16 18
this to happen before end-2019. Source: CLSA, CEIC
Market share static

Plus structural shifts. The other factors pushing the surplus into deficit
China share of world exports (%)
will be harder to reverse. They are either the result of slow moving 15 (%) Constant (2014) prices & exchange rates
changes in China’s economy, or policy (or both). Thus China’s rising Current USD
wages and export scale mean that it is no longer rapidly taking market 13
share. But if market share is static (or nearly so) import growth will
exceed export growth because its domestic demand growth (6-7%) is 11
faster than world growth (3-4%). The exceptional growth in its tourism 9
deficit is a special case of this “absorption” argument, supercharged by
high income elasticity of demand. China’s rebalancing to consumption is 7
likely to suck in more imports and reduce savings.
5
05 06 07 08 09 10 11 12 13 14 15 16 17 18
Equals full year deficit. The 1Q18 deficit was followed by small
Source: CLSA, CEIC, DataStream, cpb.nl
surpluses in 2Q and 3Q. 4Q (not yet published) should be a bigger
surplus. First quarter 2019 will be a deficit again, with a high likelihood Supercharged tourism deficit
that 2Q19 and 3Q19 will be in deficit also. The seasonal peak in export Net tourism balance (USDbn)
10
receipts in 4Q means that the final quarter will be in surplus. But we (USDbn 3mma))
forecast a current account deficit of US$27bn for 2019 as a whole. 0
(10)
Small but important. This is a tiny figure, but it will prove an important (20)
one. Markets have proven relaxed about the 1Q18 deficit, but the (30)
recurrent deficits in 2019 are likely to attract a higher profile. As they (40)
do so, it is inevitable that questions about the CNY intensify. Currency (50)
pegs and current account deficits make uncomfortable bedfellows. So (60)

far, the central bank is having little trouble managing the CNY in its (70)
crawling peg, but this should not be assumed to remain the longer the 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
deficit persists. Source: CLSA, CEIC
20 13 December 2018

Global Themes 2019
China - CRR strategy

Policy vs sentiment
Private sector decline poses a bigger challenge to Beijing than trade war
The rapidly deteriorating mood among private entrepreneurs now poses

a greater challenge to China’s economy than Trump’s tariffs, in China
Haixu Qiu
HQ’s view. Beijing’s ability to enact timely policies to lift private-sector
+86 10 5965 2032
sentiment will determine whether the country can withstand external Haixu.qiu@clsa.com
pressure and avoid a hard-landing in 2019. Our base case is that Beijing
is aware of low spirits and is ready to repair it with concrete tax cuts for
corporates soon, as well as more supportive measures for SME funding. More SMEs plan to lay off workers
% of CRR SME panel who plan to cut staff size
25 (%)
Top risk: private entrepreneurs losing confidence. The lack of
confidence and rising uncertainty about the future among private 20
entrepreneurs poses the biggest risk to China’s investment and
15
consumption growth in 4Q18 and 2019. SME entrepreneurs have
already slowed their capex, which may offset the potential rebound in 10
infrastructure FAI and dilute Beijing’s efforts to boost domestic demand.
Policy from Beijing has been in the right direction so far: slowing down 5
deleveraging, stimulating infrastructure in a measured way, aiding 0

exporters, cutting tax for consumers and making some meaningful
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
concessions to foreign investors. But more concrete tax cuts and funding
Source: CRR
support are needed to restore private-sector confidence.
Critical mass
Consumption slowdown. It is worth noting that the slowdown in retail Up close with China’s urban workers
sales this year has been overwhelmingly driven by sluggish auto sales.
CRR data shows that among middle-class households and migrant
workers, income growth has remained solid through 2018. The already-
launched Personal Income Tax reform, which cuts total tax burden on
middle-class households by over 70% and boosts their disposable
income by 6.6%, will effectively bolster consumption, especially
education and travel consumption, in 2019. CRR’s November 2018
Critical mass report draws a bullish picture about consumption among
China’s 450 million working-class population and we believe they will
replace the middle class as the primary driver of consumption upgrading.
Source: CRR
What about financial deleveraging? It is a fair comment that China’s
financial deleveraging has made progress in lowering SOE debt, avoiding Outstanding WMP
a Minsky Moment and making GDP growth less debt driven. But, the WMP scale has peaked on financial deleveraging
total debt ratio has kept rising in the past two years driven primarily by 35 (Rmbtn)
local-government and household debt. Deleveraging will continue next 30
year, but the focus will switch from curbing shadow banking to 25
redirecting credit flows from LGFVs, SOEs and households to private 20
firms. As a result, SME capex, especially for automation, may accelerate; 15

infrastructure stimulus will be tepid; and property easing may not be an 10
option for policy makers. 5
0
Aug 08
Aug 10
Aug 12
Aug 14
Aug 16
Apr 09
Apr 11
Apr 13
Apr 15
Apr 17
Dec 07
Dec 09
Dec 11
Dec 13
Dec 15
Dec 17
Source: WIND, CRR
13 December 2018 21

Global Themes 2019
China - Infrastructure
Defensive countermeasures to spur economic growth
Looking beyond the next 12-18 months
Infrastructure is critical in stabilising economic growth amid Sino-US

trade tension that could weigh on export and domestic consumption.
Alexious Lee
Besides the recently deployed Rmb1.35tn special fund, we expect a +852 2600 8722
series of new orders (PPP included) and belt and road initiative (BRI) alexious.lee@clsa.co
projects to be announced soon. Centrally-owned contractors are key
consolidators and have to most potential for SOE reform like debt- Top pick
equity swaps and asset-backed securities. Our top pick is CCCC. CCCC (1800 HK)
Strong sign of political support. China kicked out its infra push via the Policies in place
deployment of a Rmb1.35tn special government fund. The pickup of FAI-Infra forecast
construction activities in 4Q18’s infra FAI activities (versus a -3% YoY in 25,000 (Rmbbn) Yearly FAI-Infra (%) 25
YoY (RHS)
3Q18) will boost economic activities. Komatsu Komtrax data also 20,000
19,441
20
18,001
indicates a sharp acceleration in excavators’ operating hours (to 9% YoY) 15,201
17,309
in October and should continue as Beautiful China-related projects in 15,000 13,127 15

tier-1 and -2 cities’ were revived while planned investment for tier-3 9,362
11,217
cities’ public transportation and municipality projects continues to 2020- 10,000 10
21. CCCC is the top beneficiary. 5,000 5
2019 and beyond. We forecast FAI infra to re-accelerate to 7-8% YoY in 0 0

FY19 and new orders (including PPP) to re-accelerate in 1Q19 ahead of 2013 2014 2015 2016 2017 18CL 19CL
the 2019 plenary session. EPC contractors will most likely report double- Source: Company data, CITICS & CLSA
digit earnings growth on (1) well-funded backlog-to-revenue conversion,

Pro-fiscal policy
and (2) strong new orders from tier-1 and -2 cities such as Jing-Jin-Ji or
Interbank lending weighted interest (1yr)
Greater Bay Area. EPC contractors’ cash conditions will likely improve 6 (%)
on a softer deleveraging and debt-equity-swap will be critical in bringing
down the gearing ratio, as required by the SASAC. 5
4
Sino-BRI could accelerate on Rmb terms. The July BRIC summit, top-
3
level official visits (August 2018) and the Sino-Africa Summit (September
2018) will likely generate top-level new orders by April 2019. The drag 2
on overseas new orders/revenue this year formed a low base for EPC
1
contractors’ overseas operating-profit growth in 2019. Project
resumption will be based on BRI countries’ attempt to reduce the US 0
Jan 17 Aug 17 Mar 18 Oct 18
dollar impact (on their economy) by means of switching into Rmb-
Source: Wind, CITICS Securities & CLSA
denominated contracts. Currency swap with China will likely be the first
step for any BRI countries to make the switch. Rmb internationalisation Sino-BRI collaboration
is structural and will benefit key contractors like CCCC the most. Overseas contract revenue & new orders
350 (US$bn) Overseas contracting revenue
New orders
We are overweight the sector. The China infrastructure-related sector 300
remains underowned as most EPC contractors are trading below 0.5sd 250
forward PE and/or below 0.6x 19CL PB. We expect more legs to positive
200
price actions on (1) consensus upgrades, (2) potential re-rating on policy-
150
related catalysts (reform, DES, and shares buyback), and (3) revival of the
Sino-BRI projects in 2Q19. We are Overweight the sector with CCCC 100
(Obor/PPP) as our top pick. We also like BUY-rated CRCC (rail EPC), 50
Weichai (HDT) and CRRC (Train maker). Smaller-cap machinery 0
manufacturers such as Zoomlion (crane, concrete) and Lonking 2013 2014 2015 2016 2017 18CL 19CL
(excavators, loaders) are also BUYs. Source: MOC, CITICS Securities & CLSA
22 13 December 2018

Global Themes 2019
Global - Commodities
Base metals to bounce back
Macro headwinds build, but metals can rise next year
After holding steady through 1H18, the LME Index corrected almost
20% through June/July, and has failed to regain much ground despite
Andrew Driscoll, CFA
constructive physical market indicators. The demand outlook has +852 2600 8528
deteriorated amidst the China slowdown and trade tensions, and we andrew.driscoll@clsa.com
recognise some downside risk to our forecasts. However, we believe the
base metals complex can rally at least 10% from current levels through Top pick
2019. We are bullish on copper, with OZ Minerals a key pick. OZ Minerals (OZL AU)
Metals lose lustre. After rallying 10% year to mid-June, the LME base Liquidity drag on metals
metals index promptly corrected 20% as sentiment u-turned on rising China's M1, Shanghai rebar and copper futures
trade tensions, a slowing Chinese demand environment and a stronger YoY change
120 (%) Rebar future price YoY (%) 35
USA dollar, and stands at 2,869. Aluminium, copper and nickel contracts Copper future price YoY
100
are down 13-14% YTD, while zinc and lead prices have fallen near 25%. 80
M1 YoY (RHS)
30
This upsets a run of two years of significant gains from early-2016 lows, 60
25
as China’s supply side reforms coincided with a powerful cyclical 40 20
demand recovery there and a period of synchronised global growth. 20 15

0
10
Headwinds persist. Macro headwinds abound, and we recognise there (20)
5
are downside risks to CLSA and consensus base metal forecasts. Beijing’s (40)
(60) 0
pursuit of deleveraging combined with pressure on exports has weighed
2010
2010
2011
2012
2013
2013
2014
2015
2016
2016
2017
2018
on the manufacturing sector. We recently met with the world’s largest
copper tube maker and orders have fallen about 30% in the last couple Source: Bloomberg, CLSA
of months. While China’s infrastructure investment has turned up, we

From bull to near bear market
expect only a modest recovery rather than widespread stimulus. China’s LME base metals index year-to-date
property market lead indicators have deteriorated, with pressure on 3,600 (Index)
prices and new housing sales declining on a YoY basis from September. 3,500
3,400
Into cost curves. However, there are also a number of supportive factors 3,300
for prices, most notably that a number of base metals, including 3,200
aluminium and nickel, are trading well into industry cost curves. Supply 3,100
has started to respond, and typically with a lag of about six months 3,000
prices should start to migrate back up cost curves as the market 2,900
2,800
rebalances. This is most apparent for aluminium, where some 1.8mt or
Feb 18
Aug 18
Jan 18
Jul 18
Oct 18
Jun 18
Apr 18
May 18
Dec 17
Nov 18
Mar 18
Sep 18
about 5% of China’s capacity has announced closure plans due to low

prices and margins. Nickel supply has been less responsive, but current Source: Wind, CLSA
prices will stall any sulphide mine restart plans.
Loss-making smelters
Supportive factors. Despite the correction in prices, market balances SHFE aluminium price spread over raw materials
(Rmb/t)
have mostly been supportive - aluminium, nickel and zinc will all record 7,000
global market deficits this year. This is evident in the drawdown in global 6,000
exchange inventory. Global demand is also likely to grow next year for 5,000
key base metals, albeit at a slower pace than this year. Key variables 4,000
include a resolution of the trade war, and policy response to slowing 3,000
demand in China. Given the challenged macro backdrop, our preferred 2,000
Spot spread
exposure is via defensively positioned miners with strong balance sheets 1,000 Average spread
and cash flow generation. Favoured base metal names include Alumina 0
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
May 14
May 15
May 16
May 17
May 18
Limited, copper miner OZ Minerals, and diversified play Vedanta.

Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
Source: CLSA
13 December 2018 23

Global Themes 2019
China - Oil, Gas and Petrochemicals

Inflection point
Ongoing reforms add visibility to SOEs
China's rapid economic development is going hand in hand with a

newfound spirit of environmental protection. Beijing’s strong
Ken Shin
commitment to control pollution, under the slogan of Beautiful China,
+852 2600 8266
will have seismic impact on its energy consumption and fuel mix, given ken.shin@clsa.com
the emphasis on switching from coal to gas. Beijing’s energy policy and
ongoing reforms will play a critical role in determining the direction and Top pick
speed of the transition in the coming years. CNOOC (883 HK)
Structural natural-gas-demand upswing: Natural-gas demand in China was China’s reliance on crude-oil imports
up 18.2% YoY to 201.7bcm in 9M18, underpinned by structural growth Rose to 70% due to sluggish domestic production
dynamics. The wider supply gap pushed up LNG/pipeline imports (m bpd) Domestic production
Crude net import
(%)
45.6%/21.8% YoY during the same period. We expect to see natural-gas 14 Net import as % of apparent demand (RHS) 75
consumption of around 350bcm in 2020, up 46.4% or 111bcm compared to 12
70
FY17. As China’s dependence on natural-gas/oil imports rose to 45%/70%, 10
65
Beijing aims to safeguard domestic energy and is urging for a boost in 8
6
national output to reduce its dependence on imports. Therefore, the capex 4
60
of oil & gas majors is likely to accelerate from FY19. 2

55
0 50
Reforming China O&G: Beijing will focus more on boosting gas
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
May 14
May 15
May 16
May 17
May 18
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
consumption, with a target of raising China’s natural-gas mix as a
proportion of total energy consumption from 7.3% in 2017 to 10% in Source: CLSA NBS Wind
2020 and 14% in 2030. Reforms will be accelerated, including the

continued transition from a gas-pricing mechanism to one that is market- China’s reliance on natural-gas imports
Climbed to 45% due to rapid demand growth
driven, along with associated infrastructure construction. Besides, Domestic production (LHS)
(mmscf/d) (%)
stricter monitoring of China’s environmental standards will persist next NG net import (LHS)
year, with stricter regulation on fuel standards, an environmental- 30 Net import as % of apparent demand 50
pollution tax and ban on waste plastics for recycling. These measures 25 45
will drive further consolidation. 20 40
15 35
Constructive on the big three: The Chinese government will focus on a 10 30
strong mandate to clean up pollution, along with SOE reforms aimed at 5 25
deleveraging and deregulation. China’s oil & gas sector will see potential 0 20
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
May 14
May 15
May 16
May 17
May 18
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
opportunities to unlock value from ongoing reforms and policy rollouts,

which will ultimately help large SOEs such as PetroChina and Sinopec.
Source: CLSA NBS Wind
 PetroChina: The essential investment thesis for PetroChina is the
transformation from an integrated E&P company into a pipeline Capex by the big-three SOEs
operator, removing the volatility and cyclicality of its earnings, which Capex of majors to accelerate in the coming years
(Rmbbn) PetroChina
have been historically linked to oil, while adding higher visibility. 400
Sinopec
350
CNOOC
 Sinopec: Sinopec has high earnings visibility, backed by resilient 300
downstream and an improving E&P business. Strong financials and 250
robust cashflow should translate into greater shareholder cash 200
returns, while the proposed IPO of its marketing unit should be a 150
major catalyst. 100
 CNOOC: We remain constructive on CNOOC’s trajectory, given 50
improved capital deployment and cost controls which will drive core- 0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
profit recovery. Accelerating revenue visibility and continuing

productivity gains will improve its long-term return on capital. Source: CLSA, Companies
24 13 December 2018

Global Themes 2019
China/HK - Power
Emerging from a policy smog CLEAN
& GREEN TM
Wind and WTE stand-out; selective in gas and coal
Xi Jinping’s Beautiful China initiative will continue to drive China’s

power and utilities sector in 2019. Our preferred sub-sectors include the
Charles Yonts
wind operators, which delivered strong operating results in 2018 and are
+852 2600 8539
coming out from under a policy cloud. Environmental utilities are also Charles.yonts@clsa.com
emerging from financing concerns - PPP and equity. We are cautious on
gas due to margin erosion while coal-fired power is still getting Top picks
squeezed, though there are positive pockets in both sectors. After a Longyuan (916 HK)
devastating 2018, solar should hit an inflection in 2019. China Everbright (257 HK)
Towngas China (1083 HK)
Making China Beautiful again. China’s power and utilities sectors cannot
be understood outside the context of Xi Jinping’s Beautiful China Wind quarterly curtailment ratio
th
initiative. Since the harder policy line after the 12 National People’s ack down to single digits
Congress, the government has been quietly putting the pieces in place to 30 (%)
drive change. The upgraded Environmental Protection Law (2015) gives 25
regulators teeth to enforce. For air pollution, the ongoing push to 20
increase renewables, nuclear and gas at the expense of coal-fired power 15

continues. Our preferred play remains leading waste-to-energy operator 10
China Everbright (BUY). The company has an opportunity to make good
5
with investors if it can put the HK$10bn of equity raised to good use.
0
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Renewables: wind rising, solar dawn still unclear. Within renewables, we
prefer China’s wind operators, with BUYs on Longyuan, Huaneng Source: CLSA, NEA
Renewables and (much riskier) Huadian Fuxin. Curtailment has improved
dramatically in 2018 on the back of structural and policy improvements Price (CIF) of China’s LNG import
that will continue into 2019; meanwhile tariff uncertainty is clearing up. China’s gas import prices rose sharply in 2018
2014 2015 2016
Solar is mired in uncertainty, as it has been since China cut quotas and (US$/MMBtu)
14 2017 2018
subsidies on 31 May 2018. At some point next year, we should see an 13
inflection in margins and sentiment, but we cannot see any signs yet; 12
neither capacity cuts, nor clear demand uplift. 11

10
9
Gas: multiple risks. After remaining exceptionally low for three years, 8
prices of China’s gas imports (43% of consumption) have risen sharply in 7
2018. PetroChina’s losses on gas imports expanded to Rmb20bn in 6

5
9M18 and it is accelerating price hikes to distributors. We expect Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
distributors’ dollar margins to shrink again through the winter. Volumes Source: GAC; CLSA
are also likely to come under pressure due to slowing industrial activity,
rising prices and high base. We believe that risk of connection fee cuts is China’s WTE capacity growth target
also real this time. We maintain negative view on CR Gas and ENN Continuing to expand in China
700,000
Energy (both U-PF). Towngas China (BUY) is a beneficiary of the start of (Tons/day)
591,400
gas imports from Russia and is our preferred pick. 600,000
500,000 +20%
Coal-fired: secular headwinds outweigh cyclical hope. Supply-side

Cagr
400,000
reform and power demand growth continue to push up utilisations for 300,000 235,200
+21%
China’s coal IPPs. Meanwhile, there are signs that the government will 200,000
Cagr
+28%
finally bring coal prices under control, boosting margins. However, 100,000
Cagr
89,625
26,075
countering uncertain upside, power-sector reforms and push for 0
renewable energy continue to cloud the investment case for coal-fired 2005 2010 2015 2020 target
IPPs. Source: NDRC, State Council, MOHURD, CLSA
13 December 2018 25

Global Themes 2019
Global - Oil, Gas and Petrochemicals

IMO 2020 - Opacity and opportunity
Near-term uncertainties versus long-term opportunities
A century after shippers shifted from burning coal to fuel oil the marine
bunker sector faces a seismic change driven by stricter environmental
Ken Shin
regulations. While there are still many uncertainties on how ship owners
+852 2600 8266
& operators are expected to comply with the IMO 2020 regulatory ken.shin@clsa.co
framework, tighter regulations for fuel standards could undermine
demand for high sulphur fuel oil (HSFO) and thus the margins of simple Top picks
refiners while boosting the margins of complex refiners. Sinopec (386 HK)
SK Innovation (096770 KS)
st
Stricter regulations on fuel oil: Effective on Jan 1 2020, the Intentional
Brent-WTI differentials and GRMs
Maritime Organisation (IMO) will cap sulfur content in marine bunker
Crude differentials’ impact on GRM
fuel at 0.50% worldwide compared with 3.50% currently in place. Under Brent-WTI spread (RHS)
the regulation, all operating vessels globally need to lower sulphur (US$/bbl) Brent
WTI
(US$/bbl)
160 40
content of emission from current 3.5% to 0.5% from 2020. The Emission 140 GRM (RHS)
Control Areas (ECAs) will remain at the 2015 standard of 0.1% content. 120
100
30
To be compliant, three options are widely known as key solutions: 1) 80 20

60
switch to cleaner fuels such as marine gas oil (MGO) and marine diesel 40 10
oil (MDO), 2) install scrubber into an existing vessel and 3) order a new 20
0 0
ship that is eco-friendly with dual-fuel engines installed. (20)
(40) (10)
Feb 08
Feb 09
Feb 10
Feb 11
Feb 12
Feb 13
Feb 14
Feb 15
Feb 16
Feb 17
Feb 18
Challenges and opportunities: With less than 13 months left until the
change, investment in refining, shipping, and shipbuilding industry Source: Bloomberg, CLSA
appears insufficient to cope with the changes while legislative clarity is
still required as the largest area of uncertainty. Nevertheless, evolving Global refinery output share by product (2016)
Structural change in fuel oil output to follow
quality specification for fuel oil means deeper price discount of heavy
fuel oils and profound long-term implications to various sectors. Naphtha
LPG 6%
3%
 Refining: While fuel oil is almost never the primary product of
refiners, fuel oil consumption by ships represents nearly half of total Gasoline
Others 23%
fuel oil output while remaining is consumed in power/utilities sector. 18%
Jet/
A structural challenge to fuel oil demand suggests wider divergence Kerosene
7%
in simple and complex margins and thus favours refineries. Heavy Middle
Fuel Oil Distillate
31%
 Crude oil: Tighter bunkering fuel regulations will deepen price 12%
discount of heavy and sour crudes with high sulphur contents

against the key global benchmarks than they would otherwise have Source: IMO, CLSA
given capital requirement by refiners to make up for high investment
in fuel oil upgrading facilities. Fuel Oil 1.0% versus fuel oil 3.5% spread futures
Deeper price discount on high-sulfur fuel oil
 Shipping: There will be a substantial upward pressure in freight rates 16 ($/bbl)
across the board as bunker fuel costs may take up c.70-80% of total 14
voyage expenses. Therefore, ship owners will try to pass rising 12
operating costs of $50bn to their customers. Rising freight rate could 10

8
negatively impact on overall trade flow amid escalating trade
6
tension.
4
 Shipbuilding: The new regulation is likely to accelerate demolition of 2
aged fleets with limited financing support as well as drive 0

Aug 18
Feb 19
Aug 19
Feb 20
Aug 20
Oct 18
Oct 19
Oct 20
Jun 19
Jun 20
Apr 19
Apr 20
Dec 18
Dec 19
Dec 20
replacement demand in the long run.

Source: CME Group, CLSA
26 13 December 2018

Global Themes 2019
Price Action
Global - Technicals
Looking for the next leadership sector
Emerging markets and financials prime candidates for new leadership
As we outlined in Price Action Global (Fluid situation - 6 November

2018), we see the current move lower in global equities as part of a
longer prolonged choppy pullback that is expected to continue into Laurence Balanco
+61 8571 4253
2019. Rising volatility, widening credit spreads, bear market falls in the laurence.balanco@clsa.com
MSCI EM and MSCI Asia ex-Japan, topping patterns triggered in the
Nasdaq 100, SOX, FTSE MIB, CAC and DAX all suggests global equities
are lined up for a synchronised bear market. The silver lining under the
scenario is that the decline in global markets should ultimately lead to a
change in leadership from developed markets to emerging markets, and
also the emergence of financials as the new leadership sector.
An average bear. Over the past 30 years, a change in leadership from EM v DM

EM to DM or DM to EM has occurred post a bear market that has at MSCI EM and MSCI World weekly chart
least matched the average bear market (defined by at least a 20% MSCI EM
decline). The average bear market decline (since 1929) for the S&P500 is
about 34% over 40 weeks. Since the inception of the MSCI EM index in MSCI World
1988, the average EM bear market has also been 34% over 28 weeks.
Transition mechanism from DM to EM. As such, the expectation would

be to see a bear market of the magnitude of about 34% to trigger the MSCI EM versus
MSCI World
change in leadership for the DM (primarily the USA) into emerging
markets. It’s worth noting that in the 2000-2002 and 2007-2008 bear EM outperforming DM in
between Oct 08 and March 09,
markets in the final weeks of the decline, emerging markets fell less than by falling less in the final
phases of the 2000-2002
developed markets. This outperformance in the later stages of the bear and2007-2008 bear market
market provided the foundation for EMs new leadership credential in the Source: CLSA, Bloomberg, Updata
following bull market phase. As such, monitoring the relative
performance of EM vs DM through the decline should prove a key to
gauging the leadership change.
Old leaders’ roles, new leaders arise. From a sector standpoint, such a New leadership credentials
decline would also signal a change in leadership. Globally, technology MSCI World Fin and relative to MSCI World wk
has been the cheerleader of the bull market that unfolded off the March chart
2009 lows, followed by the consumer discretionary sector. With both
sectors now having rolled over they are expected to drive the downside
momentum in the bear market phase. Typically, once a leading sector
peaks, a derating follows which rules the sector out as a leader in the MSCI World
Financials
next bull market phase. Technology followed by consumer discretionary

have led the gains in the bull market off the 2009 lows. Going forward,
we can rule out technology and consumer discretionary as a new MSCI World Financial MSCI World IT
leadership group in the next cycle. While energy and materials could versus MSCI Worlds versus MSCI
World analogues
emerge as new leadership groups after having underperformed through
the current bull market, the one sector that does standout is the
financial sector as a new bull market leader.
Source: CLSA, Bloomberg, Updata
New leadership credentials for financials. Following the 2007-2009 bear
market the global financial sector has staged a grinding uptrend in
absolute terms. However, in relative terms (vs MSCI World) the sector
collapsed through the 2007-2009 bear market and then retested these
relative lows through the European crisis. Since then the sector has
formed a multi-year relative basing pattern.
13 December 2018 27

Global Themes 2019
China - Thru Trains

MSCI/FTSE inclusion in FY19
Various reforms to be positive price catalysts
The northbound inflow is structural and market earnings will bottom out
in 1H19. The overhang from pledged risk may have subsided, but
Alexious Lee
mainland firms may need look beyond bank loans to finance working
+852 2600 8722
capital. Share placement could accelerate if corporate bond issuance alexious.lee@clsa.com
fails to gain momentum in 2019 on dilution. Various reforms could
become positive catalysts and we like CCB, Shenhua, CCCC, CRCC, China/HK market major Index
Weichai Power, COSCO Shipping and CH Energy Engineering. Market picked up in November
20 (%)
Structural inflow. Northbound inflow will increase on potential inclusion 10
(if any) by MSCI/FTSE to 12.5/5% (in May/June 2019) and 20/15% (in 0
August/September 2019). The London-Shanghai Stock Connect could (10)
improve sentiment and accelerate inflow. ChiNext index (if any) inclusion SH Comp
(20)
will have limited impact on smallcaps as they are illiquid, heavily pledged SZ Comp
ChiNext Index
and have earnings uncertainties. Northbound inflows will target the (30)
SZSE SME
MSCI-235 A-shares whose average holding ratio was just 3%. (40) CSI300
Feb 18
Aug 18
Jan 18
Jul 18
Oct 18
Jun 18
Apr 18
May 18
Nov 18
Mar 18
Sep 18
New credit cycle brewing. Holistically, repayment pressure (pledged and
Source: CLSA, Wind
bonds) of the entire A-share already peaked out in 3Q18 and should
subside sequentially, greatly reducing the risk of potential forced Total value of pledge shares due and corporate
liquidation. Chinese listed companies need to look beyond bank loans to bond due for A shares
refinance their working capital and this could start a new cycle of Pledging risk peaked out in 2Q18
alternative fund raising. Share placement could accelerate if corporate 3,500 (Rmbbn) Pledged shares due
bond issuance failed to gain momentum in 2019. 3,000 Bond repayment
2,500
Uncertain southbound interest. With the overhang of pledged shares 2,000
out of the way, domestic investors’ appetite for Hong Kong equities 1,500
could dampen as they switch back to A-shares for opportunities such as 1,000
policy support on ChiNext stocks, more rounds of MSCI/FTSE inclusion, 500
and to avoid market volatility should the US market starts to correct.
0
Tencent’s southbound holding ratio shows sign of recovery in 4Q18 and,
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
if sustainable, could be a sign of improved onshore sentiment.

Source: CLSA, Wind
Watch for the national champions on potential reforms. Fundamentally,

earnings will bottom out in 1H19 (2Q19) but various reform initiatives Northbound/southbound net inflow/(outflow)
Southbound remains week in 2018
announced before the Lianghui forum (March 2019) could become 100 Northbound net inflow (Rmbbn)
positive catalysts. SOE reform will be one of the key drivers and our list 80 Southbound net inflow (HK$bn)
of 12 A- and H-share top picks are connect eligible, MSCI/FTSE inclusive
60
with stable consensus gaps (if any) and are candidates in China’s
40
“double-hundred” strategy to develop national champions and sector
20
leaders. A full list of the SOEs we mention can be found in our October
2018 Pledged funding note. 0
(20)
(40)
Jan 17
Jul 17
Jan 18
Jul 18
May 17
May 18
Nov 17
Nov 18
Mar 17
Mar 18
Sep 17
Sep 18
Source: CLSA, HKEX, Wind
28 13 December 2018

Global Themes 2019
Global - Strategy
No sustainable Treasury breakout
The 37-year-old trend line will assert itself with time
GREED & fear remains a deflationist on the usual debt, demographics and
technology arguments. For all the hyperventilation in October about a
Christopher Wood
potential USA 10-year Treasury bond yield breakout, the 37-year log-scale
+852 2600 8516
trend line is, for now, still intact. While recent wage strength or a resurgent christopher.wood@clsa.com
oil price could renew speculation that the secular bond bull market is dead,
the base case here is that the deflationary trend will sooner or later reassert Key idea
itself as US cyclical momentum should have peaked. Buy long-duration US Treasuries
Structurally deflationary view. GREED & fear’s view is that the big
picture trend remains deflationary for all the obvious reasons relating to
37-year trend intact
debt, demographics and technology. In this respect, the 10-year
US 10-year treasury yield (log scale)
Treasury bond yield has not yet technically broken above the 37-year- (%)
old trend line based on the log-scale chart, although the 10-year 16
Treasury bond yield did touch the long-term trend line when it reached
an intraday high of 3.26% on 11 October, 2018. 8
4
A yield break-out would question that view. The potential triggers for a
break-out in the 10-year USA Treasury bond yield would be aggressive 2
wage growth or a sustained rally in oil prices. On wages, while average

hourly earnings data continue to improve, and indeed spiked to 3.1% YoY 1
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
in October and November, this recent surge was in large part due to the
base effect. As to oil, while recent price action has reduced the market’s Source: CLSA, Bloomberg
focus on the sector as an inflationary trigger, GREED & fear remains
constructive. Indeed, the sharp sell-off following Donald Trump’s u-turn
on Iran sanctions should be viewed as a major buying opportunity.
Meanwhile, if there is a breakout in the 10-year US Treasury bond yields it Wages accelerating
is likely to prove to be a false one. The deflationary trend will sooner or US average hourly earnings growth
later reassert itself as USA cyclical momentum succumbs to prevailing high 3.7 (%YoY) US average hourly earnings growth
for all private employees
debt levels and higher interest rates. 3.5
3.3
3.1
2.9
But the economy is set to slow. Thus, the issue now is whether USA 2.7
cyclical momentum, in terms of both earnings and GDP growth, is peaking. 2.5
2.3
In this respect, investors face the considerable challenge of looking 2.1
through the front-end-loaded impact on the data of tax reform to assess 1.9
1.7
the cyclical threat posed by ongoing monetary tightening. The base case 1.5
here remains that cyclical momentum has probably peaked, but that
Mar 07
Mar 08
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Sep 18
America is more likely to slow back to the trend real GDP growth rate of
2.2% prevailing since 2009 prior to the tax cut, than enter an outright Source: CLSA, US Bureau of Labour Statistics
recession. And that any such renewed slowdown is likely to lead to a

stepped-up effort by Trump to implement his infrastructure agenda in the
second half of his administration; although the practical ability to do so
has been made more difficult by the mid-term election results.
13 December 2018 29

Global Themes 2019
Microstrategy
A year of two halves
Earnings bottom in early 2H19 will lead to style rotation
The debate on the forthcoming US recession will continue to flare up as

the Fed hikes rates further and the yield curve flattens. However, Asia is
Desh Peramunetilleke
already in a bear market and earnings downgrades have just started.
+852 2600 8293
First quarter is seasonally strong for Asia, but given rising rates and desh.peramunetilleke@clsa.com
earnings uncertainty, we expect the relief rallies to be short-lived. The
result season in 2019 will be dominated by earnings-linked dividend Key ideas
disappointments even as FCF and balance sheets remain strong. On a Bond-proxies and quality
more positive note, without a US recession, we see earnings bottoming
in 2H19 and the historical low valuations will drive markets higher. Earnings cuts are accelerating . . .
Focus on quality and bond-proxies in 1H19, but be ready for value later. MSCI AsiaxJ - Rolling 3M earnings revision (18F)
L3M earnings revision (18F, %)
3.5
3.5
3.3
4
3.2
2.9
Asian earnings downgrade cycle has only just started. Consensus
2.9
2.9
2.7
2.6
2.2
2.3
3
2.1
started cutting MSCI Asia ex-Japan earnings in 2H18 with 18/19F
1.2
2
0.61.2
0.9
0.9
0.8
growth now at 12/9.7%. Microstrategy forecasts stand at 10/1.2%
0.5
0.42
0.5
0.5
0.3
0.4
1
0.2
0.0
indicating further downgrades. While margins have been the main driver 0
so far, topline growth will also be cut in 2019. From a sector perspective, (1)
(0.6)
most markets and sectors are witnessing downgrades, highlighting a
(1.2)
(2)
Oct 18 (1.4)
broadbased trend that is likely to persist. History shows that Asian (3)
(2.1)
Aug 16
Feb 17
Aug 17
Feb 18
Aug 18
Jun 16
Oct 16
Jun 17
Oct 17
Jun 18
Apr 17
Apr 18
Dec 16
Dec 17
downgrade cycles last for 18 months on average. Even excluding the
abnormally long 2011-16 cycle, the average downgrade cycle lasts for
Note: Bottom-up calculated with freefloat adjustment
around 12 months, which suggests that earnings cuts will only bottom based on current MSCI universe. Source: CLSA, Factset
after 1H19.
. . . but Asia at 15-year relative PB trough vs DM
MSCI AsiaxJ vs DM: Relative 12-month trl PB
Valuations close to trough but require a catalyst. With almost a quarter of 1.3 12M trl rel PB (x) MSCI AsiaxJ relative to DM
market cap in cash and FCF yield in line with rest of the regions, Asia does 1.2
+2sd, 1.2
1.1
have cash support (see Rock solid defence). Also, despite the earnings
1.0 +1sd, 1.0
uncertainty, Asian valuations are attractive compared to developed 0.9
markets (DM), with the relative PB at a 15-year trough. Our PB-based 0.8
Avg, 0.8
upside model also suggests that we pretty close to the bottom, and a 0.7 -1sd, 0.7
further 10% correction would lead us to the point from where we have 0.6 0.6
always recovered over the next 12 months with an average 50% upside. 0.5 -2sd, 0.5
0.4
Dec 03
Dec 04
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Continue to focus on defensive for now. We turned to bond-proxies and

defensive growth in the middle of 2018 and continue to favour them Source: CLSA, Factset
(see Will EM jitters impact Asia and How to play yield curve inversion). Asian high-ROIC stocks inexpensive vs DM peers
Tactically, we find two other pockets of interest. Firstly, based on our MSCI AsiaxJ vs AC World: Top quintile ROIC PE
bear market playbook (see Anatomy of an Asian market correction), we 1.20 12M fwd relative PE (vs MSCI AC World, eq wtd,x)
are entering the third stage of market correction and highlighted our 1.15
Asia ex-JP ROIC (Top quintile)
relative to global peers
rock solid defence screen (see Rock solid defence) to guide you through 1.10
the year-end volatility. Secondly, Asian high-ROIC stocks are at a 12-
+2SD, 1.08
1.05 +1SD, 1.04
year trough compared to global peers and are trading at a five-year low 1.00 Avg, 0.99
PE premium compared to the broader universe. From a bottom-fishing 0.95 -1SD, 0.95
perspective (see Bottom fishing candidates), we like high-quality (high 0.90 -2SD, 0.90
Asian quality stocks have never been
ROIC/ROEs through the cycle) that have corrected sharply this year and 0.85
cheaper compared to global peers in 12 years 0.86
are now trading below average PB. We will look to switch into value only
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
when the earnings downgrade cycle has bottomed and if a US recession

has been delayed or averted. Note: MSCI universe (ex-China A) with bottom-up
aggregate PE based on equal weight. Source: CLSA, Factset
30 13 December 2018

Global Themes 2019
Global - Banks
Growing dislocation between USA and rest of world
A resurgent USA creates earnings risk in rest of world
Bank earnings and valuations are primarily driven by macro factors and
the macro outlook for interest rates, regulation, credit growth, asset
Brian Johnson
quality, leverage, currencies. So bank share prices look increasingly
+61 2 8571 4252
geographically disparate, all the more so given trade frictions between brian.johnson@clsa.com
the USA and China. The root cause of the onset of the global financial
crisis in 2008 was the seismic unwind of the USA housing bubble, which Top pick
was fuelled by excessive household leverage, the risk of which had been Macquarie (MQG AU)
transferred globally via securitisation. Similarly, the 1997 Asia crisis was
triggered by excessive levels of unhedged USD borrowings, which was Total non-financial sector debt has continued to
problematic as Asia currencies weakened. swell since global financial crisis
Total non-financial sector debt (US$tn; % GDP)
200 (US$tn) (% GDP) 260
So where do we stand now? Bank capital and liquidity positions are in a 180 Emerging market economies 250
lot better shape than 2008, however, that does not mean banks are 160 Advanced economies 240
Total (RHS)
immune to macro cycles. Low interest rates are effectively a tax on 140 230
120 220
deposit funded banks. USA inflation is broadly in line with the policy 100 210
target as employment, wage growth and economic growth improve. USA 80 200
interest rates have risen, however, the yield curve is flattening, possibly 60 190
40 180
given the impact US corporate tax cuts have on the fiscal imbalance. Add 20 170
in the prospect of an easing bank regulatory stance and it feels like USA 0 160
bank earnings, but more importantly dividends are in an upswing.

1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: CLSA, IMF
In contrast to improved US household and business leverage, emerging
Household debt to GDP remains on an upward
markets are awash with debt - a large proportion of which will be in trajectory in a number of countries
USD. Based on the IMF October 2018 Global Financial Stability Review, Households: debt to GDP by region (%)
pre-GFC in 2008 there was US$113t of non-financial debt in countries United States Euro area
China Other AE
with systemically important financial sectors, representing 210% of GDP. EM excluding China
Much of that then elevated global debt fuelled imprudent housing 100 (%)
lending into the USA. Despite the angst created by the unwind of the 80
USA housing bubble, global debt is now even higher, similarly standing at 60
US$167t or over 250% of GDP. The bulk of the strong growth in global 40
debt has been in emerging markets, as USA households have 20
aggressively deleveraged. In contrast, household debt excluding the USA
0
has been rising in other advanced economies and China. Much of this is
2000
2002
2004
2006
2008
2010
2012
2014
2016
likely in USD, the servicing of which could be problematic given the rise
Source: CLSA, IMF
in the USD and increasing USA interest rates.
Weak underwriting standards have led to rising
On a global basis, impaired assets on bank balance sheets are non-performing loans.
Bank gross non-performing loans by region (%)
improving, but that masks deteriorating asset quality in emerging (%)
5.5
markets vs improving asset quality in emerging markets. A rising USD 5.0
would likely further pressure emerging market bank asset quality. This 4.5
suggests while policy interest rates are set to rise in the USA, it may be 4.0
difficult to normalise interest rates elsewhere, which will adversely 3.5

3.0
impact deposit margins. It is hard not to conclude the better it gets in 2.5 Global
the USA, the worse it gets elsewhere. USA banks are likely finally exiting 2.0 Advanced economies
the adverse earnings, regulatory capital intensity and dividend impacts 1.5 Emerging market economies
of the GFC, whereas emerging market banks may well be entering 1.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
another variant of the 1997 Asia crisis, albeit this time fuelled by the
appreciating USD, as opposed to weakening Asian currencies per se. Source: CLSA, IMF
13 December 2018 31

Global Themes 2019
Asset value cycles, and bank credit cycles are driven by phases of “loose” credit and then tightening. “Loose” credit drives up asset values,
banks get over-exposed to that correlated asset class and then credit rationing bites
Liquidity Trigger
Phase 2 - Banks late to -1992 Australia Commercial Property Collapse
identify opportunity to - 1997 Asia Crisis
lend on rising asset values. - 2001 Techwreck
Values rise further given tax - 2007 Global Credit Crunch
deductibility of debt and
Asset banks become over-exposed Phase 1 - Speculative
Values to asset values Phase 3 - Asset value shock Asset Values Rising at
Phase 1 - Speculative (interest rates, currency etc) and Capex + Inflation
Asset Values Rising at asset value collapses below fair
Capex + Inflation value as banks are perceived to be
forced sellers of assets
Fair Value
Phase 5 - Banks provision for lower
Fair Value Phase 4 - Nothing happens as market values and recapitalise
bank assets overhang markets balance sheets thus removing
perceptions of desperate seller
and value rebounds to fair value
Time
Source: CLSA
32 13 December 2018

Global Themes 2019
China - Property
Bad news is good news
Time to BUY
Chinese developers always outperform when China’s economy slows, for

good reason: countercyclical policies. As primary residential sales
Nicole Wong
account for 13% of China’s GDP, of which almost a third is the land
+852 2600 8207
price, the property industry is crucial to both the nation’s economy and nicole.wong@clsa.com
fiscal income, and policy headwinds tends to turn into tailwinds during
an economic slowdown. Given that China has run a low land supply in Top pick
the past few years, a change in policy will be effective and the stocks Coli (688 HK)
look attractive. Overweight.
Sharp plummet
The bad news. The sell-through rate in the 10 tier-one/two cities that Sell-through rate of a basket of 10 cities
(%)
CREIS tracks has plummeted, from over 85% in June to under 65% by 95
November. This is partly to do with developers all accelerating supply at 85
the same time, with the number of projects launched per week rising 75
from 41 in June to 75 in November. Price cuts have become more
65
common, and as a result less effective. And as a consequence developers
who discount are widening the cuts from sometimes single-digit in 55
October to always double-digit in November. Buyers sensing the gain in 45
bargaining power are waiting for even better deals, leading to a fall in 35
sale growth.
Jul 14
Oct 14
Jan 15
Jul 15
Oct 15
Jan 16
Jul 16
Oct 16
Jan 17
Jul 17
Oct 17
Jan 18
Jul 18
Oct 18
Apr 15
Apr 16
Apr 17
Apr 18
Source: CREIS
But pressure will not last. Smaller/more leveraged developers have to
focus on cashflow safety due to rising funding costs and their bond- Meaningful for both economy and fiscal income
maturity schedules, hence their decision to accelerate sales. The bigger Primary residential sales value as % of China GDP
and better-funded developers are discounting for a different reason. As 14 (%)
land prices have fallen faster than property prices, their acceleration in 12
sales is to recycle cash for reinvestment at a lower cost. The new home 10
supply pressure is not going to last long in our opinion, as land supply 8
has been more constrained than any previous property market cycle. 6
Tier-two-city land sales have been growing only by single-digits in the 4
past 33 months, amidst double-digit property sales growth. Land supply
2
in 2017 was way below 2010-2013 levels. Tier-three-city land sales
0
have been growing by close to 30% YoY, but this has lasted only around
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
18 months. Inventory as a result is standing at six-year lows across the

board in tier-one, -two and -three cities. Source: CREIS
Countercyclical
The good news. Investors should note the importance of the property Outperformance in economic slowdown
Power generation YoY growth
industry to China: in 2017 primary market residential sales were 13% of
Properties sector rel performance (RHS)
China’s GDP. A substantial portion of this was land price. Hence the 25 (%) 350
(Jan 2010 = 100)
industry is crucial to both economic growth and fiscal income. This is 20 300
why property stocks outperformed in previous economic slowdowns of 15
250
2011 and 2014 - given that the combination of cheap valuations and an 10
200
150
improving outlook as policy headwinds typically turn into tailwinds had 5
100
triggered interest from the market. The recent mortgage-rate cuts by 0 50
banks in Hangzhou, and the removal of price caps in two Guangzhou (5) 0
districts, could mark the beginning of such a policy turn. Overweight.
Aug 10
Feb 14
Aug 17
Jan 10
Oct 11
Jul 13
Oct 18
Jun 16
Jan 17
May 12
Apr 15
Dec 12
Nov 15
Mar 11
Mar 18
Sep 14
Source: CLSA, NBS
13 December 2018 33

Global Themes 2019
Global - Autos
Shock waves
Will trade and scandal headwinds abate?
US protectionism remained a theme for all of 2018 and with the US

Department of Commerce still evaluating if imported cars are a national
Christopher Richter
security risk, we see implications for Japanese, Korean and German
+81 3 4578 8035
automakers into 2019. Scandal erupted in late 2018 with Nissan’s head christopher.richter@clsa.com
executive jailed and Hyundai sparring with US authorities. Additionally,
we see new technologies starting to take off in 2019. Finally, we see Top pick
global auto sales falling by 1.2% YoY. Our top pick is Toyota and we also Toyota Motor (7203 JP)
like Denso, Dongfeng and Maruti Suzuki.
US trade tensions continue. We highlighted acrimonious negotiations Triumvirates usually end badly
for a Nafta successor with the US-Mexico-Canada agreement (USMCA) Nissan, Renaults and MMC CEOs
finally arriving late 2018. That said, Trump keeps returning to imported
autos as a national security threat and proposing 25% tariffs. Like so
many of his aggressive pitches, it is probably a bluff to secure trade
concessions. We expect talks with the EU and Japan to be a central
focus in early 2019 and do not believe the big tariffs are coming. If they
do, we like Suzuki Motor with no exposure to either the USA or China.
India autos analyst Nitij Mangal would second that for Maruti Suzuki.
Corporate governance issues. Nissan shareholders, including top holder

Renault, were suddenly sideswiped by the arrest of long-time leader Source: Nissan, Renault and MMC
Carlos Ghosn over financial reporting irregularities. That said, not
sharing the evidence with Renault, preventing replacement directors and Slowdown in China
appointment of a new chairman set the stage for a showdown in 2019. Chinese passenger vehicles sales volume SAAR
This has broader implications for corporate governance in all of Japan. 30 (m units)
We wonder if Renault will try to force a full takeover of Nissan. 25

Elsewhere, Steve Chung notes that Hyundai Motor found itself under US
20
prosecutors pressure for a possibly delayed engine recall, slow
restructuring, and continued activist challenges. These will also dog 15
Hyundai into 2019. 10
5
Automotive technology. The world biggest experiment in new
automotive technology gets started in 2019 as the Chinese New Energy 0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Vehicle Policy kicks off in 2019. Alexious Lee expects that this will thrust
the world’s largest vehicle market into the lead of vehicle electrification. Source: CLSA
Overseas makers look well prepared. In Arizona, Google will start
offering limited fully autonomous drive services. Leonne Chen sees 5G Approaching a stall
starting, offering new potential for car connectivity. We will see what Global sales volume SAAR
100 (m units)
else the industry has on offer during January at CES in Las Vegas, the
world’s fifth largest auto show. Toyota and supplier Denso are the
technology automotive technology leader in Asia. 90
Vehicle markets. Based on 2018-to-date sales, it looks like global 80
industry sales will finish 2018 up by 1.7% YoY, somewhat below our
December 2017 forecast of a 2.1% YoY. Going through expectations on 70
a country-by-country basis, we see 2019 sales declining by 1.2% YoY.

An expected slowdown in China is the central reason for the slowdown 60
with weakness in the US and Europe contributing. 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: CLSA
34 13 December 2018

Global Themes 2019
China - Autos
Moving parts, overhangs and catalysts
Sector consolidation could accelerate on SOE reform and M&A
Traditional internal combustion engine (ICE) volume already peaked out

in 2017 while volume growth by low-margin new-energy vehicles (NEV)
Alexious Lee
will add little to automakers’ profitability. Intelligent-connected vehicles
+852 2600 8722
(ICV), self-drive technology and NEV development will disrupt. Risks to alexious.lee@clsa.com
valuation include derating on higher imports (tariff reduction), tech-
disruption and losses from JV stakes. SOE reform and M&As are major Top pick
themes amid sector consolidation and Dongfeng Motor is our top pick. Dongfeng Motor (489 HK)
Slowing volume
Challenging outlook. The dual-points system (CAFC carbon and NEV
ICE and NEV shipment volume forecast
credit) will come into play in 2019 and automakers will ramp up volume
ICE NEV YoY (RHS)
to comply. In terms of profitability, incremental increase in NEV volume 30,000 (000' units) (%) 20
will not make up for slower ICE sales. Full impact of the tariff reduction
25,000 15
(for non-US import) will come into play in 2019, putting potential
20,000
pressure on margin/volume of mass-market luxury models. 10
15,000
5
10,000
Higher Capex and R&D. ICV and NEV development requires higher 0
5,000
capex and even more R&D. Ride-hailing business is needed to create a
0 (5)
captive demand and meet regulatory requirements. Overall industry 2013 2014 2015 2016 2017 18CL 19CL 20CL
capex (not including new incumbents like Tesla) could grow 15% to 30% Source: CAAM, CITIC Securities, CLSA
in FY19 and FY20 to reach 5-20% of automakers’ sales revenue. New
incumbents’ competitive spending could aggravate the market situation. Higher R&D spending
Growth of expensed R&D and capitalised R&D
R&D Expenses Capitalized R&D
Consolidation is best way forward. The recent Rmb1tn credit line to R&D Expenses YoY Capitalized R&D YoY
FAW Group coupled with the “no hurry” attitude to boost auto sales via 50,000 (Rmbm) (%) 40
stimulus could signal sector consolidation to get rid of the excess of local 40,000
35
assemblers. The wait to ride out the storm could benefit top-tier 30
30,000 25
automakers, as long as regulators do not intervene (again). We expect 20
suppliers, distributors and others to be affected. The question remains if 20,000 15
10
China will also open up its battery market should the Sino-US tensions 10,000
5
escalate from trade to tech conflict. 0 0
2014 2015 2016 2017 2018 2019 2020
Source: Company (GEELY, GWM, Brilliance, GAC,

JV stakes versus SOE reform. China has made great efforts to open up DFM, SAIC, BAIC, FAW, JAC, JMC, ChangAn and
its auto sector and the BMW-Brilliance deal, if passed, could be symbolic BYD), CITIC Securities, CLSA
and see other foreign automakers follow suit. This will remain an
overhang on valuations and Great Wall Motor is the only name with no Higher sales discount
JV risk. Price actions of the four FAW-associated names indicate Average discount rate and retail price
Average discount rate (RHS)
growing expectations of market consolidation amid SOE reform (see our (Rmb) Average retail price (%)
October 2018 SOE reform note for more). Our top pick Dongfeng Motor 165,000 Average MSRP 16
160,000 14
is the only centrally-owned SOE in our coverage that could possibly 155,000 12
benefit and we rate it BUY. 150,000 10
145,000 8
140,000 6
135,000 4
130,000 2
125,000 0
Jun 11
Jun 12
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Source: Wind, CITIC Securities, CLSA. Note: Average

retail price and discount for domestic made vehicles only
13 December 2018 35

Global Themes 2019
Global - Lithium-ion Battery

Turn of the tide
Wave of consolidation changes industry dynamics
Despite softer automobile sales and subsidy cuts, global electric-vehicle

(EV) sales remain robust, buoyed by falling battery prices, improving
Ken Shin
customer acceptance, infrastructure availability as well as stricter
+852 2600 8266
regulations on internal-combustion engines (ICE). In the battery-supply ken.shin@clsa.com
chain, massive consolidation has started to shift value from upstream
materials/components to cell manufacturers, evidenced by the notable Top picks
turnaround of their profit versus rising pressure on components markers. CATL (300750 CH)
LG Chem (051910 KS)
A growth sweet spot: Global EV sales are expected to grow c.55%,
reaching 1.8m units in 2018, buoyed by falling battery prices, improving Lithium-ion battery demand
Global EV sales to see a 30% Cagr in 18-25CL
EV economics and stricter regulations for ICE. China is leading robust CE EV-PV EV-CV
1,400 (GWh)
growth with its battery-electric/plug-in hybrid electric vehicle sales E-bikes ESS
1,200
jumped 62%/136% YoY, contributing 76%/24% of total EV sales in
10M18 as the government introduces stricter regulations on ICE along 1,000
with higher requirements to automakers to produce more EVs. Lithium- 800
ion also continues to replace other types of rechargeable batteries such 600
as nickel-cadmium (NiCad) and nickel-metal hydride (NiMH) in various 400
applications, particularly because of its energy/power density and less 200
physical space required. 0 2012

2013
2014
2015
2016
2017
18CL
19CL
20CL
21CL
22CL
23CL
24CL
25CL
26CL
27CL
28CL
29CL
30CL
Less carrot, more sticks: Government policies - the carrot (financial Note: CE= combustion engine, EV-PV=electric vehicle-
incentives and rewards to customers) and the stick (regulations and passenger vehicle, EV-CV=electric vehicle-passenger
vehicle, ESS=energy storage system. Source: CLSA
penalties) - will remain key drivers, perhaps until pure EVs compare more
evenly to ICEs on overall cost/performance metrics. This year, we have China EV sales volume - total (‘000 units)
seen notable changes in governments’ subsidy landscape between the Strong passenger EV growth buoyed by regulation
2017 2018 YoY growth (RHS)
carrot and the stick. Despite continuing to cut EV subsidies and
160 (GWh) 160
introducing market-oriented measures, they have started to lower direct 140
138.4
(%)
140
consumer subsidies, along with higher requirement to auto OEMs to 120
126.7
120
118.6
produce more EVs. 100
95.5
100
80 80
55.4
60 50.0 60
Changing landscape: Tighter subsidy policies mean higher thresholds for 40 48.5
51.5
40
42.4
driving ranges and energy densities, which ultimately favours battery 20 20
0 0
makers with technology leadership. Furthermore, stricter requirements
Feb 18
Aug 18
Jan 18
Jul 18
Jun 18
Oct 18
Apr 18
May 18
Nov 18
Mar 18
Sep 18
to improve quality and safety are driving a few battery makers to gain
greater share. In China, the market shares of CATL/BYD jumped YoY to Source: Wind, CLSA
42%/24% in 10M18 versus 29%/15%. Reducing the number of suppliers
eases competition and helps the survivors to rejuvenate pricing power EV battery installation (10M18)
and thus injects more visibility into their earnings, evidenced by the cost Tighter subsidies favour technological leaders
Wanxiang Great
pass-through conditions in the latest contracts with automakers. 1% Power
EVE 1%
2%
Virtuous cycle: A virtuous cycle is materialising for leading battery- National Others
makers of consistent order momentum, accelerating revenue visibility Battery
2% BAK
13%
and productivity gains that are reinvested in accretive technology which 2% CATL
42%
drives further cost reductions and eases pricing pressure. On the other Lishen
4%
hand, coupled with intense competition, stabilising raw-material prices Farasis BYD
put downward margin pressure on key battery components, albeit the 4% 24%
Guoxuan
magnitude is likely to be determined by the supply-demand dynamics of High-tech
5%
each component.
Source: CATL, ESCN, CLSA
36 13 December 2018

Global Themes 2019
Australia - Mining & Metals

Rare combination
Supply decline and rising prices offer strategic exposure
We see rare-earth supply declining and costs rising due to the Beautiful
China environmental and supply-side reforms. Our top pick Lynas is
Dylan Kelly
strategically poised to benefit from its strategic use of electric vehicles
+61 8571 4263
(EVs) and green technologies as well as in the event of an escalation in dylan.kelly@clsa.com
the US trade war. As the world’s largest ex-China producer (effectively
only), we see its bottom quartile costs and increasing scale sustaining Top pick
c.50% Ebitda margins and 15% FCF yields. Lynas Corp (LYC AU)
Strategically positioned. In 2011 the world experienced the first rare- NdPr price history/forecast
First rare earth crisis saw prices spike 5x
earth crisis, after China withheld supply to Japan following a diplomatic (US$/kg)
160 Actual CLSA Forecast
dispute. Despite only lasting a few months, rare-earth prices 140
skyrocketing 5-10x and automotive and electronic supply chains were 120
significantly disrupted. The risk of China utilising this measure in a trade- 100
Illegal mining Long term
crackdown $68/kg (Real)
war escalation with the USA is possible. Ironically the USA only recently 80
passed the US John MaCain Act which banned the US Department of 60
Defence in procuring rare-earth supplies from China. 40

20
Rare earth crisis
0
There is no one else. The Lynas is a vertically-integrated producer of
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
rare earth oxides (REO) operating 100% of a mine and concentrator at
Source: Baiinfo, SMM, CLSA
Mt Weld in Western Australia and a purpose-built processing facility in
Malaysia. It is effectively the world’s largest - outside of China - and the Lynas rare-earth production
only alternative rare-earth supplier (10% of world). Production expanding 42% in next two years
30 (Kt REO) NdPr Other REO
25 26
Bullish demand outlook. We are bullish neodymium and praseodymium 25 23
(NdPr) oxide prices as China’s rare earth dominance (>90% of supply) 20 18
undergoes a structural shift due to the Beautiful China environmental

16
18 18
15 13 16
and supply-side reforms. We expect the mainland’s production to 12
9 11
decline and costs to rise due to increased environmental compliance. 10
9
With strong demand growth for EVs (c.2kg per vehicle), we believe rare- 5 7
7 8 8
5 5
earth metals have been overlooked by market exposure compared to 0
2 4
cobalt, lithium and nickel sulphate. 15A 16A 17A 18A 19CL 20CL 21CL
Source: Company, CLSA
Average sales prices and costs (REO)

Increased scale lowering unit costs
35 (A$/kg) Unit costs 32
Average sale price 27

30
24
25 22
18
20 16
15
16 15 15
15 14
10 13
0
16A 17A 18A 19F 20F 21F
Source: Company, CLSA
13 December 2018 37

Global Themes 2019
Global - Automation
Turnaround year
Next year will bring the best buying opportunity in three years
It has been a rough year for global automation stocks. Growth rates in
2018 compressed due to hard comps and the US-China trade dispute
Morten Paulsen
forced manufacturers to rethink expansion plans. Despite these factors,
+81 3 4578 8052
the long-term prospects for robotics and automation remain bright. morten.paulsen@clsa.com
Robots are finding their way into new markets and fresh technologies
continue to enhance the power and efficiency of automated- Top pick
manufacturing solutions. We expect 2019 to bring the best buying Keyence (6861 JP)
opportunity in three years. Fanuc (6954) and Keyence (6861) would be
on our shopping list.
Chinese automation demand. China has been the single-largest driver for Chinese robot growth took a breather in 2018
Robot unit shipments to the PRC
global-automation demand for a decade. Demand in 2018 held up for the 250,000
first half, but after the summer it was clear that growth was crumbling as
it became harder to access project financing and exporters were holding 200,000
back automation projects in order to assess the trade situation. We not

150,000
expect an immediate resolution to the Sino-US dispute, but do not
anticipate Beijing to stop its push to modernise factories. We expect 100,000
Chinese automation growth to come back in the 2H19.
50,000
Japan and Southeast Asia to stay firm. This year US automation demand 0
was strong in general industries, but the automotive sector was weak.
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
18CL
19CL
20CL
We believe multiple auto projects will be restarted as the new USMCA Source: IFR, CLSA
(New Nafta) agreement brings clarity. Automation demand is likely to
stay firm in the domestic market and is looking promising in Southeast
Asia and India.
Chinese workforce is becoming robotised
Technology making robots more powerful. Technology continues to Operating stock of industrial robots in China
900,000
make robotics and automation solution more efficient and powerful. IoT 800,000
and data collection is penetrating the industry deeper as networks get 700,000
smarter and sensors find their way into more mechanical components. 600,000
We further see traceability as an emerging trend in manufacturing that 500,000
will lead to improved quality and more efficient inventory control. 400,000
300,000
200,000
Best buying opportunity in three years. Automation companies are up
100,000
against difficult YoY comps throughout the first quarter of FY19. 0
However, following the selloff in 2018, we believe 2019 will bring the
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
18CL
19CL
best buying opportunity in three years. Keyence (6861) remains our top
Source: IFR, CLSA
pick in the near term, but we also like automation stocks with a solid
high dividend yield, such as Fanuc (6954).
38 13 December 2018

Global Themes 2019
Asia - Tech
Buy tech now? Almost there but not quite
Let’s wait for March-April 2019
In this same publication last year we wrote that Asian tech had rallied
too much and was ready to take a breather. After a 19% decline YTD,
Nicolas Baratte
the tech sector is still not absolutely cheap and consensus is still 10%
+852 2600 8325
too high. Stocks usually bottom out at “maximum bad news” and we nicolas.baratte@clsa.com
think we will get there with the December 2018 reporting season, by
February-March 2019.
We still see 10-15% downside risk. MSCI Asia ex-Japan tech has fallen
19% year-to-date after an 80% rally from January 2016 to December At only -0.4SD now
Asia ex Japan 20 big caps: Forward PE
2017. Stocks with high valuations have corrected massively, especially
19
the Apple supply chain and A-share tech. Our basket of 12 Apple
suppliers was trading at 18.5x (+2SD above average) at end-2017 and 17
+2sd 16.0x
has now corrected to about 10.5x (-0.5SD below average). China’s A 15

+1sd 14.2x
shares rallied to 43.7x (+2st dev) at end-2017, but have now corrected 13
avg 12.4x
to about 18.7x (-1SD below average). Asia ex-Japan big caps reached
11
14.5x (+1.2SD) at the end of 2017 and are down to 11.7x (-0.4SD below -1sd 10.6x
average). Consensus has revised down estimates for the Apple suppliers 9 -2sd 8.8x
and is now expecting net income to decline by -10% in 2018, but to 7

Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
grow by +10% in 2019 and +14% in 2020. Consensus for the big caps
looks at a very small -2% decline in earnings in 2019.
Source: CLSA. Factset
The point of maximum bad news. Hence overall Asia tech has corrected Only expecting -2% decline in net income in 2019
from bubbly levels to cheaper but not rock-bottom cheap. Consensus for Asia ex Japan 20 big caps: Consensus
2019 is still 10% too high; 1H19 could be 20% too high. Hence there is 2015E (-2FY) 2016E (-1FY)
2017E (+0FY) 2018E (+1FY)
some more room for downside. This is not about US-China trade wars 2019E (+2FY) 2020E (+3FY)
but rather iPhone units declining (we forecast -11% YoY in 1H19),
140 Net income estimates (US$bn)
elevated semiconductor inventories, especially related to datacentres as 120
demand accelerated to 45% growth in 2017-18 and will slow to 15% in 100
2019. We think that we have not yet reached the point of “maximum 80
bad news” which is usually when stocks really bottom out. We think that 60
we will get max-bad-news with the December 2018 reporting season, by 40

20
February-March 2019.
0
Dec 14 Apr 16 Aug 17 Dec 18
Make your shopping list but wait. We see super-low valuations in steady Source: CLSA, Factset
growth stocks such as Catcher, now trading at 6.2x 19CL. Reasonable

Cheaper
valuations in stocks like Largan at 15.0x 19CL or Sunny Optical at 16.6x
Hikvision forward PE
given that these two firms should see a big triple-cam product cycle
40 (x)
starting late-2019. But this is still far away and we have to process bad
monthly sales and Apple March 2019 guidance first. Our conclusion is 35
that investors should ready their shopping list of these good stocks they 30
do not have, the category winners, the Hikvisions for example, and wait +1sd 26.72x
25
for spring.
avg 20.73x
20
15 -1sd 14.74x
10
Dec 13 Aug 15 Apr 17 Dec 18
Source: CLSA
13 December 2018 39

Global Themes 2019
Asia - Tech
Beware of sexy value traps
Especially PC and smartphone cheap stocks
Consumer tech volumes, whether computers, tablets or smartphones,

will decline for the next two years. Enterprise and especially datacentre
Nicolas Baratte
spending is slowing sharply. We think this creates multiple value traps -
+852 2600 8325
or worse - for the next two years, especially in the consumer tech supply nicolas.baratte@clsa.com
chain, where volume declines often lead to fairly bad competitive
behaviour. We would rather look at ignored small caps. Top picks for spring 2019
ChinaSoft (354 HK)
Low low growth. This analyst used to say in 2013, buy the smartphone Dahua (002236 CH)
theme, it is the biggest growth story for Asia tech of the last 10 years -
5G smartphones will come . . . but in 2021
for example TSMC. But when smartphone unit growth will stop in 2018,
Global smartphone units by technology
we will have an air pocket. And it came. We forecast PC and smartphone 2-2.5G 3G 4G
units to decline a little at -2% to 2020, datacentre to slow from 45% 5G YoY (RHS)
growth in 2017-18 to 15% in 2019, etc. This is, we think, the biggest 1,800 (m) (%) 50
1,600
trap for investors looking for cheap stocks. Lack of unit growth usually 1,400
40
leads to bad pricing behaviour, increasing competition, margins decline. 1,200 30

1,000
20
800
In the smartphone supply chain. Several good companies, investors’ 600 10

400
favourites, look cheap. For example, AAC at 11.6x 19CL, but we expect 200
0
the firm to keep losing market share to Luxshare and see more pricing 0 (10)
2013
2014
2015
2016
2017
18CL
19CL
20CL
21CL
22CL
pressure in 2019. Or Mediatek at 16.1x 19CL, but this is a product-cycle
company without a product cycle until 2021: the 5G mass market. We Source: CLSA. IDC
would rather buy more expensive stocks such as Largan or Sunny with
This one looks cheap
upcoming new-product cycles, but investors might want to wait until the Chinasoft forward PE
last straw of bad news has been flushed out. 30 (x)
28
26
In the notebook supply chain. Notebook makers are cheap: Wistron at 24
9.7x 19CL with a 5.1% dividend yield, Quanta at 11.6x 19CL and a 7.6% 22
dividend. We would rather buy Lenovo on earnings recovery, very low 20
18 +1sd 18.42x
expectations and very low ownership. 16
avg 15.3x
14
12 -1sd 12.19x
Small caps that have collapsed on US-China trade war fears. These are 10
the more interesting ones to add to the spring 2019 shopping list in our 8
opinion. For example ChinaSoft at -1.5SD and Dahua at -1.8SD. We are Dec 13 Aug 15 Apr 17 Dec 18
of course in the middle of unpredictable newsflow as, maybe, President Source: CLSA
Trump and President Xi enter in an intensive bargaining phase. Also very cheap
Dahua forward PE
50 (x)
45
40
35
30 +1sd 29.71x
25
avg 23.79x
20
-1sd 17.87x
15
10
Dec 13 Aug 15 Apr 17 Dec 18
Source: CLSA
40 13 December 2018

Global Themes 2019
Taiwan - Semiconductors
Cyclical downturn to persist throughout 2019
Negative semis growth in 2019 with a potential bottom in mid-year
The semicon industry faces a cyclical downturn: tech demand growth is

slowing in all areas, while the supply chain is digesting excessive
Sebastian Hou, CLST
inventory. Leading macro indicators also point to an inevitable
+886 2 2326 8165
correction. We find a few similarities between this cycle and the 2000 Sebastian.hou@cl-sec.com
dotcom bust, possibly making this the biggest correction since the GFC.
Semis stocks don’t trough until YoY semis sales bottom, and no company Top pick
is immune. Hence, we advise being Underweight and selectively hiding in TSMC (2330 TT)
relatively defensive large-cap names, with lower beta and solid FCF.
From “channel stuffing” to “max out”
Tech demand growth slows across the board. We have collected Tech/semis inventory days elevated
increasing evidence of a demand slowdown from all major applications, 100 60
continuous lukewarm smartphone sales, iPhone order cuts, weaker-than- 90

50
80
expected automotive sales across all regions, weaker industrial 70
40
manufacturing particularly in China, and decelerating cloud capex. 60
Nothing is really growing from 4Q18 into 2019. 50 30
40
20
30
Excessive chip inventory needs to be digested. Led by the inventory 20 Total Semis DOI
10
overbuild in past 12 months and the pull-in ahead of US/China export 10 EMS/OEM/ODM DOI (RHS)
tariff, fabless DOI and system DOI both rose to new highs as of 3Q18. 0 0
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
We believe the inventory problem is severe and elevated in all parts of
the tech supply chain. Interestingly, though the semi book-to-bill ratio Source: CLST, Bloomberg
and backlog have come down, they still remain relatively high, meaning
Negative semicon sales (YoY) in coming months
that customers have continued to build up inventory in 4Q18.
Leading macro indicators to semis YoY
PI/Y Semi Sales M2-Credit (RHS)
Macroeconomics suggest a semi/tech downturn. Semiconductors are (%) (%)
200 20
highly sensitive to GDP growth, with consistently high correlation to a
few relevant US economic leading indicators (PMI, personal 150 15
income/yield and money supply). As in the past cycle, these all have 100 10
shown YoY declines in the past few months, pointing to a definite 50 5
semiconductor cyclical correction. 0 0
(50) (5)
Dotcom bust déjà vu. Every cycle is different, but we identify some (100) (10)
Jan 80
Jan 88
Jan 96
Jan 04
Jan 12
May 85
May 93
May 01
May 09
May 17
Sep 82
Sep 90
Sep 98
Sep 06
Sep 14
similarities between this cycle and the dotcom bubble that burst in 2000:
1) An overbuild for Y2K then versus for tariffs now. 2) Overbuild for
Source: CLST, FRED, WSTS
Cisco’s broadband then versus for datacentre server now. 3) Multiple semi
component shortages simultaneously. 4) System has excessive semis Oct semis sales YoY dipped to 6% vs 16% in Sep
inventory. 5) Many internet startups then versus many AI/blockchain SOX YoY vs global semis sales YoY
SOX index YoY
startups now, but real applications are small and far. 6) The relevant macro 250 (%)
Global semis sales YoY
indicators have rolled over and shown the same trend. 200
150
Semis fall YoY in 2019. Based on our micro and macro analysis, we 100
estimate semiconductors sales will fall YoY in 1Q19 and might potentially 50
bottom (on a YoY basis) in mid-2019. We forecast global semis growth to 0
decline from 22% in 2017 to 16% in 2018 and to negative 0-5% in 2019. (50)
Major global semi stocks will not trough until the sector bottoms (in terms (100)
of YoY semi sales), and we have two quarters to go.
Aug 99
Feb 08
Aug 16
Oct 96
Jan 01
Jul 09
Oct 13
Jun 02
Jan 18
May 95
Apr 05
May 12
Nov 03
Dec 10
Mar 98
Mar 15
Sep 06
Source: WSTS, Bloomberg
13 December 2018 41

Global Themes 2019
Korea - Tech
DRAM - How low can the ASP/margin go?
Expect DRAM ASPs to stabilise in 2H19
After nine consecutive quarters of growth, DRAM ASPs entered a

downturn in 4Q18 which we expect to continue at least until 1H19. As
Sanjeev Rana
visibility on demand and pricing beyond 1H19 remains blurry, investors +822 397 8574
are hesitant to buy into DRAM stocks despite low valuations. For NAND, Sanjeev.rana@clsa.com
we expect ASP declines to continue through 2019, though QoQ falls will
moderate in 2H19 on the back of demand elasticity and seasonality. Top pick
SK Hynix (000660.KS)
DRAM demand weak in 1H19. DRAM contract prices peaked in 3Q18
and we expect a 8-12% QoQ ASP correction in the next few quarters.
Demand from mobile and server applications has been weaker than To fall 5% in 2019
expected at a time when DRAM suppliers had positioned their DRAM industry revenue
(US$bn)
production for strong demand from these applications. As customers are 120
105.7
112.9
101.0
reducing inventories we expect ASP declines to continue at least until 100
2Q19. Expectations of ASP declines are making customers hesitant to
80 73.1
build inventory. Hyper-scalers, after overbuilding in 3Q18 YTD, are
looking to bring inventory to a normalised level, which we expect to be a 60
drag on demand in 1H19. 40

40.3
Supply side is responding. On the supply side, DRAM suppliers are 20
actively looking to manage their output to prevent prices from sliding 0

too far. In 2017/18CL global DRAM capex was up 36%/72%, but in 2016 2017 18CL 19CL 20CL
2019/20 we expect it to fall 20%/5%. Despite a significant increase in Source: CLSA, DRAMeXchange
DRAM capex in the past two years, the industry bit supply growth has Supply glut will moderate beyond 2018
remained rational (21-22%) while demand is expanding and broad-based. DRAM industry bit demand and supply growth
DRAM suppliers’ focus remains on profit maximisation and they are keen 40 (%) Demand growth
Supply growth
to stabilise margins by postponing the timing of new supply additions 35.1
35
and carrying inventory if needed. We expect supply side measures to
start having impact on bit output from 2H19. 30
33.7
Industry margins to bottom at a significantly higher level than the past. 25

21.8
For Samsung, we expect DRAM OP margin to bottom at 57% versus 21.1
19.4 19.2
20 21.2
peak margin of 71% in 3Q18. This compares to a peak margin of 48% 20.3
19.3
18.2
and a trough of 36% in the latest cycle (2015-16). For Hynix, we expect 15
margin to bottom at 51% versus a peak of 67% in 3Q18. This compares 2016 2017 18CL 19CL 20CL
to a peak of 43% and trough of 18% in the most recent cycle. As Source: CLSA, IDC
investors become confident about industry margins bottoming out at a Current PB not far from 10-year low
significantly higher level than in the past, we expect the valuation SK Hynix one-year forward PB range
multiple of DRAM stocks to expand once the trough quarter has been 3.0 (x) 2.74
established. Until then, the cyclical fears are here to stay and the burden 2.5
of proof will remain on the industry players. Given the near-term
2.0
uncertainties, DRAM stocks are likely to remain volatile, although we see
limited downside risk as the market has been discounting ASP declines in 1.5 1.37
the past year (Samsung/Hynix shares down 28%/29% from their peaks). 1.0 0.83
Resilient margins, falling capex and rising FCF mean the companies have 0.66
significant room to expand dividends and share buybacks. Investors 0.5
should accumulate on weakness. 0.0

Min Max Avg Current
Source: CLSA
42 13 December 2018

Global Themes 2019
China - Internet
From mobile internet to the internet of things
The era of voice assistants
China is migrating from mobile internet to the internet of things (IoT).

Voice assistant adoption has hit an inflection point while industrial
Elinor Leung
internet opens up new big-business opportunities. The cloud is the
+ 852 2600 8632
foundation, driving the digital upgrade across traditional industries from elinor.leung@clsa.com
retail to healthcare, finance, manufacturing and government. China could
also become the world’s largest autonomous driving market with the Top picks
government’s blessing. Internet giants Alibaba, Tencent and Baidu will Alibaba (BABA US)
continue to dominate. Tencent (700 HK)
Baidu (BIDU US)
The era of voice assistants. Voice assistant adoption has hit an inflection
point. Global smart speaker sales jumped 137% YoY to 20m in 3Q18 and Hitting an inflection point
China increased its share by over 10% to 29% of global sales, led by Global smart speaker sales
Alibaba and Xiaomi. Baidu’s DuerOS-powered smart device installed 25 (m)
base also jumped 33% to 150m in the past three months. Baidu was the 20
20
first to launch a smart speaker with display world-wid, taking its voice 17
assistant to next level where users don’t have to say the “awaken” words 15
every time to initiate conversation. Not only will DuerOS answer
questions, it also suggests new ideas. Meanwhile, Baidu is enriching 10 8
9
content with iQiYi videos, QQ Music/Netease Cloud music, search 6
5
information, kids content through partnerships with VIPKID and industry 3
experts. 0
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18
Cloud going beyond IaaS. Cloud is the foundation of industrial internet. Source: CLSA
China cloud penetration is still low at 5-10%, but AliCloud has led the
Outpacing the world
way, penetrating new sectors such as healthcare, entertainment,
Global smart speaker sales share
government and manufacturing over past two years. It is helping 100 (%) Others
traditional industry to digitise their businesses. Its offering has also gone UK
China
beyond infrastructure as a service (IaaS) to platform as a service (PaaS) 80
US
and software as a service (SaaS), such as AI technology for quality
control, AI database and data analytics for manufacturers. Tencent has 60
20 29
restructured the organisation to accelerate cloud services. Baidu focuses

40
on AI-empowered cloud services, eg, AI customer services for telcos,
internet of vehicles and unmanned convenience store solution. 20 46 42
China could become world’s largest autonomous driving market. Baidu 0

1Q18 3Q18
has sold 100 self-driving minibuses this July which now operates in 10
Source: CLSA
locations and has carried 10,000 passengers. Chinese state-owned autos
manufacturer, FAW, expects to launch the first Apollo L4 self-driving China leads
passenger car in 2019 and mass production in 2020. Baidu is also DuerOS smart speaker with screen
helping Changsha’s government to develop robotic taxis with expected
launch in end-2019. Additionally, the company has signed a strategic
contract to help Beijing and Shanghai government build smart cities.
With the government’s blessing, China could become world’s largest
self-driving car market given its serious traffic problem. China Mobile is
prepared to launch a nationwide 5G network in China when autonomous
driving is ready.
Source: CLSA
13 December 2018 43

Global Themes 2019
Global - Thematic
An internet transformation begins
The share of users that pay for content and privacy can grow
Vast shifts in government, regulatory and public opinion over leading

internet names mean 2019 will see the start of a reorientation towards
Shaun Cochran
better privacy, content quality and data ownership. Though there have
+852 2600 8351
been privacy-minded platforms before, the mix of an unsatisfactory shaun.cochran@clsa.com
response to criticism, mounting regulatory pressure, the potential
emergence of alternatives with high-profile backing and a change in Key idea
consumer views mean the industry has plausibly reached a tipping point. Disney to outperform Facebook
The Solid Project. The current model of internet businesses being free at People want tougher laws
the point of use invariably trades privacy for services. In late-September, Do we need tougher rules for breaches of data
privacy?
Sir Tim Berners-Lee, co-creator of the web, announced Inrupt, a startup
to fund the project Solid. This is a decentralised platform that gives
individuals ownership of their data by allowing storage in personal online No
17%
data stores (PODS). Each POD owner can then grant access to the data
stored in them to particular parties. The idea is that if the user base
grows sufficiently, then distributed apps (Dapps) can be developed
which provide services, such as social media, but which can only access Yes
83%
users’ data insofar as they and other users grant permission. Hence, it
allows for the type of sharing that is common on social current media
platforms, but lacks the need for a centralised entity to aggregate data
Source: CLSA, HarrisX
to provide the service.
Indicating a willingness to pay for quality news
A confluence of catalysts. While efforts such as these to revamp the Subscription rates of NY Times
web’s fundamental architecture will meet resistance from incumbents, (No. of subscribers) Total paid digital subscriptions (%)
the platform’s views are ultimately irrelevant. What matters is user take- 3,500,000 YoY growth (RHS) 80
70
up of alternatives. That process by definition requires the development 3,000,000
60
of said alternatives. Thus investors should be looking for evidence that 2,500,000
50
the Solid Project is generating enough developer buzz and venture- 2,000,000
40
capital monetary backing to present a credible threat to the current 1,500,000
30
industry model. 2019 presents ideal timing for consumer interest, given 1,000,000
20
a tsunami of evidence that existing platforms (particularly Facebook) 500,000 10
have completely failed to prioritise the self-professed commitment to 0 0

1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
user privacy. In this regard, privacy bills from regulators, such as the
Senator Ron Wyden’s recent draft Consumer Data Protection Act, could Source: CLSA, NYT
help drive societal attention and appetite to consider alternatives.
Pay-to-stream services are growing
Apple versus Spotify subscriber rates
Culture shift. Crucially, we would argue investors are witnessing a clear
80 (subs, m) Apple Music Spotify
parallel shift in consumer attitudes towards paying for digital services, 70
particularly content via subscription models. Evidencing this shift is the 60
growth of subscriptions across a wide range of platforms, whether in 50
music (Spotify’s premium subscribers jumped 40% YoY in 3Q18), movies 40
(Netflix’s total paid memberships rose 23.9% YoY in 3Q18), or the news 30
media (the New York Times’s total digital subscriptions expanded 24.4% 20
YoY in 3Q18). This shift drives Theorality’s preference for the 10
undermonetised old-media content businesses over freemium internet 0

Aug 16
Feb 17
Aug 17
Feb 18
Oct 16
Oct 17
Jun 16
Jun 17
Apr 17
Dec 16
Dec 17
platforms (Disney over Facebook, as an example).

Source: CLSA, Theatlas
44 13 December 2018

Global Themes 2019
Asia - Consumer
M&A to increase as a tool to speed up China access
Expect more outbound deals as Chinese capital chases local consumers
Many sectors of China consumption are seeing a premium shift as

millennials enter the spending equation; beyond the baijiu segment,
Oliver Matthew
foreign brands often have strong quality appeal at the premium end. We
+81 3 4578 8041
saw some mergers and acquisitions around China access in 2018; we oliver.matthew@clsa.com
expect this trend to accelerate in 2019.
Top pick
China consumption continues to grow rapidly. Euromonitor estimates Shiseido (4911 JP)
most categories in China will grow 150-200% by 2030, with clothing &
footwear growing the fastest at 214%. Chinese millennials are more
affluent than the older generations, and as millennials enter the spending China has highest consumption
equation, they experiment more and ASPs in certain categories are Split of total consumption in Asia
(%)
trending up. Euromonitor expects the Chinese market to add US$9.15tn 40 37.5
in total consumption by 2030, which is almost 3x the forecast addition 35

30
from Asia’s second-largest market, India. China cannot be ignored. 25 21.4
20
12.3
15
China access M&A. In 2018, Ruyi Holding Group, the Chinese apparel 10 4.6 5.5
2.1
firm, bought a controlling stake in Bally International, at a reported 5 1.5 1.8 0.9
0
valuation of around US$700m. Ruyi is experienced in clothing
India
Japan
Thailand
Korea
China
Indonesia
Philippines
Malaysia
Singapore
production, and is likely to leverage the Bally brand to expand its
presence and drive retail performance in Chinese market. In sportswear,
Anta Sports approached Amer Sports, Finland makers of Wilson tennis Source: CLSA, Euromonitor, 2017 data
rackets and branded outdoor gear, with a takeover proposal of €4.6bn China to add US$9.1tn
euros (US$5.3bn); a move to premiumise the group’s brands and help Addition to total consumption during 2017-30F
Amer drive growth in China market. In the beauty-care sector, US (US$bn)
10,000
healthcare conglomerate Johnson & Johnson bought out Japanese 9,000
9,150
skincare firm Ci:z Holdings for ¥230bn (US$2.05bn), again likely to tap 8,000
deeper into the China market by leveraging the Japanese brand’s quality 7,000
6,000
image and product innovation. 5,000
4,000 3,166
Got to be in it to win it! In the M&A deals we mention above, the desire 3,000
to succeed in China appears the lure. Many companies in China lack the 2,000
818 834
568
1,000
high-end brands to meet the rising demand from Chinese customers for 0
more premium products, while some global names also lack the suitable China India Indonesia Japan Korea
providence to get traction fast. As Ecommerce penetration rises further Source: CLSA, Euromonitor
in China, the pressure on Chinese brands that enjoyed a distribution
barrier is rising, and the excuses for overseas brands not to participate in Clothing & footwear to see largest % increase
China are running low. Increased M&A deals by Chinese capital to gain a Overall 2017-30F growth in China by category
250 (%) 214
faster track to premiumisation - and by global players looking to fill in 200
portfolio gaps - looks likely. While there will certainly be money to be 150
made spotting the takeout targets, M&A will also highlight the attractive 100
segments: fashion, health-related goods and cosmetics look to be 50

0
promising areas.
Others
Alcohol & Tobacco
Health related
Food & Beverage
Hotels & Catering
Leisure
Education
Housing
Personal Care
Total
Clothing & Footwear
Transport
Source: CLSA, Euromonitor
13 December 2018 45

Global Themes 2019
China - Consumer discretionary

Shields over swords
Seeking shelter from China macro uncertainties
We maintain that consumer discretionary remains vulnerable this year

and do not expect a sustainable rebound until 3Q19. There is a lack of a
Dylan Chu
margin of safety for valuations, as well as further downside risks such as
+852 6251 4594
wage and employment deterioration; negative wealth effects from dylan.chu@clsa.com
cooling property market; and air-conditioning inventory build-up.
Against this backdrop, we seek shelter from China macro uncertainties Top pick
and prefer defensive names over offensive beta ones. Shenzhou International (2331 HK)
Overall consumption continued to slow down

Discretionary consumption overall remains weak. After a round of
Consumer goods retail sales YoY growth
unfavourable policies, the retail environment calmed down in 2017, and 12 (%)
retail sales growth continued to deteriorate. The personal income tax
11
cuts did not help to boost consumer confidence by much. Stock market
10
woes, property price peaking, Macau gaming weakening and luxury
companies lowering down expectations exacerbated matters. These 9
factors combined confirm the subdued discretionary consumption 8
environment in China. 7
Oct 18
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
OEMs provides shelter. Relatively insulated from macro uncertainties,
apparel and footwear original equipment manufacturers (OEMs) provide Source: NBS, CLSA
shelter for investors. Slightly more near term, local currencies in key
OEM locations have been depreciating against the US dollar, which led Shenzhou: defensive sales growth
to temporary GPM tailwinds for OEMs. Outside of OEM, we also like Shenzhou’s historical sales growth trend
30,000 (Rmbm) Estimated sales (%) 25
sportswear for its relatively resilient growth which is less sensitive to Actual sales
YoY growth rate (RHS)
macro cyclicality. We remain cautious on appliances and retail due to 25,000
20
significant earnings risks and a lack of a margin of safety for valuations. 20,000
15
15,000
Top pick is Shenzhou International. Within the OEM sub-sector, 10
10,000
Shenzhou provides investors with extremely strong defensiveness and
5
earnings visibility over the medium term. It is the largest OEM globally 5,000
by profit and is the strategic partner of Nike, Adidas, Puma and Uniqlo. 0 0
2015 2016 2017 18CL 19CL 20CL
Different from macro-sensitive businesses, Shenzhou’s growth is
Source: Company data, CLSA
predominantly driven by its own capacity additions and efficiency ramp
up, which has seen close to 100% capacity utilisation over the last Shenzhou: FCF harvesting over 18-20CL
decade, including during the GFC. Additionally, the labour efficiency Shenzhou OCF & FCF trends
ramp up in Vietnam leads to structural margin upside while the 8,000 (Rmbm) OCF FCF
7,000
upcoming low-capex cycle over 18-20CL could leave more room for free
6,000
cashflow and potentially better dividend payouts. 5,000
4,000
3,000
2,000
1,000
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
18CL
19CL
20CL
Source: Company data, CLSA
46 13 December 2018

Global Themes 2019
China - Education
The pursuit of knowledge
Rise of edtech and working-class education consumption
We see three emerging catalysts that will drive online-education growth

over the next decade: personalisation, decentralisation and globalisation.
Mariana Kou
CRR’s study on China’s working class (Critical mass, 20 November 2018),
+852 2600 8190
found solid demand for after-school tutoring among migrant workers in mariana.kou@clsa.com
top-tier cities and local residents in lower-tier cities. The outlook is
particularly positive lower-tier cities, where 25% of local residents Top pick
indicate a willingness to take online courses in the future. Given its TAL (TAL US)
heavy investment in data, artificial intelligence (AI) and facial-recognition
technology, TAL Edu is our top BUY. Tutoring and test-preparation groups lead sector
China’s education market by segment, 2017
Growing industry segment. China’s online-education-market revenue (Rmbbn)
3,000 2,693
increased from Rmb79.9bn in 2013 to Rmb199.3bn in 2017. It will reach 2,500

Rmb579.2bn by 2022, according to Frost & Sullivan, representing a 24% 2,000
1,500 1,060
five-year Cagr. Personalised learning is changing the education industry. 1,000 633
279
It is achieved via adaptive learning that relies on knowledge, data and 500 156 104
0
data analysis to enhance the learning experience and increase the level
Private higher-education
Total fundamental-
After-school tutoring and
Online after-school
Total higher-education
Private fundamental
preparation market
education revenue
test-preparation-market
education revenue
tutoring and test-
revenue (2017A)
revenue (2017A)
of engagement. Meanwhile, mobile learning enables decentralisation and
revenue (2017A)
revenue (2017A)
(2017A)
(2017F)
flexibility in learning, as well as opportunities to access global teaching
resources. We believe the segment is reaching critical mass as users and
service providers gain experience in providing and using web-based
learning products. However, the industry is far from saturated and we Source: CLSA, Frost & Sullivan
expect to see higher-quality services in the coming years.
Rapid growth in online-education segment
More scalable business model. We like after-school tutoring companies PRC internet-education-platform market
for their long-term growth outlook. They should see a strong network 700 (Rmbbn) B2C
579.2
Internet-education platforms
effect in an increasingly tech-driven learning environment. Given 600 24.0
advances in education technology (edtech), it is easier for players to 500 17-22 Cagr: +23.8% 471.5
17.9
scale up and we believe leading players such as TAL and New Oriental
382.6
400 12.2
309.6
are in a sweet position to ride the sector’s tech and AI trend. TAL 300 13-17 Cagr: +25.7% 249.0 7.6
555.2
199.3 4.1
recorded K-12 student enrolment of 7.5m in FY18 and New Oriental
453.6
159.2 1.7
200
370.4
124.8 0.6
302.0
5.5m. Their sizeable student bases support substantial investments in 99.1 0.3
244.9
79.9 0.3
197.6
100 0.2
158.6
2015 124.5
technology and competitive staff compensation, which in turn will

2014 98.8
2013 79.7
0
enhance their brand and results.
2016
2017
2018E
2019E
2020E
2021E
2022E
Top pick: TAL. We value New Oriental and TAL using 0.76x PE/G, which Source: CLSA, Frost & Sullivan
is the former’s average PE in 2012-15, during which the trading multiple
was depressed following negative newsflow which coincided with the
release of short-seller reports. We use New Oriental’s historical multiple Families in lower-tier cities keen on online classes
because it has a longer history, having listed in 2006, and has gone Fastest growth to come from tier 4-5 residents
(%)
through various macro and company-specific development cycles. There 25
has been near-term uncertainty around operating expenses, given Beijing’s 20
announcement in August this year that it would step up oversight on the 15

informal education sector. We believe that our discounted multiple
10
reflects these factors. TAL and New Oriental may face temporary and
short-lived headwinds due to regulations in the next 6-9 months at the 5
operational level from teacher certification and venue relocation, but we 0

expect them to outperform and gain market share, thanks to an enhanced Current Future Current Future
regulatory environment. The longer term market-share gains should Migrant workers in Tier 1-3 Local residents in Tier 4-5
support a rerating to their historical average of 1.0x PE/G. Source: CRR
13 December 2018 47

Global Themes 2019
Asia - Gaming
Weak hand
VIP continues to be challenging while mass remains resilient
Following a robust start to 2018, a progressive deceleration of growth

marked the second half. Into 2019, macro overhangs and trade tensions
Jonathan Galligan
remain. Through 9M18, GGR grew 16%, though we note growth
+852 2600 8605
decelerated, with particular weakness at the top end of the market. The jonathan.galligan@clsa.com
resiliency of mass in 2019 will define sector performance, although
easing macro-economic headwinds and trade tensions or a positive Top pick
resolution of concession agreements could provide positive catalysts. Galaxy (27 HK)
Macro-economic and trade tensions in the focus. While a deceleration Macau annual GGR & forecasts
in GGR has defined 2H18, macro-economic pressure and trade tensions Overall GGR to increase in 18CL and 19CL
have driven share prices lower. The weakness in Chinese PMI, GDP VIP Mass/slots YoY growth (%)
50 (US$bn)
growth, the renminbi and property prices has leaked into Macau with (2)
9
19
GGR growth decelerating from 21% in 1Q18 to 17% in 2Q18 and 10% in 40
15
(34) 12
6
14
3Q18. Year-to-date, GGR has grown 14% and we forecast 12% growth 34 (3)
19
30 43 30
in 18CL and 6% in 19CL. 35
(18)
16
9 9
55 5
20 14
10
31 33
Weakness in the top end of the market. In 4Q18, weakness at the top 10 27 16 9 12
(11)
(45)
46 8 3 9
end of the market has weighed on both VIP and premium mass revenue. 33 7 66
(12) 25
In 3Q18, VIP revenue grew just 4% YoY, with rolling chips growing 5%. 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
18CL
19CL
20CL
We expect VIP growth to remain relatively muted in 2019 as we forecast
just 3% growth. Upside could come from an alleviation of trade tensions, Source: CLSA, Companies
macro headwinds and a recovery in property prices.

Macau quarterly mass & slot GGR
Mass & slot GGR in 18CL and 19CL
Ability for mass to remain resilient will define 2019. The biggest Mass & Slot GGR YoY % change (RHS)
concern as we head into 2019 is whether mass remains resilient, 60 (HK$bn) (%) 50
particularly as economic weakness in China remains prevalent. While 50
40
mass growth has decelerated in 2018 from 19% in 1Q18 to 16% in 40

30
20
3Q18, it has remained firm. We forecast mass to grow 9% in 2019,
30 10
though further economic headwinds could put downward pressure on 0
20
the space. (10)
10
(20)
Concessions resolution unclear. It remains unclear when we will get 0 (30)

1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19CL
1Q20CL
more clarity on concession renewals, but with MGM and SJM’s

concession expiring in March 2020, we would expect more clarity from
Source: CLSA, Companies
the government in 2019. We continue to believe the base case is for
MGM and SJM to have their concessions extended to align with the Macau quarterly VIP GGR
other four operators in 2022, but it is unclear at what price that will VIP GGR to grow 8% in 18CL and 3% in 19CL
happen. Overall, we are not expecting concession renewals to be overly VIP GGR YoY % change (RHS)
punitive, but we do believe return profiles will come down. 70 (HK$bn) (%) 120
60 100
80
50
60
40 40
30 20
0
20
(20)
10 (40)
0 (60)
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19CL
1Q20CL
Source: CLSA, Companies
48 13 December 2018

Global Themes 2019
Hong Kong - Conglomerates

New era, new strategy
Succession and fair valuations will bring capital allocation in to focus
With two of the five Hong Kong conglomerate groups undergoing

succession changes in 2018, the focus in 2019 will shift to capital
Jonathan Galligan
allocation. While divestments are needed, acquisitions can never be
+852 2600 8605
ruled out. Valuations are at historical levels, meaning NAV growth will be jonathan.galligan@clsa.com
needed to drive sector share prices. We forecast 12% NAV growth in
19CL, underpinned by Swire Pacific and Jardines, although we note Top pick
Jardine Matheson is the only conglo with an expensive valuation. Swire Pacific (19 HK)
Succession and capital allocation. Of the five conglomerate groups we Share price against NAV and discount movement
cover, CK Hutch (Victor Li) and Swire Pacific (Merlin Swire) saw NAV drives share price
Weighted share price
succession at the chairman level in 2018. As both become settled in (HK$/sh)
400 Weighted NAV
(%)
0
their new position, capital allocation will come into focus in 2019 as any 350
Average NAV discount (RHS)
change in strategic direction will dictate how these businesses evolve 300
(10)
over the next several years. With sector balance sheets expanding in 250 (20)
18CL, we think divestments are more likely, though we note the market 200
(30)
sell-off in 2018 and lower valuations could also lead to acquisitions. 150
100
(40)
50
Acquisitions or divestments on hand? While CK Hutch’s capital 0 (50)
allocation strategy has become increasingly convoluted, we believe the
Jan 08
Oct 08
Jul 09
Jan 11
Oct 11
Jul 12
Jan 14
Oct 14
Jul 15
Jan 17
Oct 17
Jul 18
Apr 10
Apr 13
Apr 16
market would welcome divestments as their balance sheet has
expanded. However, the group has continued to acquire assets in Source: CLSA
2018. Both Swire Pacific and First Pacific are likely poised to divest
Aggregate NAV of HK conglomerates
smaller non-core assets. While Jardines rarely sells assets, they did YoY growth to accelerate to 12% in 19CL
divest Jardine Lloyd Thompson in 2018, with the transaction (HK$bn) HK conglomerates' aggregate NAV (%)
completing in 2019. We do not expect any significant change in their YoY % change (RHS)
2,000 50
capital allocation strategy. 40
1,500 30
Valuations fair, putting pressure on NAV growth: We see limited room 20
for a narrower sector discount for Hong Kong conglomerates, which are 1,000 10
0
trading exactly in line with their 31% long-term average discount. Thus,
500 (10)
for share prices to move, the conglomerates must deliver NAV growth. (20)
We forecast the sector to deliver a 12% aggregate NAV growth in 19CL 0 (30)
underpinned by 13% YoY recurrent profit growth. This is against a 2%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
18CL
19CL
contraction in NAV in 18CL. Source: CLSA
We like stocks with strong NAV. Within our coverage, Swire Pacific HK conglomerates NAV premium/(discount)
and Jardine Strategic will deliver the strongest NAV growth in 19CL of Current valuation in line with long-term average
Prem/(Disc) (%)
18% and 17%, while MTRC will deliver the softest NAV growth at 4%. 30
20
Among our coverage, Jardine Matheson is the only company trading on 10
the expensive side of its long-term average discount to NAV, while 0
Avg historical discount : 31%
Swire and MTRC offer the best valuations relative to their own (10)
+1 std dev: 21%
historical discounts. (20)

(30)
(40)
(50) -1 std dev: 40%
(60)
Aug 95
Feb 04
Aug 12
Jan 97
Jul 05
Jun 98
Oct 09
Jan 14
Jun 15
Apr 01
May 08
Apr 18
Nov 99
Dec 06
Nov 16
Mar 94
Mar 11
Sep 02
Source: CLSA
13 December 2018 49

Global Themes 2019
Asia - Healthcare
Spending on drugs to inexorably increase
Ongoing shift in drug pipelines
As a result of the aging population, technological advancement,

increasing healthcare expenditure and favourable policies led to
David Stanton
prescription drug sales for CY11 to CY17 growing at a Cagr of +1.2%.
+61 2 8571 4247
That said, an annual Cagr of +6.4% is forecast by EvaluatePharma for david.stanton@clsa.com
CY18 to CY24, with prescription drug sales expected to reach
US$1.2trn. Growth will be driven by the continued uptake of drugs; Top pick
anticipated launch of novel therapies addressing unmet needs; and Takeda (4502 JP)
volume growth from increasing access to medicines globally.
Volume offset by decreased price of older, increasingly generic

medicines. Payer scrutiny, sales losses from genericisation and biosimilar Forecast global drug spend
competition may slow growth. Drug affordability and accessibility Increased drug spend
Prescription excluding generics and orphan
continue to apply downward pressure on the market, with payers, Orphan
(US$bn) (%)
including those in the USA and China. The United States and China are Generics
1,400 Growth YoY (RHS) 10
the two largest pharmaceutical markets in the world in terms of market 1,200 8
size in 2017 with global market share of 38.3% and 17.5%, respectively. 1,000 6
In particular, policies in China are expected to continue to focus on 800 4
encouraging the development of innovative patented drugs from 2017 600 2
to 2022. 400 0
200 (2)
0 (4)
Companies want to continue to develop drug pipelines - a shift in the
2010A
2011A
2012A
2013A
2014A
2015A
2016A
2017A
2018E
2019E
2020E
2021E
2022E
2023E
2024E
types of drugs being developed. Going forward, biotechnology drugs,
namely: biologic drugs; gene therapy drugs; and cell therapy drugs will Source: EvaluatePharma World Preview 2018
increasingly contribute to growth in the global prescription drug market.

This is building on the approval and launch of CAR-T therapies in 2017
and the first USA Food and Drug Administration (FDA) approved gene
therapy for vision loss in 2018. These are very complicated drugs.
EvaluatePharma states that biotechnology products will represent 31% Conventional vs. biotech drugs by revenue
of the market in 2024 from 25% in 2017. Similarly, within the world’s Increased biotechnology drug as a % of total
top 100 products, biotechnology products will represent 52% of sales in (%) Conventional/Unclassified Biotechnology
100
2024 from 49% in 2017. This change is indicative of the reliance the
industry has on novel drug targets only accessible through 80
biotechnology products. 60
Asian Pharma continues to move into this space. Asian biopharma 40
companies are challenging global incumbents, taking the competitive 20
landscape to a new level. Their strategy involves developing innovator 0

and copycat drugs (biologics and biosimilars) in emerging markets where
2010A
2011A
2012A
2013A
2014A
2015A
2016A
2017A
2018E
2019E
2020E
2021E
2022E
2023E
2024E
entry barriers are low, proving the products are efficacious and then
entering higher-priced, established markets. Our BUY-rated innovator Source: EvaluatePharma World Preview 2018
healthcare companies in Asia include CSL (CSL AU, TP A$222.50),

Takeda (4502 JP, TP ¥8,800), Beigene (6160 HK, TP HK$121.34) and
Hua Medicine (2252 HK, TP HK$9.15).
50 13 December 2018

Global Themes 2019
Japan - Strategy
The trade war that wasn’t
How Japan escapes damaging tariffs and emerges unscathed
Abe has a clear-cut path to avoiding damaging trade tariffs: make

concessions on agricultural tariffs. With just 38% food self-sufficiency,
Nicholas Smith
Japan can’t feed itself. With 67% of farmers over the age of 65, that
+81 3 4578 8033
undersupply is about to get incomparably worse. By cutting tariffs on nicholas.smith@clsa.com
food imports, Abe can mollify Trump and achieve plausible deniability for
dismantling the politically sensitive tariff moat on farm products. Top pick
Toyota Motor (7203 JP)
Benefits from trade war if it avoids direct hit on autos. Game-theory-
Japan is unable to feed itself
based modelling by the Netherlands’ Central Policy Bureau shows Japan
Japan’s food self-sufficiency rate (in calories)
actually benefits from a trade war if – and only if – it avoids the direct (%)
80
hit of tariffs specifically targeted at its autos and auto parts sector.
70
Japan has zero import tariffs on autos and machinery. Autos and parts 60
plus machinery account for the vast majority of Japan’s $69bn bilateral 50
trade surplus with the USA. Japan’s tariffs on these products are zero.
They’ve been zero on autos since 1978. Ex-agriculture, its weighted- 40
average tariffs are 1.4%, against 2.3% for the USA. Even including 30
38%
agriculture, they’re just 2.5%, against 2.4% for the USA, but against 3.2%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
for the EU. Japan enters negotiations in a position of relative virtue. Source: CLSA MAFF
Shale and defence equipment cut the trade surplus. Japan can cut the 67% of farmers are over 65 years old
trade surplus by raising procurement of missile defence systems and Age breakdown of Japan’s farming population
fighter jets from the US, but this takes time. Faster is to ramp up imports 70 (%)
67
of shale gas. Japan is uncomfortable about being overly dependent on 65
the Middle East for energy and needs hydrocarbons while its nuclear 60
reactors remain largely mothballed.
55
50
Easy gambit: slash agro tariffs to win Trump support. The heavy lifting of
45 47
cutting the trade surplus would likely be done using shale gas. To win
Trump’s support, however, you need to impact his voter groups: autos or 40
1996
1997
1998
1999
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2016
2017
farmers. Japan has food self-sufficiency, in calorie terms, of just 38% and,
worse, 67% of its farmers are over 65 years old, so the undersupply is Source: CLSA MAFF
likely to soon get significantly worse. It needs to increase imports and find
a scapegoat. Abe already agreed to slash agro tariffs as part of the Trans Zero tariffs on main areas of trade surplus
Pacific Partnership (TPP) treaty, so negotiating a tariff reduction package Japanese trade with the US in CY17
should be quick and relatively easy. The result is likely to be avoiding US (2) (1) 0 1 2 3 4 5 6 (¥tn)
erection of tariff barriers against Japanese autos and Japan winning Foodstuffs
Raw materials
market share, primarily off USA automakers, in China and Europe as a
Mineral fuels
result of trade war tussles between the USA, China and the EU. Chemicals
Export
Import
Manufactured goods
Machinery
Electrical machinery
Transport equipment
Others
Source: CLSA, MoF
13 December 2018 51

Global Themes 2019
Korea - Strategy
In exports we trust
Weaker Korean won and exports the only way to save the economy
Next year will be tough. The first half will see a simultaneous slowdown
in the domestic economy, property prices and exports. The silver lining is
Paul Choi
the Korean won: currency depreciation as a result of a slowdown will
+82 2 397 8520
boost the competitiveness and profitability of the country’s exporters. paul.choi@clsa.com
We suggest focusing on DRAM makers - Samsung Electronics and SK
Hynix - and shipbuilders such as Hyundai Heavy. Top picks
Samsung Electronics (005930 KS)
An evident slowdown. In the absence of a drastic policy turnaround, SK Hynix (000660 KS)
most economic indicators - including capital investment, job creation, Hyundai Heavy (009540 KS)
business surveys, and consumer sentiment - suggest a tough outlook for
Won likely to depreciate against dollar
2019. A 9.7% increase in the 2019 government budget is the highest
15-year ₩/US$ rate
since 2009, but we doubt fiscal stimulus focused on more welfare and 1,600
government-led job creation will be effective in averting a slowdown.
1,500
While exports have been holding up well so far, deceleration is
1,400
inevitable in the first half given the slowdown in emerging markets and a
correction in DRAM prices. 1,300
1,200
Silver lining is Korean won depreciation. The domestic economic 1,100
situation, with falling property prices and high unemployment, will 1,000
prevent the Bank of Korea from raising rates further. As a result, the 900
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
interest-rate gap with the US will widen further. This, combined with a
reduction of the current account surplus, will pressure the won Source: CLSA, QuantiWise
throughout 2019. Ironically, Korea’s worsening economic and financial SEC and Hynix account for 44% of Kospi OP
health will be the seed for another export-led recovery. In an SEC and Hynix OP as % of Kospi total OP
environment of a weaker currency, exporters will once again regain their 50 (%)
competitiveness and save Korea’s economy from falling into an abyss.

40
DRAM makers and shipbuilders. Among the export industries, we prefer 30
DRAM makers and shipbuilders. DRAM stocks, Samsung Electronics and 20

SK Hynix, are already pricing in a bear-case scenario of DRAM profit
falling over 50% YoY, which we do not think is likely. DRAM stocks are 10
likely to start bouncing back earlier than the bottom in physical DRAM 0
prices that we expect in the second half. DRAM now accounts for one-
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18E
third of all Korean corporate profit. Korean shipbuilders are winning

back some lost market share as orders for low-emission LNG ships Source: CLSA, QuantiWise
increase with implementation of IMO2020. We expect new ship orders New ship orders continue to recover
for Korean yards to continue to improve in 2019, and this will be the Big-five Korean ship yards new orders
major driver for share prices of Hyundai Heavy. A weaker won is a 60 (US$bn)
tailwind for both tech and shipbuilding industries. 50
40
30
20
10
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
18CL
19CL
Source: CLSA, companies
52 13 December 2018

Global Themes 2019
Taiwan - Strategy
Slowing tech and crippling politics
The good news is that Taiwanese companies are in excellent shape
Taiwan is at a crossroads as the decelerating tech cycle is compounded

by tariff-induced supply-chain adjustments and marred by a domestic
Ming-Kai Cheng, CLST
political standoff. This implies the island nation will remain tethered to
+886 2 2326 8123
global tech trends (eg, EV, 5G, datacentres) which may not see much ming-kai.cheng@cl-sec.com
momentum, especially in 1H19. The upside is that as a market, Taiwan
continues to be net cash and companies are in excellent operating shape
to weather the slowdown. Almost all Taiwan’s ICT products made overseas
Export orders: overseas production ratio
Overall
Global tech headwinds. The slowdown that started in 3Q18 across all Electrical machinery products
Information and communication products
tech segments is likely to extend into 1H19. Smartphone saturation, Electronic products
disappointing iPhone sell-through and an unexpected slowdown in 100
90
(%)
datacentre capex are all contributing to the contraction. Tech-driven 80

70
Taiwan will invariably have to undergo a period of adjustment as demand 60
continues to weaken into 1H19. 50
40
30
20
Crippling domestic politics. President Tsai Ing-wen’s approval rating 10
0
continues to slide, partly due to her administration’s indecision on 99 01 03 05 07 09 11 13 15 17
energy policy. It is impacting investment decisions, especially as the Source: CLSA, CEIC
imposition of US tariffs on Chinese goods has accelerated reshoring. And
given the president’s recent rhetoric, it would be safe to assume a Measures needed to combat declining workforce
resumption of cross-Strait talks is off the table. Taiwan’s working age population (15-64) growth
1.5 (% YoY)
Structural issues. We believe Taiwan’s biggest challenge is its rapidly- 1.0

ageing population and hence workforce. The island’s xenophobic 0.5
immigration policy means there is no immediate solution to the problem.
This has led to an outflow of investment, as evidenced by the lowest 0.0
investment-to-GDP ratio of any major Asian country - below even that (0.5)
of Japan. Companies relying on domestic consumption will continue to (1.0)

face an uphill battle as demand fails to keep pace with global inflation.
(1.5)
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
Companies are in excellent operating shape. Despite the issues facing

Source: CLSA, National Development Council
Taiwan, companies listed on the TWSE on average enjoy an excellent
operating structure (the market as a whole is net cash), so the current
correction may serve as an opportunity for many to gain share. Dividend Lowest of the bunch
Investment-to-GDP ratios
yields and the ability to pay dividends remain healthy, making Taiwan a
50 (% GDP)
good candidate for value investing with optionality on global growth 45
resumption. 40
35
30
25
20
15
10
5
0
Bangladesh
India
Japan
Thailand
Vietnam
Korea
China
Indonesia
Philippines
Malaysia
Singapore
Taiwan
Source: CLSA, IMF
13 December 2018 53

Global Themes 2019
India - Strategy
Much awaited earnings-growth recovery
Downside risk to estimates, but decade-high growth still likely
Much awaited earnings-growth recovery has eluded India for several

years, with an average through-the-year earnings downgrade of 9ppts
Mahesh Nandurkar
from FY11. The economic slowdown over FY11-15 and one-off factors -
+91 22 6650 5079
including demonetisation, NPL clean-up and GST - were the key culprits. mahesh.nandurkar@clsa.com
While downside risk exists for our bottom-up EPS growth forecast of
25% for FY20 due to aggressive margin assumptions, we expect Nifty Top pick
earnings growth of 18-20% for the year, supported by a turnaround in ICICI Bank (ICICIBC IN)
domestic corporate banks. ICICI Bank is the best play on this theme.
FY20 earnings acceleration is more optics. Bottom-up CLSA earnings FY20 Nifty earnings growth to revive to 18-20%
forecasts suggest Nifty earnings growth should accelerate from 10% in Corporate-banks turnaround to support recovery
30 (% YoY)
FY19 to 25% in FY20. This, though, has some optics built in. The optics 25
25
are due to eight stocks: ICICI and SBI due to earnings improvement in Downside risk
20 to earnings
corporate banks, Bharti Airtel, three oil-marketing companies, Tata 15
Motors and Vedanta. Excluding these eight names, Nifty earnings
22
10
18-20
growth is likely to be largely unchanged from 18% to 19% YoY - not a 5
11
10
10
9
tall order - but also not without risks.
8
7
6
1
0
(4)
(5)
Revenue-growth assumptions are reasonable. For the 96 Indian (10)
companies under coverage (excluding global commodities and financials),

FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
we build in 12% revenue growth for FY20 vis-à-vis 14% for FY19, which
appears reasonable. Companies where substantial revenue-growth Source: CLSA
improvement has been built in for FY20 include Bharti Airtel, Dr Reddy’s,
Cipla, Eicher Motors (Kerala floods during festive season impacting the
base) and Lemon Tree (cycle turning). If realised, the revenue growth
FY20 growth acceleration ex-8 stocks1 is small
could drive a stock rerating. Nifty earnings growth
% YoY FY19CL FY20CL
Margin assumptions leave downside risks. Excluding financials and Nifty 10 25
global commodities, we build in a 95bp YoY improvement in margins for Nifty ex-8 stocks 18 19
1
Eight stocks are: SBI, ICICI Bank, BPCL, IOCL, HPCL,
FY20 over FY19. For 80 out of 96 companies under coverage we build Bharti Airtel, Tata Motors and Vedanta. Source: CLSA
margin improvement in FY20. For fast-moving consumer goods
companies, we build in price increases (which were delayed due to GST
implementation) and product-mix improvement. For cement, we build in
a 7-8% price increase from now to March 2020 which will be a function Earnings have been consistently downgraded
of producer discipline and continuing strong demand growth momentum. Commodity-price correction should help margins
35 (% YoY) Year start earnings growth
In pharma, we have built in some recovery in the US business and some
30 Nifty earnings growth
cost containment. In telecom, we build in Arpu-driven tariff increases by 25
Reliance during FY20. For IT services, we build in rupee depreciation, 20
which will help margins. 15
10
5
c.20% earnings growth for FY20 would still be a big improvement. The 0
recent correction in commodity prices (oil and steel) should help (5)
margins. The biggest risk to headline Nifty earnings growth would be a (10)
potential extension of the NPL and provisioning cycle. A second round

FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
of impact on the economy from a slowdown by non-bank financial

companies remains the key growth concern. The Nifty still trades at 17x Source: CLSA
one-year forward EPS estimates and remains 11% higher than the 10-
year average and hence valuation comfort is still lacking.
54 13 December 2018

Global Themes 2019
Singapore - Strategy
Beacon of safety
Defensive yield, strong currency to weather storm
A worsening global environment will drag Singapore’s trade-dependent

economy down with the rest of Asean. However, the Lion City’s
defensive yield and resilient currency make it a beacon of safety, as we Yew Kiang Wong
+65 6416 7885
detailed in our Port in a storm strategy report, and will help it outperform Yew.kiang.wong@clsa.com
peer markets. The possibility of a 2019 election offers further positive
sentiment for retail Reits and consumer names. We reiterate our Top pick
defensive strategy in 2019, with our dividend portfolio of 12 stocks. DBS (DBS SP)
Prolonged trade war is key risk. Singapore will not be spared from a full-
blown trade war, given that China is one of its largest trading partners. Singapore highly dependent on world trade
Recent weakness in export data to China seems to suggest that a World trade vs Singapore GDP growth
prolonged trade dispute could further drag on Singapore’s highly open 20 (% YoY)
and trade-dependent economy. Our adjustment of 19CL GDP expansion 15
from 3.0% to 2.8% partly reflects the impact of the trade war so far, but 10
we remain confident of sustained global growth to partially offset this 5

impact. Heading into 20CL, we have further moderated our GDP to a 0
2.3% increase, as we pencil in a slower global growth environment. (5)
(10)
Elections in 2019? On the cards. While the deadline for the next general World trade volume
(15)
elections is January 2021, the writing seems to be on the wall for a 2019 Singapore GDP
(20)
general election. On 23 November, the ruling PAP appointed Heng Swee
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
Keat as its next first assistant secretary general, a position that is usually Source: CEIC
reserved for the upcoming Prime Minister role. We believe this is a
prelude to a possible 2019 general election, which also coincides with PAP has never lost a general election
th PAP share of votes since Singapore independence
the 200 anniversary of the founding of modern Singapore. That said,
100 (%)
elections have historically had little bearing on stock-market 86.7
performance, and this remains our base case. We also expect the 80 74.1
77.7 75.3
incumbent PAP to keep its lead over opposition parties. The market
70.4 69.9
64.8 63.2 65.0 66.6
61.0 60.1
would see a share of less than 70% of votes as negative. 60
40
Expect some goodies. Given past experience, we can expect more
financial rebates and handouts to households, including possible income- 20
tax rebates, ahead of the general elections and bicentennial celebrations.
This should result in marginal positive read-throughs for domestic- 0
1968
1972
1976
1980
1984
1988
1991
1997
2001
2006
2011
2015
consumption plays, including retail Reits and consumer stocks. We also

expect the government to continue investments in healthcare and Source: Elections department of Singapore
infrastructure, which would be positive for these sectors.
Dividend portfolio has outperformed market
Stay defensive with dividend portfolio. As trade-war fears and Dividend portfolio against MSCI Singapore
(13 May 15 = 100) Outperformance to MSCI SG (%)
expectations of a tightening US monetary policy continue to weigh on CLSA dividend cocktail (LHS)
140 25
markets, we reiterate our defensive strategy for Singapore in 2019 until MSCI SG (LHS)
130 20
there is further visibility on the macro front. Its high yield and resilient 120
Singapore dollar are the key reasons why we stay Overweight on the 110
15
local market. Yield strategy with our dividend cocktail delivered strong 100
10
outperformance in 2018 and this remains our key strategy heading into 90
5
2019. Our dividend portfolio consists of 12 stocks with an aggregate 80 0

4.9% yield. 70 (5)
Aug 15
Feb 16
Aug 16
Feb 17
Aug 17
Feb 18
Aug 18
May 15
May 16
May 17
May 18
Nov 15
Nov 16
Nov 17
Nov 18
Source: CLSA, Bloomberg
13 December 2018 55

Global Themes 2019
Indonesia - Strategy
After the pause
Expect economy to resume recovery post-election in 2019
It has been tough for Indonesia for the most of 2018, with much
currency volatility, a rising oil price and multiple rate hikes. This has
Sarina Lesmina
paused the economic recovery that we have seen since 2017. Moving
+62 21 2554 8820
into 2019, we see tailwinds from a potential reversal of these trends. A sarina.lesmina@clsa.com
smooth election in April would be a key catalyst. After that, a low crude
price, a potential reduced cost of borrowing and more infra delivery will Top pick
be triggers for a recovery in consumption and the economy to Telkom (TLKM IJ)
accelerate. In this light, JCI is still a laggard with a sensible valuation.
Lower “oil-related” risk. As a net crude importer, the country’s oil deficit
has been the main reason for a widening CAD this year. Exacerbating
this is the tendency to “overconsume” and also smuggling, due to the Consumption has room to bounce back
price subsidy. The 2019 election has made it hard for the government to Private consumption growth (YoY)
remove the subsidy. This puts a pinch into our fiscal condition and 6 (%)
lessens the ability to boost production spending (eg infra). All these 5
factors will reverse if oil remains below US$70/bbl, which is the base for 4
the state budget. Ideally, even with a weaker crude price, government
3
should remove any remaining fuel subsidy post-election - and reallocate
it to greater spending. 2
1
Easing of tightening. The central bank has been proactive in staying
0
ahead of the curve and has hiked the benchmark rate (among other
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
18CL
19CL
monetary operations). This has helped the rupiah to recover, along with
improving sentiment on Indonesia (as seen in recent inflows into equity Source: CLSA
and bond markets). With an expected easing of global tightening by mid-

2019, stable currency and inflation staying under control, there is room
for central bank to aggressively cut rates in 2019.
JCI is a laggard
More infra delivery to support growth. Government has been spending PE of Indo market
more on infrastructure in the past few years. Some mega projects such 21 (x)
as the Trans Java tollroad network and Jakarta MRT are due to be fully 20
19
completed next year. +1sd 18.66x
18
avg 17.28x
17
JCI is a laggard. We have recently seen a swift recovery in JCI, but at the
16 -1sd 15.9x
time of writing, it is still down about 4% YTD, and 11% in dollar terms 15
given the depreciating rupiah. As such, its -1SD valuation is 14
undemanding, which is one reason for recent foreign inflows, notably in 13
big caps. A low oil price, a reduced cost of borrowing and better
Feb 14
Aug 14
Feb 15
Aug 15
Feb 16
Aug 16
Feb 17
Aug 17
Feb 18
Aug 18
May 14
May 15
May 16
May 17
May 18
Nov 13
Nov 14
Nov 15
Nov 16
Nov 17
infrastructure will boost consumption and trigger capital spending by

companies. However, a smooth election in April 2019 is the key catalyst. Source: CLSA
Interest-sensitive stocks (eg banks, property) will benefit, as well as the

bulk of consumer companies. We like Astra, Telkom and Mandiri, and
among smaller names, Ramayana, Mitra Adiperkasa and Pakuwon.
56 13 December 2018

Global Themes 2019
Malaysia - Strategy
2.0
The making of a new Malaysia

Keep a watch on FDI and private investment flows
Malaysia pressed its reset button in 2018. With the current situation of
fiscal consolidation paired with taking care of the wellbeing of the lower-
Sue Lin Lim
income segment of the population, the nation is not ready for a
+60 3 2056 7875
government pump-priming era yet. Catalysts would be the country’s suelin.lim@clsa.com
ability to derive FDI flows and greater participation from the private
sector. Sectors to watch are consumer, manufacturing (selected tech Top pick
companies), healthcare and banks. Maybank (MAY MK)
Euphoria is over; it’s down to execution. After an eventful 2018 for

Malaysia with the new government, a maiden budget presented, changes
in several key company positions and institutional reforms in the making,
the country is poised for investors to take a fresh look. While the
foundation has largely been laid, all eyes will be on its ability to execute Private sector shoulders more investment growth
and deliver initiatives and reforms. In addition, the Industry 4.0 blueprint Investment as a percent of GDP
(% of GDP) Private Public
aims to make Malaysia the prime destination for high-tech industries, 25
19.3
including the development of an aerospace-industry hub. 20
Trade is the central theme for 2019. The country now needs to rely on 15
FDI to spur growth amid scarce funds. Malaysia will undoubtedly see an
10
impact from the US-China trade war, given that both countries are
6.3
among Malaysia’s top-three trading partners. However, the dispute has 5
also created a unique opportunity for Malaysia, given that it is well
0
positioned as a safe haven for manufacturing investors. From January to
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
1H18
August 2018 (the latest data available), Malaysia recorded a total of
RM61.6bn in investment approvals, compared to RM40.4bn over the Source: Bank Negara Malaysia
same period in 2017.
Focus on the states of Penang and Johor. Touted as the Silicon Valley of
the East, Penang has attracted many investors and has contributed to A need to revitalise FDI
industrial clusters, in particular the Penang Industrial Zone. This has not Net FDI in Malaysia
(RMbn) Net FDI (LHS) YoY growth (%)
just attracted FDI but has also generated exports and employment for
the E&E sector. Johor state on the other hand has pulled in electronic- 50 40
manufacturing-services companies, producing component parts for 40 20

multinational companies.
30 0
Opportunities to buy; hopeful for more visibility in 2H19. As the 20 (20)

country is in the midst of repair, expect business and consumer spending
momentum to be slow at least up to the first half of 2019. We expect to 10 (40)
see banks’ loan growth picking up by 2H19. Spillover effects of the 0 (60)
social welfare protection coverage, particularly for the middle-and 2013 2014 2015 2016 2017 9M17 9M18
lower-income groups, would be positive for the healthcare sector. Source: CLSA, Bank Negara Malaysia
Targeted benefits to the lower-income segment would also be positive

for the mass consumer plays. We remain watchful of capacity expansion
and potential FDI flows for tech and manufacturing companies.
13 December 2018 57

Global Themes 2019
Thailand - Strategy
Politics in action
Post-election stability is crucial amid global uncertainty
An election - and especially post-poll political stability - will be critical to

turning the investment and spending mood around. This stability will
Suchart Techaposai
allow a future government to pursue the 20-year National Strategy and
+662 257 4632
Reform Plan. If so, there is likely to be investment-led growth, allowing suchart.techaposai@clsa.com
bank, contractor and property names to rerate.
Top pick
Lingering political uncertainty. The military government has achieved Kasikornbank (KBANK TB)
the various legislative hurdles towards an election and is committed to
the 24 February target date. However, the public mood remains Declines have caused concerns over tourism
unexcited. In our view, post-election political stability is critical to see a Chinese tourist and total tourist arrival growth
100
future government, if not a military-backed one, pursuing economic (% YoY)
policies according to the 20-year National Strategy and Reform Plan that 80 Chinese tourist arrivals
the military government has set in place and that is required by the new 60 Total tourist arrivals
2017 Constitution. 40
20
Normalising external-led growth. While the latest export data is weak as 0
a result of the US-led trade war and the China slowdown, we remain (20)
optimistic on exports sustaining their mid-single-digit growth. However,
(40)
the fall in Chinese tourists since the Phuket boat accident that killed 41
Jan 16
Jul 16
Jan 17
Jul 17
Jan 18
Jul 18
May 16
May 17
May 18
Nov 16
Nov 17
Mar 16
Mar 17
Mar 18
Sep 16
Sep 17
Sep 18
of their countrymen looks worrisome. This is especially so as Chinese
have been cautious in their spending amid a slowing economy at home. Source: CLSA, Ministry of Tourism and Sports
Improving household income. Recovering rice-farm income, growth in Disappointing public investment execution
Public construction and investment
manufacturing hiring, and the 5% rise in minimum wage in April set the (% YoY) Public construction investment
80
stage for household income to rebound and for spending to gain Public investment
momentum. 60
40
Infra-project execution to catch up. Public investment has been
disappointing in the past two years, with a recent 3Q18 growth uptick. 20
Delays to construction and concession bidding so far this year have
raised doubts as to whether such grand infra plans will ever been 0
fulfilled. That is why post-election political stability is critical: so that all (20)
pending biddings can resume and proceed smoothly.
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
Source: CLSA, NESDB

Fairer SET valuation. The SET has derated across all sectors YTD despite
solid GDP growth. This is due to poor political visibility towards an SET looks fairer following the recent derating
election, further tightening in US monetary policy, lingering fear of a SET forward PB
trade war, and how a slowing China could hit Thai exports and tourism. 2.5 (x)
However, the SET is now at 1.85x mid-cycle forward PB, with banks, 2.3
property, and energy names offering attractive value relative to 2.1

1.9
improving growth visibility, especially with post-election political 1.7
stability. Our strategy is a domestic-led growth theme, buying 1.5
Kasikornbank (read From small things . . .), CPALL, AIS, CK, Supalai and 1.3 SET fwd PB
PTTEP (which is likely to win the ongoing concession bidding for an O&G 1.1 Avg = 1.9
+1 SD = 2.2
0.9
operation in the Thai Gulf: see New lease of life). -1 SD = 1.5
0.7
Feb 10
Aug 12
Feb 15
Aug 17
Jun 08
Oct 11
Jun 13
Oct 16
Jun 18
Apr 09
Apr 14
Dec 10
Dec 15
Source: CLSA, Bloomberg
58 13 December 2018

Global Themes 2019
Philippines - Strategy
Poised for a comeback
Value has emerged and catalysts ahead
The market has had a rough 2018 thus far with the Philippine composite
index (PCOMP) now at 7,268, down 15.1% YTD. As a result, the market
Alfred Dy
is cheap again, trading at 15x 19CL PE, which is one standard deviation
+63 2 860 4008
below the five-year market mean PE of 16.7x. Catalysts include: falling alfred.dy@clsa.com
inflation; improving earnings growth; pre-election spending; and tax
reform and infrastructure initiative progress. Our top pick is largecap Top pick
Ayala Corp. Ayala Corporation (AC PM)
Value has re-emerged. After a strong start in January 2018 where we Market is oversold
saw the PCOMP peak at 9,078, the market has been in a tailspin with Philippine market five-year forward PE
the PCOMP currently at 7,268, down 15.1% YTD. We trace the decline 22 (x)
due to heavy net foreign selling amounting to US$1.7bn YTD. Foreign 21

20
investors cite profit taking as well as concerns on the country’s political 19
+1sd 19.81x
outlook, monetary policy and rising inflation as key reasons for the sell- 18 avg 18.27x
off. As a result of the sell-off, value has re-emerged with the market now 17 -1sd 16.73x
trading at 15.1x 19CL PE which is below the one standard deviation 16

15
below the five-year market mean PE of 16.7x. 14
May 14
May 15
May 16
May 17
May 18
Nov 13
Nov 14
Nov 15
Nov 16
Nov 17
Key catalysts. We believe that the aforesaid concerns are mostly priced
in. We have noticed foreign institutional investors beginning to buy
Source: CLSA
select issues in recent trading sessions. Key catalysts include a more
stable global geopolitical situation, softening crude prices and an end to Philippine inflation and oil price chart
the US-rate tightening cycle. On the domestic front, we expect inflation Softening crude price is a big positive
Inflation Tolerance range
to soften next year and for corporate earnings growth to slightly Target inflation Crude oil
accelerate. Pre-election spending in 1H19 should provide an overall 12 (%) 140
120
boost to the economy and we also expect the government to produce 10
100
some results on the legislative and infrastructure fronts. We’d like to see 8
80
less politics and more economics in 2019! 6
60
4
40
Lots of actionable plays. Our top big-cap ideas are Ayala Corp, Ayala 2 20
Land, Bank of the Philippine Islands, Metrobank, Universal Robina, and 0 0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
JG Summit. Top second liners are Puregold, Robinsons Retail,

Bloomberry, Megawide, and IMI. Source: CLSA
Low leverage gives the market some legs

Philippines’ debt-to-GDP ratio
80 (%)
75
70
65
60
55
50
45
40
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Source: CLSA
13 December 2018 59

Global Themes 2019
Australia - Strategy
Housing conundrum
The residential debate set to stay in the spotlight
The ebb and flow of the domestic housing sector with all the
implications it has for the broader economic outlook is likely to stay
firmly in the spotlight in 2019. House prices have already eased back Richard Johnson
+61 2 8571 4351
noticeably in 2018, but the leading indicators continue to indicate that richard.johnson@clsa.com
further caution is warranted, not least because of the looming Federal
election before May. We briefly consider the sector implications of this Top pick
and highlight the key stock recommendations. Macquarie (MQG AU)
Financials: Fears of a housing crash abound as banks increase rates and

tighten lending. Banks are overexposed, and despite recent falls, house Sydney house prices are falling faster
prices remain high, but to put this in perspective there was relatively Sydney house prices
limited LVR lending done at peak prices, ex a rate rise IO rates seem 25 (%) Forecast house price change
YoY house prices
manageable and bank liquidity is robust. WBC has the most risk to 20
housing in its book and faces above-peer longer-term earnings and 15
regulatory-capital headwinds. Our top pick is MQG, with its multiple 10
sources of earnings growth and global leadership in infrastructure asset 5

management. 0
(5)
Building materials: BM names more leveraged to the domestic
(10)
residential cycle than the ongoing strength of a formidable pipeline of
Aug 10
Feb 14
Aug 17
Oct 11
Jul 13
Oct 18
Jun 09
Jan 10
Jun 16
Jan 17
May 12
Apr 15
Nov 08
Dec 12
Nov 15
Mar 11
Mar 18
Sep 14
East Coast infrastructure activity are likely to fare poorly against
decaying new housing construction activity. Arguably much of this Source: CLSA, CoreLogic
negativity has already been priced in to names like CSR. BLD operates in
the heavy end of construction materials, and although having obvious Housing construction is elevated
residential exposure, is more leveraged to infrastructure spending both Australia new dwelling activity
260 Approvals
in Australia and the USA. Dwelling starts
240
Dwelling completions
Property: Diversified developers MGR, SGP and LLC are all impacted by 220
the slowdown in the resi market, but by different degrees. With credit 200
likely to remain restricted, we continue to see both price and volume risk 180
over the next 12-18 months. But given the vintage of landbanks and 160
high embedded margins, we believe FY19 earnings are relatively safe. 140
We see some volume downside in FY19-20, particularly for SGP given 120
it’s mainly a land only business. We believe MGR will fare better given 100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
its diversified resi business and A$2.1bn contracts on hand with MGR
expected to have record apartment settlements in FY20. LLC is largely Source: CLSA, ABS
out of the apartment market post FY19, but like other developers has
settlement risk, which to date has been less than 3%. Mortgage rates have been rising
Australia mortgage rates
Standard owner Discounted owner
Industrials: The broader industrials sector has some exposure to Investor standard Investor discounted
housing. Two stocks that stand out are DLX and BSL. DLX enjoys 50% of 8.0
the domestic paint market and about 80% of sales are housing-related. 7.5
7.0
However only around 15% of this is new housing, and revenue has only 6.5
fallen twice in the past 20 years, which underlines the strength of 6.0
business model. Some 32% of BSL domestic despatches of flat steel are 5.5
in the residential construction market, so it is not immune to a slowdown 5.0

4.5
in activity. We hasten to add that much of this volume is leveraged to 4.0
the alterations and additions cycle, which demonstrates far less volatility
Aug 10
Feb 14
Aug 17
Jun 09
Jan 10
Oct 11
Jul 13
Jun 16
Jan 17
May 12
Apr 15
Nov 08
Dec 12
Nov 15
Mar 11
Mar 18
Sep 14
than new housing construction.

Source: CLSA, RBA
60 13 December 2018

Global Themes 2019
Global - Themes 2018

How did the 2018 predictions do?
On our self-assessment, we scored 67% for last year’s predictions
This year proved to be another turbulent one, with continued global

political uncertainties and trade-war tensions making for comparatively
Shaun Cochran
low visibility. Below we show the key predictions that we made in our
+852 2600 8351
2018 global themes report. We give 100% for a simple ‘Yes’, 75% for a shaun.cochran@clsa.com
‘Largely’, 50% and 25% if ‘Somewhat’ and ‘Marginally’, and zero for a
‘No’. We arrived at a score of 67% for 2018’s predictions list, which is a
touch lower than 2017’s 73% accuracy and slightly below our four-year
average of 67.6%.
Global Themes 2018 predictions and results

Evaluating the key predictions Did it play out?
Steady Asian GDP growth to be matched by slowdown in trade and manufacturing L
Disinflationary themes to continue to dominate in 2018 Y
Yield curve to flatten in 2018 (potentially inverting) L
The USD to top out in 2018 N
Old economy stocks to outperform Y
Volatility to return to Global markets Y
Washington to harden its stance against China on trade Y
Northbound HK stock connect to outperform southbound as infra to stabilise Chinese growth Y
Hong Kong property market to experience slower growth rates N
Thematic drivers to be dominant in auto industry and global sales to increase at 2.1% N
EV manufacturers to weather the global cobalt shortage Y
Luxury brand demand in China to remain robust through 2018 Y
Ride-sharing companies to be hurt by autonomy – an autonomous taxi service launches within the year Y
Top 4 Chinese mobile manufacturers to make global market share gains Y
Wind and solar to dominate new energy in China Y
New stewardship code to positively impact fiduciary duties in Korea, with payouts reaching 30% N
Thai banking, property and energy sectors to re-rate in 2018 M
Singapore government to continue push to digital economy, which will grow at c.3% Y
Indian government’s RERA policy to positively impact the sector Y
Rising oil prices to squeeze downstream margins for Asian chemical companies Y
New Macau bridge VIP sector to drive growth, but share price performance will require NAV growth S
Tech sector to experience market correction Y
Brent oil prices to average at US$58 through 2018 N
Steel equities to rally further in 2018 M
Thematic drivers in Taiwan to sustain 2017 momentum whilst political tensions ease L
Increased consumption in Indonesia to drive growth in 2018 S
Blockchain to receive wider mainstream adoption Y
Australian banking sector to see slowing balance sheet momentum, but retail sales will grow YoY Y
Chinese and US banks to offer good buying opportunities M
Majority of AxJ countries to see inflation remain below 2% L
China to make great reveals in AI N
Digital solutions to continue to be the major theme in Chinese manufacturing Y
Japanese returns to hit all-time highs S
Malaysian FDI to see upswing in FDI investments and interest rates to rise by +25bps L
High conviction that Ayala Corporation, Metro Pacific, Puregold and Megawide to perform strong N
Source: CLSA
13 December 2018 61

Important disclosures Global Themes 2019
Companies mentioned
ACC Technologies (N-R)
Adidas (N-R)
AIA (1299 HK - HK$64.60 - O-PF)¹
AIS (ADVANC TB - BT172.5 - BUY)¹
Alibaba (BABA US - US$151.50 - BUY)¹
Alphabet (N-R)
Alumina (AWC AU - A$2.25 - O-PF)¹
Amer Sports (N-R)
Anta Sports (2020 HK - HK$37.00 - O-PF)¹
Apple (N-R)
Astra (ASII IJ - RP8,250 - BUY)¹
Astra Agro (AALI IJ - RP11,875 - BUY)¹
Ayala Corp (AC PM - P930.50 - BUY)¹
Ayala Land (ALI PM - P42.35 - BUY)¹
Baidu (BIDU US - US$179.75 - BUY)¹
Bally International (N-R)
Bank Mandiri (BMRI IJ - RP7,475 - BUY)¹
BeiGene (6160 HK - HK$85.45 - BUY)¹
Bharti Airtel (BHARTI IS - RS305.6 - BUY)¹
Bloomberry (BLOOM PM - P8.37 - BUY)¹
BlueScope (BSL AU - A$12.07 - BUY)¹
BMW (N-R)
Boral (BLD AU - A$5.01 - BUY)¹
BPI (BPI PM - P94.80 - BUY)¹
Brilliance Auto (1114 HK - HK$6.28 - U-PF)¹
BYD (N-R)
Catcher Tech (2474 TT - NT$230.0 - U-PF)¹
CATL (300750 CH - RMB82.11 - BUY)¹
CCB (939 HK - HK$6.56 - BUY)¹
CCCC (1800 HK - HK$7.66 - BUY)¹
CEEC (N-R)
China Mobile (941 HK - HK$77.45 - BUY)¹
China Moly (N-R)
Chinasoft (354 HK - HK$4.12 - BUY)¹
Ci:z (N-R)
Ci:z (N-R)
Cipla (CIPLA IB - RS530.2 - O-PF)¹
CK Hutchison (1 HK - HK$78.90 - U-PF)¹
CNOOC (883 HK - HK$13.06 - BUY)¹
Coli (688 HK - HK$27.90 - BUY)¹
ComfortDelGro (CD SP - S$2.17 - O-PF)¹
Cosco Shipping (N-R)
CP All (CPALL TB - BT70.8 - BUY)¹
CRCC (1186 HK - HK$11.00 - BUY)¹
CREIS (N-R)
CRRC (1766 HK - HK$7.86 - BUY)¹
CSL (CSL AU - A$181.65 - BUY)¹
CSR (CSR AU - A$2.81 - BUY)¹

Dahua Tech (002236 CH - RMB13.13 - BUY)¹

DBS (DBS SP - S$23.92 - BUY)¹
Denso (6902 JP - ¥5,238 - BUY)¹
Dongfeng Motor (489 HK - HK$6.96 - BUY)¹
Dr Reddy's (DRRD IB - RS2,582.1 - O-PF)¹
DuluxGroup (DLX AU - A$6.75 - O-PF)¹
Eicher Motors (EIM IS - RS23,722.0 - BUY)¹
ENN Energy (2688 HK - HK$74.70 - SELL)¹
Euromonitor (N-R)
EvaluatePharma (N-R)
Everbright (257 HK - HK$6.98 - BUY)¹
Facebook (N-R)
Fanuc (6954 JP - ¥17,470 - BUY)¹
Fast Retailing (9983 JP - ¥61,220 - U-PF)¹
FAW Group (N-R)
First Pacific (142 HK - HK$3.03 - U-PF)¹
Frost & Sullivan (N-R)
Galaxy Entertainment (27 HK - HK$52.10 - O-PF)¹
Genting Singapore (GENS SP - S$1.01 - BUY)¹
Great Wall Motor (2333 HK - HK$4.77 - BUY)¹
Hikvision (002415 CH - RMB28.20 - BUY)¹
HN Renewables (958 HK - HK$2.17 - BUY)¹
Hua Medicine (2552 HK - HK$8.29 - BUY)¹
Huadian Fuxin (816 HK - HK$1.76 - BUY)¹
Hyundai Heavy (009540 KS - ₩143,000 - O-PF)¹
Hyundai Motor (005380 KS - ₩118,500 - O-PF)¹
ICICI Bank (ICICIBC IB - RS350.4 - BUY)¹
IMI (IMI PM - P9.05 - BUY)¹
Inrupt (N-R)
International Maritime Organisation (N-R)
International Monetary Fund (N-R)
Jardine Lloyd Thompson (N-R)
Jardine Matheson (JM SP - US$66.96 - O-PF)¹
Jardine Strategic (JS SP - US$36.45 - O-PF)¹
JG Summit (JGS PM - P51.95 - BUY)¹
Johnson & Johnson (N-R)
Johnson Controls (N-R)
Kasikornbank (KBANK TB - BT190.0 - BUY)¹
Keyence (6861 JP - ¥57,940 - BUY)¹
Largan (3008 TT - NT$3,320.0 - BUY)¹
Lemon Tree (LEMONTRE IN - RS68.0 - BUY)¹¹
Lendlease (LLC AU - A$11.64 - O-PF)¹
Lenovo (992 HK - HK$5.53 - BUY)¹
LG Chem (051910 KS - ₩355,000 - BUY)¹
Longyuan Power (916 HK - HK$5.34 - BUY)¹
Lonking (3339 HK - HK$2.04 - BUY)¹
Luxshare (002475 CH - RMB14.86 - BUY)¹
Lynas (LYC AU - A$1.62 - BUY)¹
Macquarie (MQG AU - A$114.00 - BUY)¹

Maruti Suzuki (MSIL IB - RS7,487.1 - BUY)¹

Maybank (MAY MK - RM9.44 - BUY)¹
MediaTek (2454 TT - NT$237.5 - U-PF)¹
Megawide (MWIDE PM - P18.36 - BUY)¹
Metrobank (MBT PM - P80.75 - BUY)¹
MGM China (2282 HK - HK$13.96 - U-PF)¹
MGM Resorts (N-R)
Mirvac (MGR AU - A$2.27 - O-PF)¹
Mitra Adiperkasa (MAPI IJ - RP800 - BUY)¹
MTR (66 HK - HK$41.00 - O-PF)¹
Nasdaq (N-R)
NetEase (NTES US - US$247.09 - BUY)¹
Netflix (N-R)
New Oriental Edu (EDU US - US$56.92 - O-PF)¹
Nike (N-R)
Nissan Motor (7201 JP - ¥937 - O-PF)¹
OZ Minerals (OZL AU - A$8.89 - O-PF)¹
Pakuwon (PWON IJ - RP610 - BUY)¹
People's Bank of China (N-R)
PetroChina (857 HK - HK$5.45 - BUY)¹
PTT E&P (PTTEP TB - BT134.0 - BUY)¹
Puma SE (N-R)
Puregold (PGOLD PM - P42.70 - BUY)¹
Quanta (2382 TT - NT$51.1 - U-PF)¹
Ramayana (RALS IJ - RP1,380 - BUY)¹
Reliance (N-R)
Reliance (N-R)
Reliance Industries (RIL IB - RS1,110.5 - BUY)¹
Renault (N-R)
Robinsons Retail (RRHI PM - P76.00 - BUY)¹
Ruyi Holding (N-R)
Samsonite (1910 HK - HK$22.80 - BUY)¹
Samsung Electronics (005930 KS - ₩40,000 - BUY)¹
SBI (8473 JP - ¥2,500 - BUY)¹
Shenhua (1088 HK - HK$18.54 - BUY)¹
Shenzhou (2313 HK - HK$99.90 - BUY)¹
Shiseido (4911 JP - ¥7,319 - BUY)¹
Sinopec (386 HK - HK$6.54 - BUY)¹
SJM (880 HK - HK$7.41 - U-PF)¹
SK Hynix (000660 KS - ₩65,500 - BUY)¹
SK Innovation (096770 KS - ₩182,500 - BUY)¹
Spotify (N-R)
State Bank of India (SBIN IB - RS285.2 - BUY)¹
Stockland (SGP AU - A$3.75 - U-PF)¹
Sunny Optical (2382 HK - HK$74.50 - BUY)¹
Supalai (SPALI TB - BT18.6 - BUY)¹
Swire Pacific (19 HK - HK$82.50 - BUY)¹
Swire Pacific Ltd (N-R)
Takeda Pharma (4502 JP - ¥3,980 - BUY)¹

TAL Edu (TAL US - US$28.12 - BUY)¹

Tata Motors (TTMT IB - RS163.9 - SELL)¹
Telkom (TLKM IJ - RP3,650 - BUY)¹
Tencent (700 HK - HK$318.60 - BUY)¹
Tesla (N-R)
The New York Times Company (N-R)
TopBuild Corp (N-R)
Towngas China (1083 HK - HK$5.75 - BUY)¹
Toyota Motor (7203 JP - ¥6,870 - BUY)¹
TSMC (2330 TT - NT$226.0 - O-PF)²
Uniqlo (N-R)
Universal Robina (URC PM - P128.50 - BUY)¹
Vedanta (VEDL IS - RS199.3 - BUY)¹
Venture (VMS SP - S$14.89 - O-PF)¹
Wabco (N-R)
Walt Disney (N-R)
Weichai Power (2338 HK - HK$8.79 - BUY)¹
Wilson (N-R)
Wistron (3231 TT - NT$19.2 - SELL)¹
Xiaomi (1810 HK - HK$13.76 - BUY)¹
Zoomlion (1157 HK - HK$2.81 - BUY)¹
¹ Covered by CLSA; ² Covered by CLST
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my/our own personal views about the securities and/or the issuers and that no part of my/our compensation was,
is, or will be directly or indirectly related to the specific recommendation or views contained in this research
report.
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only publish research that is impartial, independent, clear, fair, and analysts attest that they were not in possession of any material,
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the listed company within the coming three months. Unless Key to CLSA/CLST investment rankings: BUY: Total stock return
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class of securities of the subject company, and does not make a return below 20% but exceeding market return; U-PF: Total
market, in the securities. expected return positive but below market return; SELL: Total return
The analysts included herein hereby confirm that they have not expected to be negative. For relative performance, we benchmark
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Ideas are not necessarily stocks with the most upside/downside, but the full (or any) amount invested. Past performance is not
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Global Themes 2019

Best ideas in Asian equities

GLOBAL MICROSTRATEGY: Bond-proxies and quality. Head of Microstrategy, Desh

Australia: Mining & Metals;

www.clsa.com Source: CLSA, Factset Source: CLSA, Factset

Global themes portfolio ....................................................................................................................................................... 11

2 shaun.cochran@clsa.com 13 December 2018

On Sino-US trade, Christopher Wood long argued that an interim deal is

13 December 2018 shaun.cochran@clsa.com 3

‘Beautiful China’ is more than coal-to-gas, enjoying Xi Jinping’s personal support.

Looking at policy-driven opportunities, the International Maritime Organisation

4 shaun.cochran@clsa.com 13 December 2018

L3M earnings revision (18F, %)

Interestingly, on the potential emerging-to-developing-market transition, head of

13 December 2018 shaun.cochran@clsa.com 5

Alexious sees similar themes playing out in China in a characteristically policy-

Of auto’s three positive themes, enabling electrification is closest to a profitable

2013 2014 2015 2016 2017 18CL 19CL 20CL

6 shaun.cochran@clsa.com 13 December 2018

13 December 2018 shaun.cochran@clsa.com 7

8 shaun.cochran@clsa.com 13 December 2018

15-year ₩/US$ rate Nifty earnings growth projections

Source: CLSA, QuantiWise Source: CLSA

Another market troubled by tech weakness is Taiwan. Potential tariff-induced

13 December 2018 shaun.cochran@clsa.com 9

Another market caught in macro crosswinds is Indonesia. A volatile currency,

Disappointing Thai investment Singapore dividend portfolio performance

80 (% YoY) Public construction investment 140 (13 May 15 = 100) (%) 25

Source: CLSA, NESDB Source: CLSA, Bloomberg

10 shaun.cochran@clsa.com 13 December 2018

Global themes portfolio

Alibaba (BABA US - US$151.83 - BUY)

Elinor Leung’s investment case 0

13 December 2018 shaun.cochran@clsa.com 11

Global themes portfolio (cont’d)

growth. As Beijing has already deployed about 60% of its

China Moly (N-R)

track is the likely shifting balance of power between the

12 shaun.cochran@clsa.com 13 December 2018

Global themes portfolio (cont’d)

Fanuc (6954 JP - ¥17,020.00 - BUY)

13 December 2018 shaun.cochran@clsa.com 13

Global themes portfolio (cont’d)

Ayala Corp (AC PM - P938.00 - BUY)

Philippines was no exception. However Alfred Dy sees 1,200

multiple potential catalysts: falling inflation; improving 1,100 avg 18.93x

14 shaun.cochran@clsa.com 13 December 2018

Global themes portfolio (cont’d)

Horng Han Low’s investment case 5

 VMS continues its product transition with management 0

 It will benefit from new product introductions for multiple

SBI Holdings (8473 JP - ¥2,476 - BUY)

Hideyasu Ban’s investment case

13 December 2018 shaun.cochran@clsa.com 15

World trade growth is OK, but it is narrow. Developed economy demand

import growth, although we doubt by enough to close the trade deficit. 6

helped by the persistence of spare capacity in global supply chains. It has

Tariffs versus growth. The imposition of tariffs on USA imports doesn’t

Source: CLSA, CEIC

Donald Trump signalled in his tweet on 1 November that he was looking 0

participants. It has the potential to underpin a year-end equity rally led 38

there will not be continuing friction between China and America on a

that a negative retaliatory dynamic that ultimately benefits no one