P ursuing regional opportunities
􀂄 Supermarket business benefiting from higher food prices
Price hikes in food have pushed up domestic inflation. As one of the most
important retailing channels for most food products, we believe the supermarket
industry has benefited from this ‘unanticipated inflation’, because 70% of
merchandise sold in supermarkets is food related. Consequently, we expect the
industry’s same store sales growth rate to reach 8.0% in 2008E and 7.5% in 2009E.
􀂄 Managing multi-retail formats
We believe supermarket operators will attempt to operate all three retailing
formats—hypermarkets, supermarkets and convenience stores in the domestic
market, which could maximise economies of scales and scope. However, the
hypermarket segment is the most difficult retailing format to operate, in our view.
During 2008-10E, we expect new store openings to record a 4% CAGR.
􀂄 Intensifying competition
Since the relaxation of restrictions on foreign companies setting up supermarket
business in China, foreign chains have been expanding aggressively. Walmart and
Carrefour, the two largest foreign supermarket companies in China, added 23 and
15 stores in 2007, respectively, to reach 99 and 110 stores by the end of 2007.
􀂄 Top pick: Buy rated Lianhua Supermarket
We are initiating coverage of Lianhua Supermarket Holdings with a Buy rating,
which is our preferred pick in the sector. We are also initiating coverage of Beijing
Hualian Hypermarket and Wuhan Zhongbai Group with Neutral ratings.

Contents page
Summary and investment case 4
Industry analysis 8
— Total domestic consumption.................................................................................8
— Inflation numbers are under the spotlight..............................................................9
— Living expenditure and disposable income.........................................................12
— Growing disposable income ...............................................................................13
— Discretionary income..........................................................................................13
— Supermarket retailing formats ............................................................................14
Competitive analysis 16
— Assessment of industry attractiveness................................................................16
— Competition........................................................................................................17
— Competition from international operators............................................................18
— Global peer comparisons ...................................................................................19
— Supermarkets in China.......................................................................................20
— Supermarket business model.............................................................................21
— Other issues.......................................................................................................23
Industry risks 25
Valuation and comparables 26
Lianhua Supermarket Holdings 31
Investment Thesis 32
— Lianhua’s positive drivers ...................................................................................32
— Risks..................................................................................................................33
— Key catalysts......................................................................................................33
— Sensitivity analysis .............................................................................................33
— Valuation and basis for our price target ..............................................................34
— UBS versus consensus ......................................................................................34
— Porter’s five forces analysis................................................................................35
— Management strategy ........................................................................................35
— Stake ownership ................................................................................................35
— Company risks ...................................................................................................36
Financials 37
— Profit and loss ....................................................................................................37
— Balance sheet ....................................................................................................40
Price target derivation 44
Company background 47
Beijing Hualian Hypermarket 50
Investment Thesis 51
— HLZC’s positive drivers ......................................................................................51
— Risks..................................................................................................................52
— Key catalysts......................................................................................................52
— Sensitivity analysis .............................................................................................52
— Valuation and basis for our price target ..............................................................53
— UBS versus consensus ......................................................................................53
— Porter’s five forces analysis................................................................................53
— Management strategy ........................................................................................54

— Stake ownership ................................................................................................54
— Company risks ...................................................................................................55
Financials 56
— Profit and loss ....................................................................................................56
— Balance sheet ....................................................................................................58
Price target derivation 60
Company background 62
Wuhan Zhongbai Group 65
Investment Thesis 66
— WHZB’s positive drivers .....................................................................................66
— Risks..................................................................................................................67
— Key catalysts......................................................................................................67
— Sensitivity analysis .............................................................................................67
— Valuation and basis for our price target ..............................................................68
— UBS versus consensus ......................................................................................68
— Porter’s five forces analysis................................................................................69
— Management strategy ........................................................................................69
— Stake ownership ................................................................................................69
— Company risks ...................................................................................................70
Financials 71
— Profit and loss ....................................................................................................71
— Balance sheet ....................................................................................................73
Price target derivation 76
Company background 78