Scenarios beyond our base case can be significant: Surprises move the stock
market. Therefore, we have asked our China economist, strategist, and analysts to
identify scenarios, which, although not their base cases and not necessarily even
likely, could drive share prices or even the stock market significantly.
Most surprise cases relate to the government stimulus and global economic
outlook: Two uncertainties, the effectiveness of the Chinese government’s stimulus
package and the outlook for the global economy, have resulted in a variety of
alternative scenarios. Judging these two uncertainties will be key to 2009 portfolio
performance.
Many industries, especially Banking, Energy, Telecoms, Autos, Airlines,
Capital Goods, and Consumer Goods, could surprise on the downside in 2009.
Failure of the stimulus measures to boost domestic demand, coupled with a deep G3
economic recession, could put heavy pressure on the outlook for these industries.
Ports and Shipping, Shipbuilding, Fertilizer, Internet & Media, and IPP could
surprise on the upside. Should the stimulus measures prove effective, the
fundamental business environment for these industries would be improved by
stronger-than-expected trade growth and a stronger domestic economy.
Our surprise scenarios are skewed to the downside: Twenty of the 26 analysts
have chosen the most significant surprise in 2009 to be a bearish one. The simple
average of our universe of ‘surprise movers’ indicates 30% downside from current
share prices. Clearly, analysts are worried more about the downside risks.

Strategy & Economics
3 China & Hong Kong Strategy and Economics
Government and global economy hold the surprise
keys
Jerry Lou, Qing Wang, Denise Yam
Industry Analysis
8 Airlines
Sharp RMB depreciation and
demand shock in 2009
Edward H Xu, Lance LuTommy Wong, Chin Y. Lim
10 China Autos and Auto Parts
Demand destruction + oversupply = margin squeeze
Kate Zhu, Bin Wang
12 China Banks
Surprise in larger rate cuts in 2009 on slow response to
stimulus packages, despite aggressive rate cuts in
2008
Minyan Liu, Eric Mak, Edmond Law
14 Hong Kong Financial Services
HK Banks: margins & consolidation
Anil Agarwal, Daniel Shum
16 China Capital Goods
(Construction Machinery)
Effect of stimulus package is less than expected
Kate Zhu, Maggie J Huang
18 Capital Goods
(Power Equipment)
Sharp drop in new orders and more order delivery
deferrals
Helen Wen
20 Clean Tech
The big if: availability of global credit
Sunil Gupta, Shawn Kim, Bin Jiang
22 China Coal Mining
Yanzhou Coal: weaker demand pressuring spot coal
suppliers
Wee-Kiat Tan, Sara Chan
24 Consumer/Retail
Not immune
Angela Moh, Dennis Tao, Lillian Lou
26 China Fertilizers
Pick-up in fertilizer prices could drive up share prices
Kang-Ho Chong
28 China Healthcare
Mindray – potential for further downside from hospital
capex cutbacks
Bin Li, Sean Wu, Christopher Lui
30 Hong Kong/China IC Design
Spreadtrum – potential for further downside from
reduction in consumption
Bill Lu, Charlie Chan
32 China Infrastructure
Actual delivery lagging original plan would add
downside risk
Kate Zhu, Maggie J Huang
34 China Internet/Media
Beneficiary of macro slowdown
Richard Ji
36 Chinese IPPs
Coal prices the key potential surprise factor for 2009
Simon H.Y. Lee, Chapman Deng
38 Macau Gaming & Property
Commission cap could provide significant margin
improvement
Praveen K Choudhary, Corey K Chan
40 China Oil & Gas
Sinopec: macro environment key to potential negative
surprises
Wee-Kiat Tan, Sara Chan
42 Ports & Shipping
Double-digit export growth for China in 2009
Edward H Xu, Sophie Loh, Chin Y. Lim,
44 China Property
If the macro economy surprises, so could property
Derek Kwong, Coral Ching, Angus Chan
46 Hong Kong Property
We prefer developers to investors
Derek Kwong, Karen Kwan, Angus Chan
48 China Shipbuilding
GSI: favorable pick in bearish shipbuilding industry
Andy Meng
50 Enterprise Management Sofware
Significant demand slowdown and margin decline
Carol Wang, Vipin Khare
52 China Steel & Building Materials
Capex recession: collapse of private sector investment
Charles C. Spencer
54 China Telecommunications
Potential impact from macro slowdown and competition
Yvonne Chow, Navin Killa, Vincent Wu
56 Tourism and Restaurants
Threat of consumption downturn
Lin He, Jerry Lou
58 Valuation Methodology & Risks
63 Industry Views

China & Hong Kong Strategy
and Economics
Government and global economy
hold the surprise keys
Morgan Stanley Asia
Limited+
Jerry Lou
Jerry.Lou@morganstanley.com
Qing Wang
Qing.Wang@morganstanley.com
Denise Yam
Denise.Yam@morganstanley.com
Key Surprise Cases Have Two Common Roots
Government stimulus boosting domestic demand and global
calm driving stronger external demand are the sources of
upside risk, which could be seen in 1) extensive and effective
stimulus to the private sector, 2) early revival of the property
market, 3) strong export growth, and 4) a buoyant Hong Kong
trade sector and economy.
Should the stimulus fail and the global recession deepen, the
surprises would be some combination of 1) a domestic capex
recession, 2) a sharp downturn in consumption, 3) early arrival
of a default cycle, 4) sharp depreciation of the RMB, 5) major
unemployment and related issues, and 6) an extended credit
crunch hitting Hong Kong corporates and property.
From an economic perspective, while many market
participants appear to have been well prepared for a G3-led
recession and thus do not expect much of a role for exports as
a driver of growth in 2009, they have high expectations that a
strong policy response from the Chinese authorities will
manage to boost domestic demand and help deliver
reasonably robust growth for the year as whole. Our GDP
growth forecast is 5.5% for 2009, and we think that the
economy will likely get much worse before getting better over
the course of 2009, as the effect of policy stimulus kicks in by
mid-year and a tepid recovery in the G3 economies
materializes by 4Q09 (Exhibit 1). The evolving relative
strength of positive policy stimulus versus negative external
demand over 2009 will help shape the quarterly trajectory of
GDP growth.
From a market strategy point of view, although our GDP growth
forecast of 5.5% for 2009 looks conservative enough, surprises
might come from the sharp slowdown’s impact on different
sectors, especially the cyclical ones. The generous market
consensus MSCI China earnings growth forecast of 4.9% in
2009 implies that the market, or at least sell-side analysts, are
still largely underestimating the downside for earnings, which
are much more volatile than GDP’s top-line growth by nature,
in our view.
Our top-down modeling shows this GDP growth base case
could result in a 5.1% decline in private sector consolidated
profit (including the unlisted companies). Considering the
much greater volatility of the listed companies’ business (major
China indices are dominated by energy, financials, and
materials), HSCEI, MSCI China, and CSI 300 could see their
index EPS drop 27%, 18%, and 15%, respectively, in 2009.
Our MSCI China index target is 31.4, implying 14.7% downside
and a forward P/E of 10 times.
We also construct two alternative scenarios – bear and bull
cases – to highlight both downside and upside risks to the
outlook under our baseline scenario (Exhibit 3). The biggest
swing factor in gauging the growth outlook for 2009 is property
investment in China. Investment in the property sector – an
important growth driver in boom years – will likely be the key
swing factor in determining the economic outlook in 2009, as
this sector has been subject to much policy change in recent
years, from restrictive to supportive.
Exhibit 1
Getting Worse Before Getting Better
-6
-3
0
3
6
9
12
15
1Q 00
3Q 00
1Q 01
3Q 01
1Q 02
3Q 02
1Q 03
3Q 03
1Q 04
3Q 04
1Q 05
3Q 05
1Q 06
3Q 06
1Q 07
3Q 07
1Q 08
3Q 08
1Q 09
3Q 09
1Q 10
3Q 10
Real GDP (%QoQ, SA)
Real GDP (%YoY)
Proj.
Source: Statistical Office of the European Communities, Morgan Stanley Research
Exhibit 2
What 5.5% 2009 GDP Growth Implies for MSCI
China/ HSCEI/ HSCCI/ CSI300 Earnings Growth
Index EPS Decline
MSCI China (%) -17.5
HSCEI (%) -26.9
HSCCI (%) -7.0
CSI300 (%) -15.3
Source: Wind, Company data, Morgan Stanley Research.