Asian Small Cap Sector
SECTOR REVIEW
20 hidden jewels in the aftermath
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After last year’s market slump, some investors disdain the smaller
names, and stock brokers do not bother to broke small-cap analysts’
research. However, the more undervalued Asian small caps have quietly
outperformed the large-cap sector by 10% since mid-December 2008.
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We are now seeing opportunities to venture into the quality,
undervalued and investable mid and small caps, as the more expensive
and crowded large-cap sector has a higher risk of underperforming
amid the macro risks.
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After losing 61% from their peak, Asian small caps are at attractive
valuations (a 2009E P/E of 8.1x and a P/B of 0.75x, and 32-42% lower
than the MSCI Asia ex. Japan) or close to the trough discount at end-
2002. This low P/E is at the lower quartile of the P/E bands, or one
standard deviation below the average since 2001. China and Hong
Kong are the two most inexpensive markets in Asia.
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The time when David defeats Goliath is when the economy recovers.
After the post-tech bubble corporate earnings decline in 2001,
business at many Asian smaller companies rebounded strongly. Their
shares outperformed the large caps by 43% for two and a half years
until September 2003. The unprecedented depressing 2008 is now
behind us. We believe Asian small caps should see a similar
outperforming rally as in 2001-03.
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We have picked 20 ‘hidden jewels’ in the region with 12-month potential
upside of 30-120%, or an average of 65%. They come from different
sectors, each with a unique story, with an average market cap of US$1 bn
and average daily turnover of US$5 mn. They are trading at a 2009E P/B of
0.97x and P/E of 7.6x, or 25-36% less expensive than the MSCI Asia ex.
Japan Index. 12 of our top 20 picks are from China and Hong Kong.

20 hidden jewels in the aftermath
Small caps are an untouchable sector in a bear market. They are also bull market darlings,
as the rate of their business recovery is usually stronger than for large caps. These small
caps are normally dumped for a fraction of their book value at the end of a bear market,
paving the way to be multi-baggers when the bull market returns. We are now seeing this
opportunity arising, as the more expensive and crowded large-cap sector has a higher risk
of underperformance than the value small caps amid the macro risks. We have picked 20
undervalued small caps in the region with average potential upside of 65%.
Undervalued David surpasses Goliath in the
aftermath
Undervalued Asian small caps have outperformed the large-cap sector by 10% since mid-
December 2008. After losing 61% from their peak, they are now at a 2009E P/E of 8.1x
and P/B of 0.75x, or 32-42% lower than the MSCI Asia ex. Japan, which is close to the
trough discount recorded at end-2002. Historically, a narrowing of this valuation gap
usually follows share price outperformance against large caps. Hong Kong-listed China
small caps are the least expensive at 5.5x 2009E P/E, followed by Singapore at 7.3x, and
Hong Kong and Indonesia at 7.5x 2009E P/E. China, Hong Kong, Malaysia, Singapore,
Taiwan and Thailand all trade below book value. Taking into account the valuation
discounts of P/B and P/E, China and Hong Kong are Asia’s two most attractive markets.
When David strikes back
The time when David defeats Goliath is when the economy recovers. The most recent
example is the post-tech bubble recovery. After the decline of corporate earnings in 2001,
stock markets began to rise in 4Q01. The business of many Asian smaller companies
rebounded strongly amid recovering overseas demand, whereas many large caps saw few
domestic themes. These smaller caps outperformed the broader market by 43% for 2.5
years until September 2003. The unprecedentedly depressing 2008 is now behind us. We
believe Asian small caps should see a similar outperforming rally as in 2001-03. Not
anticipating a strong recovery in the US and Europe, we believe the small-cap winners will
be the ones exposed to a recovery in Asia, especially in China.
The top picks in the region
We have picked 20 value small caps in the region with 12-month potential upside of 30-
120%, or an average of 65%. They come from different sectors, each with a unique story,
with an average market cap of US$1 bn and average daily trading turnover of US$5 mn:
■ China – China Power, China Shanshui Cement, RexCapital and Shimao Property
■ Hong Kong – Great Eagle, ICBC (Asia), Kingboard Chemical, Melco Crown, Ming An,
Orient Overseas, Shun Tak and Techtronic
■ Indonesia – Indo Tambangraya
■ Korea – CJ Cheiljedang, Kangwon Land, LG Dacom and LIG Insurance
■ Singapore – Olam and Raffles Education
■ Thailand – Thai Tap Water
Undemanding valuations are a prerequisite for a small-cap stock to perform, given the
usually inherent risk of lower trading liquidity and business volatility. These 20 hidden
jewels are trading at a 2009E P/B of 0.97x and P/E of 7.6x, or 25-36% less expensive than
the MSCI Asia ex. Japan Index. Some 60% of our top picks are from China and Hong
Kong, where the valuations are the most attractive in the region.

Table of contents
Undervalued David surpasses Goliath in the aftermath.......................................................5
When David strikes back....................................................................................................13
The top picks in the region .................................................................................................16
China.................................................................................................................................16
China Power International ...........................................................................................19
China Shanshui Cement................................................................................................21
RexCapital .....................................................................................................................23
Shimao Property ...........................................................................................................25
Hong Kong .........................................................................................................................27
Great Eagle ..................................................................................................................30
ICBC (Asia)....................................................................................................................32
Kingboard Chemical ....................................................................................................34
Melco Crown Entertainment ..........................................................................................36
Ming An ........................................................................................................................38
Orient Overseas International........................................................................................40
Shun Tak .....................................................................................................................42
Techtronic Inds. ...........................................................................................................44
Indonesia...........................................................................................................................46
PT Indo Tambangraya Megah.......................................................................................48
Korea.................................................................................................................................50
CJ Cheiljedang ............................................................................................................53
Kangwon Land...............................................................................................................55
LG Dacom Corp ...........................................................................................................57
LIG Insurance ..............................................................................................................59
Singapore..........................................................................................................................61
Olam ............................................................................................................................64
Raffles Education .........................................................................................................66
Thailand .............................................................................................................................68
Thai Tap Water ............................................................................................................70
Appendix I: Index performance ..........................................................................................72
Appendix II: Index valuation ...............................................................................................74
Appendix III: Valuation and screening of CS Small Cap Index constituents ......................77