Asia Equity Focus China's 12th FYP provides long-term investment opportunities - Credit Suisse

Selected consumer and building material names will benefit from the 12th FYP
Although the recently concluded National People's Congress (NPC) did not turn out to be a market re-rating event, a less aggressive policy tightening tone and recovery in risk appetite could lead to a mid-year market rebound in China equities as inflation peaks, in our view. In fact, the agenda of this year's NPC was very much centered on improving the living standards of the poor. There are many initiatives in the 12th Five Year Plan (FYP) that addresses this issue. These include curbing food inflation, income redistribution, tax reform, social housing, and healthcare coverage to name a few.

Almost all of the consumption-related sectors in China should benefit from the policies of the 12th FYP. However, we do not advise investors to take up positions in consumer staples at this point, especially food and beverage names, due to the mounting margin pressure on rising soft commodities prices. The only exception are supermarket operators, such as China Resources Enterprise (291 HK, BUY, TP HKD 38), which have effective means of absorbing the higher costs of goods sold through subsidies and the pass-through to customers. For the consumer discretionary sector, the effect of rising income will differ across the mass and highend retail markets. The consumer discretionary names that we expect to receive a boost from an increase in disposable income over the longer term are mass consumption-related consumer discretionary stocks such as Tencent (700 HK, BUY).

According to the Ministry of Housing and Urban Rural Development's (MOHURD) latest announcement, local governments will be required to begin construction of no less than 10 million units in 2011 (versus 5.8 million in 2010), and another 10
million in 2012. This is an ambitious target, considering the construction start target for 2011 could account for almost 50% of the commodities housing floor space sold in 2010. We believe the social housing program announced during the NPC, together with water facility initiatives and the full-scale expansion of the high speed rail system during the 12th FYP period, will significantly boost demand for various building materials. The cement industry, in particular, should be one of the major beneficiaries due to the improving demand and supply dynamics. Our TOP PICK in the sector is China Resources Cement (1313 HK, BUY, TP HKD 7.4). On the other hand, low-end construction steel products will also be required, e.g. products produced by Maanshan Steel and Iron (Magang) (323 HK, HOLD). Despite this, Magang is currently facing imminent margin pressure with rising iron ore prices; thus, we only recommend accumulating this stock on dips.

We continue to advocate avoiding sectors that are not supported by government policies (e.g. auto, properties) and favor sectors that stand to benefit in the medium to long term from the government's 12th FYP, including the cement, energy, machinery, consumer and banking sectors.