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Asia/Pacific Economics

Asia/Pacific Economics. 1. The Post September 11 World: Cyclical and Structural Adjustments 2. China: Economic Growth Drivers. Andy Xie (852) 2848 5220 Andy.Xie@morganstanley.com. Delayed Recovery Is the Bad News. Would Stimulus Work?. But Is It Just Cyclical?.

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Asia/Pacific Economics

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  1. Asia/Pacific Economics 1. The Post September 11 World: Cyclical and Structural Adjustments 2. China: Economic Growth Drivers Andy Xie (852) 2848 5220 Andy.Xie@morganstanley.com

  2. Delayed Recovery Is the Bad News Would Stimulus Work? But Is It Just Cyclical? US Slowdown: Cyclical or Secular? The Other Challenge “Flying Geese” Are Dead Was It All a Bubble? The Next Leg Down with US Consumption Specialize or Be Poor Again The Post September 11 World

  3. Tigers Have to Shrink Relative to China Where to Look for New Winners The Post September 11 World - cont. Asia Pacific Economic Forecast Summary

  4. The Next Leg Down with US Consumption GDP Growth Forecast (YoY % Change) • The US terrorist attacks were a confidence shock. US consumption was maintained by borrowing and was vulnerable to shock. • After an IT business investment-led downturn, US consumption is likely to drive the global economy down another leg. E = Morgan Stanley Research Estimates Source: Morgan Stanley Research

  5. Delayed Recovery Is the Bad News GDP Growth Rate (YoY % Change) • The IT downturn has hit the region hard. Consumer goods exports have a lower elasticity and will have a different impact than IT on the region • We think the expected recovery has been pushed out by two quarters to 3Q02. The delay increases pressure on highly indebted companies, in our view. Source: Morgan Stanley Research

  6. Would Stimulus Work? Europe: Fiscal deficit rises to 1.9% in 2001 from 1.6% in 2000. This has a stabilizer effect. Monetary policy bears the burden of stimulus and is likely to aggressively follow the Fed in future. Japan: Unsterilized currency market intervention. Supplemental budget for income support could come soon, perhaps at 0.5% of GDP. US: Leads the world in stimulus. US$75 billion in tax cuts; US$125 billion could go into September 11 related spending. Fed funds rate cut by 400bps. The global economy should respond strongly soon. However, balance sheet cleansing by consumers and corporates blunt impact of lower interest rates. We predict recovery delayed to 3Q02.

  7. But Is It Just Cyclical? US demand has been the growth engine in East Asia. Is the current downturn another cycle or is it a secular shift? • If it’s purely cyclical, East Asia can treat the current downturn as before, even though it’s more severe than usual. • If the US economy is in a secular downturn, East Asia must find other demand sources to grow. US GDP and Import from Pacific Rim (YoY % Change) Source: Morgan Stanley Research

  8. US Slowdown: Cyclical or Secular? Cyclical 1) IT bubble has burst. The consumer bubble is bursting. Once the excesses are cleared, the US would resume 3.5% trend growth rate. 2) September 11 increases cost of doing business. This slows the economy down for a while before it is absorbed. However, it only affects two quarters. 3) Terrorist organizations crumble under pressure. Arab countries remain friendly to the West. Secular 1) Faster productivity in the 1990s was a bubble phenomenon. After cleansing the excesses, the US grows at 2-2.5%. 2) The war on terror turns into a war against Islam. Oil production is permanently disrupted. 3) The US reacts to September 11 by building a Fortress America: subsidizes industries, erects tariffs on imports and reduces immigration.

  9. Was It All a Bubble? Long Way to Fall? Was the strong US economy in the 1990s just a bubble? Suspicious characteristics: 1) Rising leverage 2) Dependency on foreign capital 3) Rising investment/GDP ratio The answer should determine policies and strategies in Asia Source: Morgan Stanley Research

  10. The Other Challenge What justification is there for Taipei salaries being 10 times Shanghai’s? Your answer determines how economies, stocks and currencies will unfold in this decade. In our view, there is absolutely no justification for the difference!

  11. ‘Flying Geese’ Are Dead • East Asian development has followed a flying geese pattern. The higher-income economies are also higher up in the export value chain. • China has caught up in basic conditions for mass production, such as infrastructure and education. But wages don’t go up with a large surplus labor force. Hence, China is redefining prices and encompasses the whole value chain. Flying geese are dear. Wide Income Dispersion for Now Source: CEIC, Morgan Stanley Research

  12. Specialize or Be Poor Again • Premium over China can no longer be sustained by more capital • Specialization could protect some of the existing premium • Finland specializes in telecom equipment and printing machinery. It has retained a premium in Europe • Indonesia and Thailand are complementary to China • Singapore can act as the middleman between China and Indonesia • Hong Kong can manage Pearl River Delta trade • Korea and Taiwan must search for niches

  13. GDP Ratio of Tigers to China (%) Tigers Have to Shrink Relative to China • Specialization will protect some of the premium that the tigers enjoy over China but not all. • Regardless of how successful the tigers are at transforming themselves, their premium over China will decline substantially this decade, in our view: • Are Finland’s wages 10 times Europe’s? • The gap between China and the tigers will narrow via (1) faster growth in China, (2) depreciation of tigers’ currencies and (3) renminbi revaluation. Source: CEIC, Morgan Stanley Research Tigers include Hong Kong, Korea, Singapore and Taiwan

  14. Growth Determines Performance Where to Look for New Winners • Manufacturing should remain a primary source of GDP growth but not increased wealth. • Property bubble is gone and price appreciation won’t support wealth creation, in our view. • Wealth should grow in businesses that have pricing power in a deflationary environment. They should have brands, scale or intellectual property (IP). • The key themes for wealth creation are: • Lifestyle: Consumption is income- rather than lifestyle-driven, as in the past. Rising competition is likely to create low-priced lifestyle. Companies that cater to this trend should become valuable. • Urbanization: China and others could create huge cities in East Asia. This brings opportunity in urban services and scale service business. • Healthcare: Aging and growing income create the perfect combination for health services. • Technology: Maths is replacing experience in IP creation. The law of large numbers of people will likely apply to East Asia in IP production. Source: CEIC, Morgan Stanley Research

  15. Asia/Pacific Economic Forecast Summary Source: CEIC, Morgan Stanley Research, E = Morgan Stanley Research Estimates

  16. Asia/Pacific Economic Forecast Summary-cont. Source: CEIC, Morgan Stanley Research, E = Morgan Stanley Research Estimates

  17. China Economics EconomicGrowth Drivers Andy Xie (852) 2848 5220 Andy.Xie@morganstanley.com

  18. How Does China Accumulate Capital? How Does China Improve Its System? Is China Ready for Takeoff? Scale and Low Base Offer High Potential Capital Market Reform: The Last Piece Why Are Some People Poor? Capital Efficiency Remains Low How Does China Improve Human Capital? Stock Market: Key to Corporate Development Economic Growth Drivers

  19. Structural Uplift I: Production Relocation Economic Growth Drivers -Cont. Structural Uplift II: Infrastructure Externality Structural Uplift III: Super-Scale Urbanization Structural Uplift IV: Technology Structural Uplift V: Asset Sales Boost Consumption Take-off Is Likely After WTO Restructuring The Next US$10 Trillion Economy China: Economic Forecast Summary

  20. Why Are Some People Poor? Per Capita Income in 2000 (US$) • A person is poor because a) he didn’t go to school - no human capital, b) he can’t afford a machine - no physical capital, c) the society doesn’t offer opportunities - the system is inefficient. • Becoming rich is, therefore, a combination of capital accumulation and improving system efficiency. Gross Fixed Capital Formation (% of GDP) Source: Morgan Stanley Research

  21. How Does China Accumulate Capital? High savings rate and FDI One-child policy has decreased the dependency ratio and raised the savings rate substantially in 1980s. Savings were put into infrastructure and education. China now has: a) a national highway system, b) a national power grid with ample generating capacity, c) a national telecom system with the largest mobile system in the world, d) a national aviation system, and e) US$250 billion in export earning power

  22. How Does China Improve Human Capital? Increase enrollment 1) Nine-year education has become universal 2) Technical schools are readily available after secondary education 3) University system has been massively expanded. The total enrollment has increased to over 2 million a year (11% of age group) from 350,000 (or 1.5% of age group) 20 years ago. 4) Post-graduate education has increased significantly. 200,000 have gone abroad for graduate study. Over 20% of these have returned. 5) Expatriate population has risen to 250,000. About 500,000 Taiwanese live in China.

  23. How Does China Improve Its System? Join the WTO 1) China used incremental measures to improve incentives for production. For example, family responsibility system in rural sector, corporatization of state-owned companies, township- and village-owned enterprises, special economic zones, foreign JVs, preferential tax treatment for foreign companies or export, etc. 2) As China has become big, the complicated incentive system is too difficult to administer. The distortion has created a lot of non-performing loans. Joining the WTO levels the playing field for everyone and connects China’s system with the global norm. Hence, China’s low cost structure is fully unleashed into the global economy.

  24. Is China Ready for Takeoff? Takeoff: Fast growth and appreciating currencies 1) China used devaluation to make itself more attractive. Its currency has been stable for six years. However, foreign capital continues to pour in, as it has used system improvements to attract foreign capital. 2) Although devaluation strategy is over, currency appreciation is still five years away. China has 300 million surplus workers; 18 million join workforce every year. China faces pressure to appreciate its currency, but it can stop this by expanding money supply, which doesn’t cause inflation as wages are kept down by surplus labor. China to have fast growth and stable currency. 3) Beyond 2006 China’s surplus labor may have declined sufficiently to allow currency appreciation to begin.

  25. Scale and Low Base Offer High Potential Prices don’t rise 1) Surplus labor keeps wages down. Hence, though total demand rises with more employment, individual purchasing power is not rising to allow price increases. 2) However, as more buyers emerge, businesses can leverage scale to reduce costs, which is the only way to maintain or increase margins. 3) The big payoff will happen, when surplus labor is sufficiently reduced to allow wages, prices and currencies to rise at the same. Between 2006-16 this virtuous cycle will emerge, in our view.

  26. Capital Market Reform: The Last Piece The Stock Market Bubble 1) China has high competition in the goods market, a flexible labor market, and commitments to a WTO-defined entry-exit environment. 2) The capital market is the only piece that hasn’t fallen into place. The banking system is saddled with bad debts. The domestic stock market is a bubble. Offshore listed companies are hampered by poor corporate governance. Source: Morgan Stanley Research

  27. Stock Market: Key to Corporate Development Stock Market Fund Raising • Chinese corporate development unfolds in three directions: • 1) Foreign ownership through rising FDI • 2) Corporatization and listing of SOE’s to sustain government ownership in key sectors • 3) Nurturing private sector for employment generation • If the stock market fails in allocating capital to efficient companies, China will become largely foreign owned, which may not be in the best interest of the Communist Party in the long term. Source: Morgan Stanley Research

  28. Capital Efficiency Remains Low Share in Total Fixed Investment (%) • Capital efficiency remains low: • 1) State sector remains dominant in capital formation • 2) Private sector remains small • 3) Household capital formation (e.g., property) is just beginning. • 4) Foreign direct investment is the main source of efficiency Source: Morgan Stanley Research

  29. US Imports (US$ billion) Japan’s Imports (US$ billion) Structural Uplift I: Production Relocation • Taiwan is following HK in relocating its manufacturing to China. China’s labor and land costs are one fifth of Taiwan’s. • Global downturn and WTO are forcing the pace of relocation. Half of Taiwan’s manufacturing sector survives on protection and must seek lower production costs after WTO. The IT sector is competitive, but has come under a margin squeeze in the global downturn. Moving to China is the only way to preserve margins. Source: CEIC, Morgan Stanley Research

  30. Structural Uplift II: Infrastructure Externality Economic development has been restricted to 20% of the population along the southeastern seaboard, which now accounts for 50% of GDP and 75% of exports. Mid- and Upper-Yangtze valley has 30% of population, but 20% of GDP and 3% of exports. The population is dense enough to make infrastructure pay. The western development program is likely to mainly create infrastructure for the intra-region and access to the coastal region. The Three Gorges Dam gives deepwater port access to Sichuan province. Development of North and Northwest requires water, which will be available in 15 years. NortheastPop = 64 mnGDP = US$61 bnExp = US$12 bn Bohai Basin Pop = 224 mnGDP = US$270 bnExp = US$45 bn Korea Pop = 47 mnGDP = US$398 bnExp = US$172 bn West Pop = 51 mnGDP = US$38 bn Exp = US$1.5 bn Northern Plain Pop = 157 mnGDP = US$97 bnExp = US$4.5 bn Lower Yangtse Pop = 138 mnGDP = US$232 bnExp = US$72 bn Mid/Upper YangtsePop = 371 mnGDP = US$244 bnExp = US$9 bn Pearl River Delta Pop = 128 mnGDP = US$325 bn Exp = US$130 bn TaiwanPop = 22 mnGDP = US$285 bnExp = US$148bn SouthwestPop = 128 mnGDP = US$70 bn Exp = US$3.8 bn Source: CEIC, CIA, Morgan Stanley Research

  31. Population Density Looks Fine But Good Land Is Scarce No Migration: Higher Relative Population Density Country (people/sqkm) China 123 France 108 Germany 235 Japan 336 UK 239 US 30 Structural Uplift III: Super-Scale Urbanization • Urbanization lifts labor productivity and requires capital. China has the high savings rate to make it happen. Further, China can take advantage of massive economies of scale to reduce per-capita cost of urbanization. • Hong Kong/Shenzhen already has a population of 14 million and will likely reach 20 million by 2010. Shanghai has already hit 16 million and will likely reach 22 million by 2010. Population • China could have 15 cities with over 15 million people by 2015 and 30 cities with over 30 million by 2030. Source: LLASA LUC-GIS

  32. Structural Uplift IV: Technology • Less expensive and better technologies allow China to leapfrog competitors, lower costs and accelerate the pace of development, especially in communication, transportation and urbanization. • Communication capex cost has declined by 80% or more. China is making advanced communication tools available to consumers with low per-capita incomes. • Production of transportation capacity has declined by 50% in a decade. New bullet train technology could lower costs further. Inter-province expressways now reach 16,000 km, from zero in 1988. • China could accumulate intellectual property soon. IP acquisition has become more dependent on math computation rather than experience, which favors China with its large population and effective mass education. Source: China Statistical Yearbooks

  33. Government Balance Sheet (US$ billions) Allowing Households to Save Money Structural Uplift V: Asset Sales Boost Consumption • Households increased deposits less last year, as they put an extra Rmb54 billion into the stock market and Rmb75 billion more than last year into government bonds and property. • In our view, the government can sell sufficient assets to cover its liability and boost consumption when it becomes necessary. Source: CEIC, Morgan Stanley

  34. How Did Other Asian Economies Take Off Take-off Is Likely After WTO Restructuring • A developing economy takes off when rapid growth and real currency appreciation occur together. • China has had fast growth but a weak currency for 20 years due to high demand for jobs and a low level of efficiency. • The restructuring timetable for joining the WTO will likely lift the level of efficiency and remove barriers to high growth. China could experience a takeoff between 2006-15. Source: CEIC, Morgan Stanley Research

  35. China’s GDP (US$ billions, 2000 $) The Next US$10 Trillion Economy • If WTO-related reforms are carried out, China’s economy could be worth US$10 trillion by 2020. • If China implements WTO-plus reforms, the economy could reach US$10 trillion by 2015. • If reforms fail and China remains inefficient, the economy could hit US$10 trillion by 2025. • Possible impediments: (1) instability, (2) corruption, (3) environmental degradation, and (4) containment by the West. Current reforms appear positive for China. 16,000 14,000 12,000 10,000 8,000 Aggressive WTO Business Restructuring Scenario as usual 6,000 4,000 2,000 - 2000 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Source: CEIC , Morgan Stanley Research

  36. China Economics Privatization Success Andy Xie (852) 2848 5220 Andy.Xie@morganstanley.com

  37. Privatizations Completed (1999 - 2001)

  38. Major Indices and Comp Performance Since Pre-Marketing(9/11/2000) Breakdown of Demand Case Study - US$3.46Bn IPO for China Petroleum and Chemical Corporation The Largest Ever Chinese H Share IPO • On October 12, 2000, Morgan Stanley Dean Witter priced the largest Chinese H share IPO in history for China Petroleum and Chemical Corporation (“Sinopec”) • Sinopec was priced at a 43.4% and 1.9% premium to PetroChina’s consensus 2000E and 2001E P/E, respectively. It was also priced at a 19.5% premium to Sinopec’s NAV (PetroChina was priced only at a 10% premium to its NAV) • Landmark pre-IPO restructuring and corporatization achievement • Significant strategic investment in the IPO from Exxon Mobil, the Royal Dutch Shell Group and BP Amoco Transaction Highlights • Largest ever Chinese H share IPO • Third largest ever Chinese IPO in history • Extremely successful despite turbulent market conditions and fragile investor sentiment towards investing in new issues: • Over US$4.1 billion of institutional and retail demand (over 3x subscribed) • Over US$710 million of demand in Hong Kong Public Offer (over 4x subscribed) • Priced at attractive valuations: • 43.4% premium to PetroChina’s consensus 2000E P/E • 1.9% premium to PetroChina’s consensus 2001E P/E • 19.5% premium to Sinopec’s NAV (PetroChina was priced only at a 10% premium to its NAV) • Landmark pre-IPO restructuring and corporatization achievement: • 15 month process (from mandate) that involved the restructuring of a Chinese SOE comprised of approximately 100 multi-tiered, independent and cross-competitive organizations encompassing approximately 10,000 separate companies • Significant balance sheet restructuring / rating agency process - achieved investment grade rating (BBB-) by S&P • Significant regulatory restructuring • Significant strategic investment in IPO (committed prior to IPO) from Exxon Mobil, The Royal Dutch Shell Group, BP Amoco, Asea Brown Boveri, Cheung Kong, Hutchison Whampoa, Henderson Group and Hong Kong & China Gas • Emphasizes MSDW’s equity franchise in Asia: With this transaction, Morgan Stanley has lead-managed 6 equity-linked offerings of US$1 billion or above for Non-Japan Asia issuers since 1998, more than any other underwriter Roadshow Launched Pricing Pre-Marketing Launched Institutional By Region(1) Total Demand By Type Source FactSet Note: (1) Excluding strategic, corporate and retail investors 1

  39. Case Study - US$3.46Bn IPO for China Petroleum and Chemical Corporation The Sinopec Restructuring Story • One of the most complex restructuring assignments in MSDW history • MSDW was the key driver of the restructuring effort • Actively supported lobbying efforts with the State Council • Effectively led and achieved positive change in Sinopec’s corporate culture resulting in genuine focus on shareholder value creation and the development of systems and processes to support it • A blue print for Chinese SOE reform The creation and corporatization of Sinopec was part of a massive restructuring effort: • Restructuring of a Chinese SOE comprised of approximately 100 multi-tiered, independent and cross-competitive organizations encompassing approximately 10,000 separate companies • 1.2 million employees • Huge and sprawling geographic spread of assets; very diverse scale/efficiency and financial profile of the assets • Significant operations outside of core business areas • Unprecedented accounting process • KPMG Asia’s largest audit process ever - 8 month process • 450 full time accountants for first 8 months, 260 full time accountants for year 2000 interim audits • Creation of ListCo and Non-ListCo holding companies • Transfer of core assets (and related liabilities) to Sinopec ListCo, residual assets remain with parent • Non-compete agreements, hundreds of related party contracts worth in excess of US$5 Bn • Significant balance sheet restructuring/rating agency process • US$4.0 billion debt-to-equity swap with domestic banks prior to IPO • US$4.0 billion debt restructuring with parent • Investment grade rating (BBB-) by S&P • Important regulatory restructuring • Liberalizing refined products pricing structure unlocked substantial value and eliminated regulatory uncertainty Landmark restructuring and corporatization story - 15-month process (from mandate) that was driven by senior management and the Morgan Stanley Dean Witter team and was a primary factor in the success of the IPO 3

  40. Case Study - US$3.46Bn IPO for China Petroleum and Chemical Corporation Positioning Sinopec - An Attractive Growth Story / Premium to Petrochina • Succeeded in articulating and quantifying in simple terms a rather complex investment story • The primary energy interface with the Chinese consumer • A pure play on China’s growth potential • Superior growth and returns to PetroChina • Less exposed to crude oil volatility • Conditions in place to achieve and surpass growth and efficiency objectives The key to differentiating Sinopec (in particular from PetroChina) was in highlighting its superior growth and return profile, which is driven by a number of notable structural factors: • China is the world’s most attractive energy market • Unprecedented absolute and relative growth potential • Sinopec is best positioned to capture China’s growth potential • The Company’s principal market covers the highly attractive southern and coastal regions (73% of China’s population and 78% of GDP) • Sinopec’s dominant infrastructure and networks in its principal market establish insurmountable barriers to entry, even post-WTO • Unprecedented dominance in a consolidating market gives it unique pricing power • End-consumer orientation (versus pure commodity play) leaves it highly leveraged to China’s growth • Sinopec will continue to benefit from a highly favorable regulatory and industry environment • Recent regulatory changes toward a liberalized industry structure are to the benefit of Sinopec • Leveraged to cycle improvements in the refining and chemicals, but not dependent upon them • The effect of the WTO will be gradual and largely mitigated • Sinopec has focused strategies for growth and returns across all of its business segments and the conditions to achieve its objectives are in place • Sinopec is aggressively pursuing sustainable and profitable growth opportunities • Sinopec is taking advantage of the benefits of consolidation and corporatization by implementing a comprehensive cost cutting and productivity improvement programs • Sinopec’s incentivized management, its centralized corporate structure, newly implemented advanced information systems and its financial discipline ensure its ability to meet its objectives Despite lack of a strong track record, a difficult market environment and other uncertainties, Sinopec at pricing was able to achieve a slight premium to PetroChina, implying a large premium on a fully-distributed basis 4

  41. Comps Performance since Pre-marketing (5/12/00) Indexed to 100 Breakdown of Allocation by region Case Study - $4.92 Bn IPO for China Unicom Limited The Largest Chinese IPO in History Offering Highlights • On June 16, 2000, Morgan Stanley Dean Witter placed the largest Chinese IPO in history - having generated over $16Bn in total demand • China Unicom was priced near the high-end of the final price range of HK$13.80 - HK$16.00 at HK$15.58, which is 19.8% above the mid-point of the initial price range • Asia, U.S., and Europe institutions generated 35%, 46% and 19% of the total institutional demand • Largest ever Chinese IPO in history • Largest ever international equity distribution by an Asian issuer • Largest Hong Kong Public Offer IPO which generated approximately 3x of demand • Over US$ 15 billion of institutional demand (approximately 4x subscribed) • Priced at a 19.8% premium to the mid-point of the initial price range (HK$13.00) and near the top of the revised pricing range of HK$13.80 - HK$16.00 • Highly successful marketing program:The Company met with 88 institutions in one-on-one meetings during 3 weeks of roadshow in Asia, Europe and US, achieving an one-on-one hit ratio of 100%, 83% and 91% in Asia, U.S. and Europe • Emphasis of MSDW equity franchise in Asia: With this deal, Morgan Stanley has lead-managed 4 equity offerings of US$ 1 billion or more for Non-Japan Asian issuers since 1998 Emerging Pre-marketing launched Roadshow launched CTHK LD/Data Developed Source Factset Notes 1. As of June 16, 2000.2.

  42. Major Indices and Comp Performance Since Pre-Marketing(11/5/2001) Breakdown of Demand (Excluding Alcoa and HK Public Offer) Institutional By Region(1) Total Demand By Type Privatization of Aluminum Corporation of China Limited - A Case Study Pre-Greenshoe Case Study • On December 5, 2001, Morgan Stanley priced the IPO for Aluminum Corporation of China (“Chalco”), re-opening international equity capital markets for Asia Pacific issuers • Chalco was priced at premiums of 94% and 64% to PetroChina’s and Sinopec’s 2001E P/E, respectively. It was also priced at a 22% premium to its own NAV; Sinopec and PetroChina IPOs priced only at 19% and 10% premiums to NAV, respectively • Over 70% one-on-one hit ratio in each region • Significant strategic investment in the IPO from ALCOA • S&P “BBB” investment grade rating Transaction Highlights • First Metals & Mining sector equity issue out of China since 1998 • Reopens international equity capital markets for Asia Pacific region • First Asia Pacific ADR offering since September 11th • Second largest ADR offering from Asia Pacific region in 2001 • Second major equity issue out of China this year after CNOOC’s IPO completed 10 months ago • Successfully marketed “deep cyclical” equity offering despite little visibility in global economic recovery during uncertain and volatile equity and aluminum commodity market conditions • Priced at attractive valuations - premium to Chinese SOE comparables despite challenging market conditions: • 24% – 90% premium to 2001 P/E multiples of Chinese SOE comparables • 22% premium to Chalco’s own NAV; Sinopec and Petrochina priced at only 19% and 10% premiums to their own NAVs, respectively • Exceptional quality and breadth of institutional demand: • Over US$2.8 billion of institutional and retail demand (over 10x subscribed) • Top global and Tier 1 institutions constitute about US$1.5 billion or 60% of total institutional demand • US$320 million of high quality supplemental orders from top institutions that did not have a one-on-one meeting with management • Hong Kong Public Offer fully covered • Redefines nature of strategic investment for Chinese SOEs • Alcoa (NYSE: AA) to own 8% of equity, have one board representative and form a 50/50 JV at one of Chalco’s integrated refiners and smelters • 30 month lock-up; AA to fund 50% of JV’s capex; and significant corporate governance rights for AA Pricing Pre-Marketing Launched Roadshow Launched Source FactSet Note: (1) Figure excludes PWM demand, includes orders from Canada 1

  43. China: Economic Forecast Summary

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